5 essential steps to escaping your debt
By Holly Johnson
No matter where you live, chances are good that almost everyone you know owes money to someone. They owe money on their cars, their credit cards and their private loans. They've got satellite television and swimming pools, season tickets to football games and designer clothing. Judging only by appearances, the average family appears to have it made.
However, the numbers prove otherwise. According to Experian's latest State of Credit study, the average American is over $27,887 in debt, not including mortgage debt. And if you look around you, it's easy to see why.
If you're in debt and ready to change your ways, it's important to know that it's not too late. You can change your behaviors, change your spending habits, and learn to live within your means once and for all. It may not be easy, but it's the only way to escape from the debt you've created. Here are five essential steps to escaping your debt, once and for all:
Track your spending
Most people end up in debt because they spend more than they earn. The only way to solve this problem is to identify your spending weaknesses and address them. Start by analyzing your bank statements from the past few months in order to determine where your money is really going. Are you eating out a lot? Paying huge sums for entertainment? Use the information you discover to identify your spending weaknesses. Once you recognize the problem, it will be much easier to get your spending under control.
Confront your debts -- all of them
When you're deep in debt, it's easy to stick your head in the sand. However, doing so will only perpetuate the problem by allowing your debt load to grow unchecked. Before you can create a plan to become debt-free, you must list all of your debts, one-by-one. Make sure to find out the up-to-date details on each amount you owe so that you can begin tracking your progress.
Start a debt snowball
The debt snowball method is one of the easiest ways to become debt-free. Start by prioritizing your debts, either by loan size or by interest rate. Then pay the minimum payment on all of your debts, except for the one you've decided you want to pay off first. Many people choose to pay off their debts with the smallest balances first, while others choose to tackle those at the highest interest rate. Truthfully, there is no one right way. However, once you pay off the balance you've prioritized, you should throw all additional funds toward the balance that is next highest priority, and so on.
Don't add to the pile
Once you begin making progress on your debt, it may be tempting to let go of the reins. However, it is crucial that you don't repeat the behavior that got you in debt in the first place. Instead of adding onto the pile, learn to embrace your new, less-expensive lifestyle. Refuse to finance anything that you cannot afford. Instead, insist that any new purchases be paid for with cash, and only after all of your bills are paid in full.
Build an emergency fund
One way to get out of debt, and stay out of debt, is to have a properly funded emergency fund designed to take care of unexpected or emergency expenses. These types of funds typically hold anywhere from three to six month's expenses and should be held in an easy-to-access checking account or high-yield savings account. If that seems overwhelming, start by making weekly or monthly deposits into your account and let it build up over time.
Getting out of debt and staying out of debt is no small feat. However, it will likely benefit your family for years to come. So, track your spending, confront your debts and create a plan to pay them off. Once you make some progress, refuse to go back into debt and use your additional funds to start saving instead. Once you are free of debt and the stress that comes with it, you'll be glad you escaped your debt -- once and for all.