Stop Running From Debt June 4, 2012ArchivesOff

Checklist Woman

By Carol Holm

Debt – it’s the one little word that has the ability to send most people running for cover. You can run but, unfortunately, you can’t hide.

The topic of debt is a tender subject. If you’re in debt, it’s difficult to listen to people chastise you on how you shouldn’t have gotten so for behind financially in the first place. But lecturing isn’t going to do any good.

To get out of debt, you either need to: 1. Win the lottery or 2. Make a plan and stick to it. The odds of number one happening are not so good. But if you choose number two and you follow a few steps, the odds are in your favor. And one day you will likely know the joys of debt-free living.

These four steps can set you on the right path:

1. Keep track of everything you spend: One secret for losing weight is to keep track of everything you eat so you can pinpoint where your weaknesses are when it comes to food. It’s the same concept with your spending; you need to figure out where all the money is going.

For one month, write down every single dollar you spend – that includes everything from the coffee you got at Starbucks to the pack of gum you bought at the gas station. Once you realize what items your money is going towards, it becomes clear where spending changes need to be made.

2. Create a budget and (really) stick with it: By creating a budget, you are putting yourself in control of what you spend money on instead of reacting to impulses. Start by making a list of fixed expenses such as house, car, phones, TV and insurance payments. Look at the list and see if there are places that can be cut – is the most expensive cable package necessary? Could you do without unlimited data and texting on your phone?

Next, list all non-fixed expenses such as food, gas, utilities, clothing, medical, entertainment, etc. Give yourself a monthly dollar amount for each category.

Here is the key to making it work – actually do it! The easy part is making the budget; the hard part is sticking to it. It’s all about your willpower

so do things that can help you stay strong. Many people use cash envelopes. These are great because if you use up all your money, you’re done. You can’t spend above what was budgeted.

3. Use the debt eliminator system: It’s not a groundbreaking idea, but it genuinely works.

Here’s how: write down each debt with the monthly payment and the payoff amount. Then work toward paying off the smallest debt first. After the first creditor has been repaid, put the amount you were paying them towards payment for the second creditor. When that debt is paid off, do the same with the payment on the third debt. It’s as easy as that. Keep doing it until all debt is paid off.

4. Start a “put and take” savings account: Being in debt can be a vicious cycle because when so much goes towards paying off debts, there’s little or no free money to use when emergencies arise. So what happens when something comes up? More debt is added to the existing mountain.

When struggling to make monthly payments, the thought of a savings account may seem crazy, but remaining debt free will be next to impossible unless you have a savings account to use for major purchases and emergencies.

Add a certain amount of money to your monthly budget to put into a savings account. Only use this money for emergencies or for big purchases.

Carol Holm has been in the financial services industry since 1977 and is currently a financial advisor for the firm of Carol Holm Financial. She is co-author of Have You Bought the Ticket?

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