Monday, June 27, 2011

How to Cut Down Your Debt

Like many Americans today, I had a ton of debt that seemed to pile on month after month. Between credit cards, car payments, and the like, my debt situation seemed hopeless. I had one Visa card with a $1,250 balance and another with $5,000. I also had a MasterCard with a $1,250 balance and a Discover Card with around $2,500. Then I decided to take steps to eliminate my debt without having to make more money.
The method I used was not rocket science, and anyone can duplicate my success with just a little sacrifice and discipline. Here's what I did to all but eliminate my debt within one year.

Decide What Is Necessary

This is the discipline part I was talking about. When you make up your mind that you want to wipe out debt, then you have to have discipline. This starts with taking a hard look at what you have and what you want to get and then deciding what is really a necessity.
For me, this meant cutting out coffee shops in the morning and making my own cup of joe. I saved about $4 per day or $28 per week, for a total of $1,456 a year. I used this to pay off the $1,250 balance on my Visa and even had a couple of bucks to spare.
Others might decide to brown-bag it instead of buying lunch every day. You could also save if you spend $5 for lunch at the store instead of $9 for lunch at a restaurant.

Downgrade Where Possible

My wife and I went from being a two-car family to a one-car family. We sold the car that had payments and kept the one that was paid off. As our car payment was $450 per month that meant we saved an astounding $5,400 in one year. Include the money we saved on insurance at $70 per month or $840 per year, plus what we saved on gasoline at $25 per week or $1,300 per year. In total our downgrade saved us $7,540 for the year. Goodbye Visa Card No. 2 and Discover Card!
While this was an inconvenience, it saved us tremendous amounts of money each month that we then applied to our debt. We now have two cars again, and both are paid in full.

Cash Is King

My new favorite saying is, "If I don't have enough cash to get something I want, then I don't need it." This can be hard as credit cards allow you to make purchases that you otherwise wouldn't be able to. However, this will catch up with you, and then what good is a house full of material items?

Not Always Top of the Line

You don't always have to have the best of the best. My cell phone is nice, but not too nice. I also ended my long-term contract with a major cell carrier and now use a prepay service. While my phone doesn't do all the latest and greatest things, it still makes calls and texts, which is really all I use it for anyway. Besides, not having the "newest and greatest" cell phone is saving me over $80 per month or $960 per year. That was nearly enough to pay off my MasterCard.
When cutting debt you need to decide what is important. With a little sacrifice and discipline, I have been able to get rid of almost all my debt in one year's time and sock away a few bucks. At the end of the year I paid off $9,956 of debt. Now, I use my credit cards only to secure a hotel room or a car rental, and I've learned the value of what is important over what is wanted. Even though I did this without making any additional money, it feels like I make more since I actually get to keep some of it now.

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