David Bakke is a blogger for Money Crashers Personal Finance, where he talks about saving money on daily life. He managed to climb out of $30,000 in credit card debt, and vowed never to put himself in the same situation again.
Many people in the United States are saddled with debt. In fact, the average credit card debt per household is nearly $16,000! There are several reasons why people fall into debt, including misconceptions that lead to debt addiction.
Regardless of why you have accrued debt, one thing is certain: If you owe a lot on your credit cards, you need tangible, practical ways to pay the money off. Fortunately, there are a number of free and simple methods to eliminate your debt for good:
1. Review Your Finances and Create a Budget
When I became serious about solving my personal debt issues, I knew I had to begin by objectively examining the reasons for my debt. I looked at what spending habits caused me to fall so deeply into debt, and considered what I could do to alter my mindset and change my bad habits.
Next, I made a budget. Creating a budget can help you manage your finances in a responsible way. Without a budget, you may have no idea how much you actually spend on a monthly basis – and if you don’t know every detail about your spending habits and the state of your finances, you cannot eliminate your debts.
2. Find Ways to Save in Every Aspect of Your Life
When I reviewed my spending habits, I realized my personal debt issues did not stem from a few ill-advised purchases. Rather, they came about because of a general misconception of how to handle the money coming into (and out of) my home.
To remedy this, I sought every opportunity to save money in my personal life, and set to work reducing my spending and breaking expensive habits. It did not matter to me if an idea had a major financial impact, or if it only saved me a few dollars per month. If I could save a penny, I did it. I cut out trips to the coffee shop in the morning, and I stopped buying the daily newspaper. I stopped purchasing lottery tickets, found ways to save money on groceries, and adjusted my thermostat in both summer and winter to reduce utility bills.
Implementing all of these ideas at once can be a challenge. I did it because the stress of my personal debt worries far outweighed the minor inconveniences these changes brought about.
3. Set Goals
As with any successful business plan, setting goals can improve your overall chances of success. I once had so much debt that it seemed as though any changes I made barely made a dent in my finances. Goal-setting helped me immensely at this stage of my debt elimination plan.
If you carry a $3,000 debt on a credit card, you cannot expect to erase that debt in a few months. Instead, mark your progress in increments. Tell yourself to get the credit card balance down to $2,500 in the first three months, and down to $2,000 within six months.
Update your goals as you experience changes in your financial situation. For example, if you receive a promotion, a raise, or a bonus at work, use this additional income to pay off more of your credit card debt.
If you don’t set goals, you may revert to the bad habits that got you into debt in the first place, such as overspending. Setting and reaching manageable goals can give you the confidence you need to succeed.
4. Stop Spending More Than You Make
The next step in my plan to eliminate debt was to curb my spending. I figured out how much I earned each month, subtracted all monthly bills using my new budget and goals, and utilized the remaining income for all of my other expenses.
After finding ways to save in various areas of my life, I was able to keep my spending in check. I didn’t cut up my credit cards, but I thought long and hard before paying for anything with plastic. If you automatically reach for a card to pay for a purchase, leave your credit cards at home and carry cash instead to control your spending.
5. Understand the Difference Between Wants and Needs
Identify the wants and needs in your life and adjust your spending accordingly. After a lot of consideration, I realized my needs included having a roof over my head, food on the table, and a car to get to work. I crossed most of the “wants” off my list – not forever, but until I had my finances under control.
Thinking that you must eliminate nonessential items forever is a common misconception to money management, and can actually stall your efforts to get out of debt. You only need to make temporary sacrifices. Once you have paid off your debt, you will have enough money to resume purchasing some nonessential items, within reason of course.
During this process I also reduced the cost of essential items. I negotiated and lowered my apartment rent payments, I learned extreme couponing to save money on food, and I waited to buy a new car until I had paid off all of my debt.
6. Follow the Golden Rule of Credit Cards
Lastly, follow the golden rule of credit cards: If you can’t afford to pay for an item with cash, then you just can’t afford to make the purchase. Following this rule ultimately allowed me to pay off my debt and to avoid accruing new debt.
Unfortunately, many people do not follow this rule, and it’s one of the reasons why most Americans should not use credit cards.
It took me a long time to pay off my debts. However, by staying focused on my financial goals and never veering from my plan, I made some headway. I finally paid off the last of my credit card debt, and also got out from under an upside down car loan.
With the exception of my mortgage, I have remained 100% debt-free, and I still use the lessons I learned as part of my current spending and saving habits. Once I paid off my debt, I began to plan for retirement and established a college fund for my son. Knowing that I fixed my current financial situation and that I am solidifying the future for myself and my family is extremely gratifying.