Debt Elimination Strategies - Financial Freedom From Debt and Creditors

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Debt Elimination Strategies - The Path to Financial Freedom

Last Updated: October 19, 2011

Have you taken on more debt than you can handle? You're not alone. Thousands of Americans are in the same boat, with many of them defaulting on loans, losing their homes and cars, and some even filing bankruptcy. It doesn't matter how much money you make, if you can't live within your means, you will become a slave to your creditors.

This article is by no means a comprehensive treatise on financial planning, but rather a list of strategies you can use to regain your financial freedom.

Why Are You in Debt?

Money is a powerful force that can destroy you, if you let it. You must learn to control your money instead of it controlling you. If you don't, you'll never get out of debt. Be brutally honest with yourself and really examine the reasons why you are in debt. I'm not referring to financial conditions which may be beyond your control, but about the times when you let the power of money control you. Here are some questions to consider:

Do you buy stuff to mask your own insecurities?
Are you using money as a drug to comfort yourself?
Do you feel you have to compete financially with your friends, neighbors, or family members?
Are you trying to impress someone? Maybe your parents?
What is it that compels you to buy something right now?
Why don't you have enough self-control to buy it later or may never?

These are serious questions which must be answered before you attempt to control your money with any kind of budget or financial system. Otherwise, it's like treating cancer with a Band-Aid. You might even consider psychological counseling for your money difficulties.

We wrote an article on how to tell if you're a compulsive spender. You might want to give it a look see.

How Much Debt Do You Have?

It is important you be fully aware of how much debt you are actually carrying no matter how painful it is. Take a sheet of paper, write down the amounts of all your debts, and total them. Keep this amount fixed in your mind. It has been said that pain and pleasure are powerful motivators. If the pain of carrying your debt is acute enough, you will take aggressive measures to change your behavior.

Start Eliminating Your Debt Right Now

Put away your credit cards and make a comittment not use them. If you don't think you can kept the pact you've just made with yourself, give them to a friend or relative to hold. Or better yet, cut them up. The thing you don't want to do is cancel your accounts, as closing accounts which are old (accounts which are 60 months old are valuable) can have a negative impact on your credit score.
Pay off your highest interest rate credit card first, paying a little more than the minimum payment each month. This will shave months off your debt. With your other debts, continue paying just the minimum. After you finish paying off your highest interest rate card, move on to the next highest interest rate card. Roll over the amount you paid each month from your first card to pay off this one. Don't be tempted to use the money elsewhere! You must stay disciplined. You’ll pay off the second card even more quickly. Continue this strategy until all your debts are paid.
If you find yourself unable to pay your bills, communicate with your creditors! Be honest, and explain your financial situation. Ask them to reduce your payments or the interest rate. Tell them you plan to pay off the debt. The worst thing you can do is not communicate. They may assume you are unwilling to pay your bills and get nasty.
Apply for a low interest rate credit card and transfer your balances. A word of caution: Be suspicious of cards with a low-interest rate cards introductory period. Read the fine print before you apply.

What they don’t tell you is that most of these cards jump back up to a high interest rate after 4 to 6 months. Then you’re back to where you started or even worse! If you do get a card with a low, introductory rate, have a financial plan about what to do when the rate and your payments increase so you won't be caught off guard.
If you own your home, you might consider a debt consolidation loan. This kind of loan is a second mortgage on your property which allows you to consolidate your debts into one payment. Some loan programs require no equity or appraisal. You can use this loan to consolidate credit card bills, car payments, or any other bills. Interest on this loan may be fully tax deductible depending upon your situation. Consult your tax advisor. As with any home loan, this is a lien on your property. If you sell your home, you must pay off both your 1^st and 2^nd mortgages. In addition, although you may be making lower monthly payments, you may be paying for a longer time period than if you paid off each individual debt.
Make an appointment to see a credit counselor. You should be able to find a free service in your area that will help negotiate payments with your creditors, and give you good financial advice. You can find one on this site: http://www.nfcc.org. They'll give you a fresh perspective on your financial burden, and help you realize you're not the only one dealing with debt. They'll also be candid with you and tell you whether or not you should consider bankruptcy as an option.

Note: I have heard from people who have had both good and bad experiences with this approach, so be careful. Ask the company you contact what happens to your credit if you use their services. Is it difficult to re-establish credit after using their services? Call your debtors, and get their feedback too.

How to Live Debt Free Forever

Now that you've reviewed some of the personal reasons you've found yourself in debt, and taken some drastic measures to attack your debt, it's time to develop a plan to determine where all your money is going, and develop a healthy financial strategy. You must be able to account for every penny you spend each month. Don't worry, you won't have to cut your spending yet. Here's a simple method to develop a plan which may fit your comfort zone.

Step 1

Take a sheet of paper, and write "Master Budget" at the top. On one side, list all your relatively fixed expenses (mortgage/rent, telephone, electric, water, gas, car, credit card minimums, etc.) Better yet, if you have a smart phone, there are tons applications online you can download to track your expenses and make a budget. A nice thing about using a smart phone is that you always have it with you.

Step 2

Now comes the tough part. You must estimate how much you spend on various expenses like food, eating out, entertainment, stuff for the house, school, clothing, car repair, gasoline, etc. If you have old receipts, you can use them as a guide for real expenses.

Step 3

Track all your expenditures for one month. At month’s end, total each category, and you’ll know exactly how much you spend on everything.

If you're not using a smart phone application, you'll need to carry your budget notebook where you go. Carry this notebook with you wherever you go. Be very detailed on your categories. For example, one category might be "Eating Out." Under this heading, write down the date, description, and the dollar amount for each time you eat out.

No matter how you do it, tracking your expenses allows you to see exactly where all your money is going. If you don’t know where your money is going, how can you expect to control it?

After you’ve totaled your categories, transfer them and their respective expense totals to your "Master Budget" spreadsheet.

Step 4

List your take home income after taxes on your "Master Budget." You might want to develop two different budgets based on your two pay periods. Should you pay the phone bill on the 1^st, or would it be better to pay it on the 15^th? What I find is that one pay period usually has a tighter budget than the other because you have to pay the bigger bills like your mortgage, rent, car payments, etc.

Step 5

Now the challenge begins. Balance your income and expense categories, so you stay within your budget. Leave yourself a $200 cushion in your account. Take a long hard look at your expenses and see how you can reduce them. Let’s look at the category of "Entertainment." which may include dinners out, movies, movie rentals, plays, etc. Let’s say you’re currently spending $75 per weekend on eating out and entertainment. That’s $300 per month. Why not only spend $100 and take $200 to make a larger payment on one of your high-interest credit card bills?

You may be shocked to realize how much you spend on little things. For example, if you spend $2.00 per day on gourmet coffee, you spend $40 per month just on coffee. Why not buy a nice coffee maker, and make your own, or at least have coffee out only once or twice a week?

You’ll have to play around with the amounts you set for your expenses categories. You don’t want to completely cut out your fun. Otherwise, you’ll give up on your budget completely. Cut back a fair amount, and see how it feels. Adjust as you go. Ask yourself questions like:

Could we sell our home and buy or even rent a smaller place until we get back on our feet financially?
Should we move to a different area where housing is less expensive?
Do I really need to buy premium gas?
Why not wait and rent a movie, instead of paying $10-$12 to go to the theater?
Do I really need all those magazine subscriptions?
Do I really need those movie channels? Could I live without cable TV?
Do I really use my bottled water service? What are some cheaper alternatives?
Do I really need a new dress, suit, purse, jewelry this month?

How you answer these questions all depend on how quickly you want to get out of debt.

Step 6

By now, your Master Budget should list every category where you money goes. When you start living out your new budget on your the next pay period, enter into your spreadsheet (paper or electronic) the individual amount you have allotted for each category at the top of its own page. Think of each category page as a mini-account log. Every dollar you spend must be categorized and deducted from its appropriate category account balance.

If you're recording expenses in a notebook, remember to carry your notebook with you everywhere. If you're doing it on a smart phone, you will probably have your spreadsheet with you at all times.

When you get to zero in one category, you can’t spend any more in that area! However, what you’ll find is that you have other categories that have money left over at the end of your budget period. You can roll these amounts over to categories you've zeroed out, or better yet, use those extra dollars to hammer away at your debt. Revisit your master budget and adjust it accordingly.

Still looking for ways to make that budget stretch further? Here is a little guide more tips on ways to save money.

I hope these tips have encouraged you. Good luck on pursuing financial freedom!


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