Have you made any New Year's resolutions? Many people plan to shed the extra pounds that are dragging them down – but does that include weight from bad debt? It’s amazing how heavy a maxed out credit card can feel! If you want to shed your debt weight and improve your financial health and get relief from your debt with a plan that really works, read on.
Be Realistic – Shedding Debt is Like Shedding Pounds
Nothing truly worthwhile is quick and easy. A financial plan to tackle your credit card debt is a great new year’s resolution as long as it’s realistic. A successful plan to shed your debt weight is much like a plan to get rid of the extra pounds accumulated over the years. Both require discipline, a check-up to determine where you’re at before you get started, lots of exercise with your muscle of self-control and a reasonable timeline to achieve your goal.
Health Check – Decide what Really Matters and Add it to Your Budget
It’s much easier to create a plan when you know what you’re working with. Much like cooking dinner; you make sure you’ve got what you need before you start. When you want to make changes in terms of your spending, start with what you know. You’re the expert; take a few weeks or better yet, a month, and write down what you’re spending your money on (click here for free resources to help you track your spending).
Once you know what you’re spending right now, grab last year’s calendar and your bank or credit card statements and figure out what you missed. Expenses that only occur seasonally or irregularly throughout the year can be hard to identify. By looking back at what you did last year, you’ll remember things like special occasions or birthdays, repairs you forgot to save money for or insurance renewals that only come due once a year.
Create Good Spending Habits to Live Within Your Means
Everyone’s spending habits are different, so don’t short-change yourself by cheating. The great thing about jotting down what you spend is that rather than feeling guilty about it, you get a second chance to make it right.
Now the fun begins; it’s time to create your spending plan. Consider how much money you have coming in on a regular basis, what you need to set money aside for (so that you’ve got what you need later), as well as when you need to spend money each week or each month on all the “regular” stuff.
Set up a system that works easily for you: a Google Calendar might help, sticky notes on a wall calendar can easily be carried forward to a following month, or automatic payments and transfers through your online banking system.
With a spending plan, your expenses won’t exceed your income and you’ll have what you need when you need it. Voila! It’s that easy, and the bonus is, you won’t feel deprived because you’ve got a budget that lets you spend your money on what’s important to you.
Some bills are pretty set and don’t change much from one month to the next. To end 2013 on the lighter side, you’ll want to focus on what you can change, rather than on what you can’t.
There’s no magic vitamin you can take to melt away your bills. Instead, ask yourself the following questions:
- Where can I trim expenses so that I can top up a payment by even $20 a month?
- Should I suspend regular investment contributions while I’m paying down debt?
- If I consolidate my debt with a new loan, would the interest rate be lower?
- Can I increase my income at all? What about getting income from another source?
- Do I need help considering my options objectively and developing a plan that will work?
Strange but True – You Need Savings to Get Out of Debt
The hardest thing for some people to understand is that you still have to set money aside in savings when you’re trying to pay down debt. If this seems odd to you, think about it this way:
You’ve given up having lunch out every day at work so that you can pay an extra $50 a pay cheque towards your credit card. Now you need to buy new glasses.
Your credit card is paid down but where’s the money to buy the glasses? In the past, you’ve always used your credit card, so what’s the big deal if you do that again? But didn’t you give up eating out just to pay down your credit card?
Instead of relying on credit to make ends meet, if you had paid down your credit card by $25 each pay cheque and saved the other $25 each time in a separate account, you’d have had cash for your glasses and your credit card would have stayed safely tucked away where it belongs.
Something always comes up, so while you might want to expect the best, you’re better off planning for the worst.
Over the long term, debt will drag you down. The interest and fees you pay will only grow. The more you spend to service your debt, the less money you have available for what’s important to you. Dropping your debt weight sooner than later is actually easier than dragging it around with you (trust us on this)!
Try these small changes on for size:
- Use only cash, no plastic of any kind, for all of your purchases for one week.
- Prove to yourself that you can live without your credit card and put it away for two weeks.
- Plan not to eat out for one week – prepare to do that by shopping for foods that you can take along for lunch; create a meal plan for dinners; no take-out on the way home either.
- Don't buy any drinks-to-go for two weeks – coffees, teas, waters, juices, pop.
- Scale back your cell phone features for one month.
- Reduce the monthly fee on one utility bundle, e.g. lower your cable package, for two months.
- Put unexpected money, like a tax refund or store rebate cheque, towards your debts.
With a clear plan of how much you make, where you spend it, how you save it and what you pay towards your debts, you’ll be happy to be the biggest loser as you shed your debt weight one payment at a time (you can even print and use our monthly expense tracker to keep your spending plan (Excel Download) on track).
If You Need More Information About How to Shed Your Debt Weight