Saturday, July 25, 2009

Don't Dig Yourself Deeper Into Debt - Part 3

Tip #168 - Don’t Dig Yourself Deeper Into Debt – Part 3. In Parts 1 and 2 of this series we discussed how to get out of consumer debt. In this last part of the series we will discuss how to stay out of debt.

After you have come up with an amount you need to pay off each month and have adjusted your expenses so that you can meet that payment (or increased your income to make that payment), then the final step is staying out of debt. By making a budget that lists all of your income and all of your outgo, you can stop spending more than you earn. But you need to strictly follow the budget to stay within your means. If your income is $5000 per month, then your expenses need to stay under that amount to stay out of debt. Simple in theory, but harder in practice. So let’s look at specific methods of staying out of debt.

The first step to staying out of debt is to not spend money before you earn it. Some people spend money before they get it because they know it’s going to come in their paycheck next week or next month. Well, let’s try to get out of that habit. Scrimp and save for a week or two or a month until you are all caught up with your paychecks, so that you are not spending in advance of earning the money. Once you are caught up, stick to your budget and don’t spend the money unless you already have it. It will take many sacrifices but once you are on the right spending cycle with your income, it will be much easier to live within your means.

The other step to staying out of debt is to not spend more than you have by not using your credit cards. Using credit cards allows you to spend money that you don’t have. If you just stick to money that you have in the bank and in your pocket, then you cannot go into debt. All of this sounds ridiculously simple, and while the concept of it is, the reality isn’t always so. A car breaks down and there is no money to pay to fix it, so you put it on your credit card. Or a special occasion comes up and you decide to front the money until you get paid the following week. As I said, it’s not easy. It takes a lot of discipline, hard work, and a realistic budget. That includes a line item in your budget for car repairs and a line item for special occasions. If you have an old clunker car, then you need a line item in your budget for repairs. Otherwise the budget isn’t realistic. If you have no money left in your budget for this line item, then you need to cut out a luxury in your life – the cable t.v. or the new clothes you like to buy. Again, it sounds simple on paper, but is harder to do in real life. However, in order to keep your outgo less than your income, you need to be prepared for things that come up and include them in your budget. This way you are not putting things on your credit card that you haven’t budgeted for.

In summary, to get out of debt, address your problem, figure out a payment plan to pay the debts back by increasing your income or adjusting your budget. If you don’t have a budget, make one, and make sure it’s realistic to meet your needs. Once you are following these steps and have gotten out of debt, you need to stay out of debt. Don’t spend money before you earn it and don’t ever spend money that you don’t have. Once you follow these steps, you will get used to your new way of life and you will wonder how you ever lived in debt before. You will feel freer and happier, and will probably sleep better at night, too.

In Real Life (IRL) – As with every thing else, once you address your problem that you are in debt, you are halfway there to solving the problem. I always read about people who follow Dave Ramsey to get out of debt. Out of curiosity I read his book and understand his appeal. He outlines about 7 steps to getting out of debt. It’s not a magic cure or anything truly out of the ordinary. It takes hard work, budgeting, and being committed to paying off your debt on a schedule.

While reading finance blogs and forums, I have read about many people who have paid off their debt using Dave Ramsey or similar plans, and I’m talking thousands and thousands of dollars’ worth of debt. That takes incredible discipline and a change of spending habits. Anyone who can do that has my admiration. It’s hard work to be sure. But the results are so worth it. Once you are out of debt and are living within your income, you can really start to live. You can go to sleep well at night knowing how your bills will be paid on time. Also, you can spend your money contentedly knowing that you can afford what you are paying for. It's not easy and I wish everyone who is in debt or whose spending is out of control the best of luck in taking the first step to taking care of it.


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