As we reach the midpoint of the year, this can be a good time to take a closer look at your financial well-being … particularly if paying off debt is a priority. It’s been said that the journey of a thousand miles begins with the first step and this is also true in getting your financial situation back in order. Just like that 1,000 mile journey, a clear roadmap comes in handy when it comes to debt reduction.
Step one is to evaluate your expenses from the past year and decide how much you really spend on a monthly basis. Don’t forget to account for items like car loans, student debt, 1-time purchases such as household appliances, and outstanding medical bills. Compare your spending behavior to your income and arrive at a plan to hold down your expenses as much as possible. Short-term sacrifices, such as less dining out, shorter vacations, and eliminating luxury purchases, are likely to be necessary, in order to help turn the corner. Many financial advisers recommend determining the monthly amount of additional dollars available to you and beginning the process of paying off your highest interest debt first. You may find a wide disparity between the rates your lenders are charging you. By paying off the highest interest rates first, you can significantly decrease your monthly cost of living.
Popular national financial adviser Dave Ramsey recommends a slightly different approach he calls the “snowball method.” His concept is to pay the minimum balance due on your largest bills, while focusing primary effort on the small ones. Pay them off as quickly as possible. Then, take the funds you were allocating to the paid off bills, and apply them to the next largest ones.
The most important thing, is getting started on that 1,000 mile roadmap. Begin with a plan that makes sense to you. If your budget analysis leads you to believe that you’re facing a challenge you can’t handle alone, consider getting help from a credit counselor. They may be able to look at your situation in a new light and might also be able to assist you in negotiating reduced payoffs to your creditors. While many organizations may be willing to accept a reduction in your debt if they think it’s their best option, this tactic may also have a negative effect on your credit report. Before taking this step, get professional guidance and exhaust your other options.