Just to recap, in part one (see it here) I talked about creating a game plan for dealing with any overwhelming debt you might have and I listed the below steps:
- Differentiate between good debt and bad debt and prioritize what to pay off first
- Create a list of all your debt and the amounts you pay each month and place the list where you can see it everyday.
- Cut up those credit cards
- Actually start paying off your debts
- Build an emergency fund
This time I will talk about consolidating debts, living within your means and staying OUT of debt.
Consolidating your credit card debt
A lot of people get overwhelmed having so many bills to pay at once e.g. 10 different maxed out credit cards etc. A good idea might be to consolidate that debt into one monthly payment by transferring the balances of the 10 different credit cards to a new single credit card that has a 0% or very low introductory interest rate; these low interest rates usually apply for the first year or so of owning the card BUT this only makes sense if you can pay off your outstanding debt within the time frame of the low introductory rate and you will need to read the fine print very carefully as to any fees associated with the balance transfer. Otherwise I would suggest you stick to the original plan of paying off each credit card one by one based on the priority list you have already created.
There are also various organizations that offer debt consolidation services for a small monthly fee. They will call your creditors to negotiate lower interest rates for you and create a pay-off time line for you to follow but if you think about it, this is something you can do yourself once you made up your mind to be debt free. Calling your creditors to negotiate lower interest rates and creating a pay-off plan for yourself might be hard but being debt free is worth it.
Create a budget
Once you have mapped out your debt payment plan or have paid off your debt completely, the next key thing is staying out of debt which means living within a budget. A lot people hate the word budget but it definitely keeps you in check by helping you monitor your spending. Some great tools for creating a budget are mint.com and Quicken (You can download trial versions of these software online and they are relatively cheap to purchase). They connect to most bank accounts and notify you if you are exceeding your spending limit based on any budget you might have set up. They also do a good job tracking your stock portfolios and credit cards. If that’s too complicated a simple excel sheet will suffice.
Here are a few things to keep in mind when creating your budget –
- Don’t be too harsh on yourself. Remember you now have an action plan.
- Make sure you distinguish between your wants and need and prioritize your cash allocations according to that; While you pay off your debt, purchases of all non essentials should be on hold.
- Don’t forget to save your initial emergency fun. Even if you can only afford a small amount.
Check out part 1 - here
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