The amount of debt a person has will vary significantly depending upon their age, lifestyle choices, education and background. It can also impacted by unexpected expenditures brought about life-changing events, whether it is positive like getting married, having kids or furthering your studies, or if it is an illness or other adversity you face. Regardless, it is easy to rack up debt in your life without even meaning to.
Paying off that debt can be harder than you think. Many credit cards have high interest rates once you are past that introductory period. If you only pay the minimum rate, you will end up carrying debt for as long as ten to twenty years on a credit card that you used for expenses that you might not even remember!
What are some examples of these kinds of expenses? As a military vet, when you come home, it is natural to want to splurge on a few things, but putting that new TV on your card, those new speakers and furniture and then going out to eat constantly, can quickly rack up your debt.
Also when you spend without having enough savings in place and without budgeting appropriately, things can easily get out of hand even if you are earning a lot.
Debt Grows When You Don’t Plan
It is easy to develop debt when you do not have a budget that you update periodically. Your budget has to include your required expenses like your rent/mortgage, food, student loans, car loans, heath insurance and any other necessary expenses you might have. Then you can add in some leeway for entertainment and other miscellaneous expenses.
Without good budgeting and some savings put away for emergency - at a minimum of $1,000 at the beginning - you can find yourself living paycheck to paycheck every month.
This can become very difficult quickly. For example, if you or your family member gets sick, you will have additional expenses. If you are unable to work, you can quickly become stranded without enough cash coming in to survive monthly.
It can be hard to change financial habits when you have been doing things a particular way and if you have gotten used to a lifestyle that exceeds your budget. Wouldn’t you rather have the peace of mind and cash in hand to buy something you wanted or needed, instead of stressing about making ends meet every month because you have overspent?
Taking control of your finances is taking control of your life!
Even if you are not ready to save a lot of money per month yet, you can meet with a certified financial planner to understand where you are currently and what you need to do to achieve your financial goals, whatever they may be.
Take Stock of Your Current Financial Picture
When you sit down with a financial planner, he or she will carefully go through your current monthly and annual expenditure. You will have a financial breakdown that will show you where you are spending your money. Often this can be a shock to people when you discover you are spending a large percentage of your monthly income on basic expenses such as rent and your cell phone while not making a dent in larger important payments like your college loans, credit cards or other such debt payments.
Track Your Expenses
Once you know where you are spending money and what your financial habits are, you can change them. Start first with your daily expenditures.
You will quickly see where your money is going and you can eliminate the non-essential and establish a clear budget for what has to get paid and what can be added on.
With these excellent habits in hand - lower monthly expenses and an allocated weekly budget for food, gas and related expenses - you begin to have strong self-discipline. You will find even small indulgences seem luxurious and you are satisfied with less as you keep your eye on your prize - paying off your debt and building up your savings!
If you get a new job or come into more money, keeping your same good habits will enable you to pay off debt faster and save money faster. Some of the priorities to think about include setting aside an emergency fund and paying down your student loans and credit cards. Your emergency fund should first be a $1,000. Then you can add funds to include at least one month’s rent and utilities. After that, aim for 3-6 months of monthly expenditure.
Pay More than the Minimum Required
In terms of student loans, always pay more than the minimum. If your minimum payment is $300, pay $400 at least. Make a dent. With a higher salary or additional income, start eliminating your debt. Do it in stages like paying off the credit cards in full while paying a higher amount of your student loans. Once your credit cards are paid off in full and you should see a nice uptick in your credit score too, start paying off your student loans with the same gusto and in as large payments as you can.
Make achieving financial freedom - paying off all your debt and protecting yourself with strong savings - your primary goal. Celebrate your successes along the way. Figure out what other expenses you can eliminate. For example if you do not need to commute to work or you live in an area with great public transportation, ditch your car. Free yourself of your monthly car payment and insurance. Put that money again towards your loans and credit card payments.
Eliminate Your Large Debt in Less than a Year
Track your progress too. It is incredibly satisfying to see the numbers and progress! Within less than 10 months, with a focused plan like this, you can eliminate a large amount of debt and also put aside 3-6 months savings.
Finally, if you decide to move, aim for an area that costs less than where you currently live. Save money by your lowered expenses. You may also want to consider taking out a personal loan to pay off your credit card or student loans at a lower percentage rate and save significant dollars on interest rates.
Improve Your Credit Over Time
It is hugely motivating to see your credit card balances drop to zero and your credit score go from 500s and 600s to the high 700s and 800s. Favorable credit opens up better purchasing options for you whether you are looking to rent or buy a home or vehicle or expand a business or anything that requires a credit check.
Enjoy Peace of Mind
Having emergency funds gives you a peace of mind unlike any other. Being self-disciplined and keenly aware of your own spending habits teaches you how to manage yourself and keep your expenses within your budget. By doing these steps, you will end up with a positive net worth that may be the first time in your life as an adult! Enjoy!