Toni-Lynn
08-09-2008, 02:47 PM
If you feel that you have too much debt, you're not alone. According to one estimate, Americans as a whole spent about $472 billion more than they earned in 2005. That's a negative savings rate of 5.2 percent! For many, the growing cost of gas, groceries and health care have caught them off guard. But for a substantial number of Americans, the debt is the result of unchecked spending and purchasing beyond their means.
If debt is a concern for you, here's a five-step plan for getting it under control:
1. Stop buying on credit. Go on a cash-only diet and take your credit cards out of your wallet. Cut them up, if you have to, but don't buy another thing on a credit card. Don't worry about earning points or perks. Having your balance paid off is the best perk of all.
2. Write down every dollar you earn and spend in a month. Financial pros call this a cash flow analysis, but that's just a fancy name for tracking your spending. You may be surprised to discover exactly where your money is going.
If all of your income is truly going toward paying for essentials, you'll need to focus on increasing your income. In the short term, you can take on a part-time job or find a roommate to share expenses. In the long term, you'll need to seek out training for a better-paying job.
3. Establish a budget. If you find that hundreds of dollars each month are going toward clothes and entertainment, you need to institute a spending freeze. For six months, try to go without buying clothes, concert tickets, electronics or whatever else is your weak spot. Pack your lunch, take a thermos of coffee and eat at home as often as possible. You may even need to cancel the cable and cut back on your cell plan. It won't last forever - just until you can get your debt under control.
4. Start paying off debt, starting with the most expensive. Credit card debt can cost you an additional 12, 18 or 20 percent or more in interest every year. If you only pay off your minimum balance each month, items you bought on sale could actually cost twice as much as you thought they did. Follow with other non-tax-deductible debt, such as car loans, and student loans, which may offer some tax advantages. Mortgages, on the other hand, are considered "good debt" because the debt represents an asset that will retain its value or potentially grow in value. Also, interest paid on your mortgage and home equity loans is still deductible, so there is a small incentive to not pay that debt off early.
5. Pay yourself first. Once your credit card debt is paid off, you owe it to yourself to get on a regular savings plan. Paying yourself first means having the money deducted directly from your paycheck, so you'll never miss it. Start with an emergency fund of three to six months' expenses in an easily accessible account. Then, begin a tax-advantaged retirement program, such as a 401(k) or Roth IRA.
Once you reach this stage, your money will be working for you, instead of you working for your money. It's a great feeling!
What tips do you have for balancing your budget?
If debt is a concern for you, here's a five-step plan for getting it under control:
1. Stop buying on credit. Go on a cash-only diet and take your credit cards out of your wallet. Cut them up, if you have to, but don't buy another thing on a credit card. Don't worry about earning points or perks. Having your balance paid off is the best perk of all.
2. Write down every dollar you earn and spend in a month. Financial pros call this a cash flow analysis, but that's just a fancy name for tracking your spending. You may be surprised to discover exactly where your money is going.
If all of your income is truly going toward paying for essentials, you'll need to focus on increasing your income. In the short term, you can take on a part-time job or find a roommate to share expenses. In the long term, you'll need to seek out training for a better-paying job.
3. Establish a budget. If you find that hundreds of dollars each month are going toward clothes and entertainment, you need to institute a spending freeze. For six months, try to go without buying clothes, concert tickets, electronics or whatever else is your weak spot. Pack your lunch, take a thermos of coffee and eat at home as often as possible. You may even need to cancel the cable and cut back on your cell plan. It won't last forever - just until you can get your debt under control.
4. Start paying off debt, starting with the most expensive. Credit card debt can cost you an additional 12, 18 or 20 percent or more in interest every year. If you only pay off your minimum balance each month, items you bought on sale could actually cost twice as much as you thought they did. Follow with other non-tax-deductible debt, such as car loans, and student loans, which may offer some tax advantages. Mortgages, on the other hand, are considered "good debt" because the debt represents an asset that will retain its value or potentially grow in value. Also, interest paid on your mortgage and home equity loans is still deductible, so there is a small incentive to not pay that debt off early.
5. Pay yourself first. Once your credit card debt is paid off, you owe it to yourself to get on a regular savings plan. Paying yourself first means having the money deducted directly from your paycheck, so you'll never miss it. Start with an emergency fund of three to six months' expenses in an easily accessible account. Then, begin a tax-advantaged retirement program, such as a 401(k) or Roth IRA.
Once you reach this stage, your money will be working for you, instead of you working for your money. It's a great feeling!
What tips do you have for balancing your budget?