5 Smart Ways to Get Out Of Debt
These days, debt seems to be able to make the world go around. Very few people can afford to pay for large ticket items, such as a car or a house, with cash. As a result, most consumers find themselves in debt. There is a danger to debt, though, when households start to use it to buy for unessential items, such as TVs, cell phones, tablets and mp3 players. In fact, in 2012, the average US household’s debt to disposable income was at 112%, meaning that for every $1 in disposable income that we have, we are spending $1.12 and going deeper into debt as a result. This percentage had a high of 128% in 2007, the height of the recent financial instability crisis, so the country is bringing it back down slowly. But more does need to be down to bring it below 100%, and here are a few simple suggestions to help make your own personal debt more manageable.
The biggest suggestion is to make a budget. Take a look at the last 3 months of all of your financial statements, and then start to calculate all of your expenses, separating them into different categories. First should be your fixed expenses (rent or mortgage payments, utilities, student loans and the like). The second category is variable bills, such as food, gas, clothing, entertainment, etc.). Naturally, some of the items in this category are necessities, so cutting them out entirely isn’t realistic. You can, however, see what you are spending on non-essentials, and begin to cut down on those. A daily cup of Starbucks coffee will quickly add up after a month and cutting that will save you $60 a month ($3 a day, 20 purchases in a month).
Pay off Credit Cards
After figuring out where to cut costs, your next step should be to work on your credit cards. You should start paying more than just the bare minimum due on most of your cards, which are usually 2 to 3% of each bill’s total. Financial institutions make money off of the interest rates they charge you, and the longer you take to pay off your bills, the more money they make.
Compare & Save
Another suggestion is to do what is called “the snowball effect” with your cards. If you compare all of your cards, you may notice that some cards have a lower interest rate, or a higher balance limit. Consider transferring money from higher rate cards to lower rate ones. Keep in mind, though, that some cards charge you an additional rate, usually around 3%, to do so, so it may not make sense to do this. At any rate, you should pay more off on higher bearing interest rate cards than on your lower rate ones. As you pay off each card, consider the option of closing that account. Closing it will affect your credit rate in the short term, as you are effectively shutting off an available line of credit, but if you do not have any plans to purchase a high ticket item, such as car or house in the near future, it makes more sense to close it.
Car & Home
Once the cards start to become eliminated, consider moving money into paying off your car and house early. Even one or two extra payments a year would knock 2.5 years off on a 30 year house mortgage.
A final suggestion would be to consider moving away from credit cards to cash, or its equivalent. Doing so can be painful for someone that is used to being able to purchase anything they may want at a moment’s notice, but you may be surprised at how quickly what you might have called a necessity at one point becoming something that you can do without when you find out how long it would take to actually save up for it. Granted, this may not be a good option for a car or house purchase, but for most other things, it couldn’t hurt.
Getting out of debt isn’t easy, but it is needed if our nations desire to get back onto sound financial stability, and it starts with you.
Bio: Im Jay a Finance writer from www.loanrater.co.uk a loan comparison site who will find you the lowest rate and fastest loan.