Has the new year motivated you to start chipping away at your debt—but left you wondering where to begin? In this ongoing series on how to get out of debt, you’ll be introduced to the very first steps to take in order to make your dreams of eliminating your debt in 2012 a reality.
The key to getting out of debt is first knowing exactly how much you owe. It sounds basic, but most people who have debt feel overwhelmed by the idea. As a result, they go through the motions of debt management, and pay the minimum amount required on monthly bills. This strategy will keep your “head above water”—but it never truly leads to a zero balance and financial freedom. (It also costs a lot of wasted money on interest rate payments). In order to get out of debt, you need a plan and a defined “exit strategy.” It all starts with facing your fears and figuring the total debt you owe.
Gather every single statement you have for revolving debt, including credit cards, personal loans, car loans/leases, and student loans. Make a list (either on a sheet of paper, or electronically) with five columns and these headers:
Sort the list from highest interest rate to lowest.Add the total amount of the balances. This is your total debt. (Don’t worry, we’ll break it into manageable chunks)!
On a separate list, write down your monthly income, after taxes and insurance. (If you have no idea, look at your bank statements or pay stubs. Don’t estimate or guess).
Next, take account of your expenses:
GET OUT OF DEBT STEP 3: Calculate what you can put towards debt
Subtract “total monthly expenses” from “total monthly income.” This is the amount that you have to work with in chipping away at debt. We’ll call it your “Freedom Fund.”
These first steps will help you to take account of the nature of your debt and spending habits so that you get a realistic picture of what can otherwise be overwhelming and difficult to visualize. Stay tuned for Part 2 to learn more about how to chip away at your debt in the new year!