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April 7, 2010 / Abigail Adams

Stop Spending Beyond Your Means, and Do a Budget (but do it just once)!

Anything that seems like an easy way out of debt is probably a scam. Getting out of debt is not easy, but it can be accomplished with determination and discipline.
 
Doing a budget is the most important step!  Most people have no idea where the money goes each month.  The budget doesn’t have to be 100% accurate, at 70% accurate budget is better than what most people are doing.
 
First you want to take inventory of your situation by doing a budget to see exactly where you are spending your money.  So many people think they are in debt because of a loan they took out or a car payment they have, when in fact, it is because they eat out 3-4 times a week, and go clothes shopping every weekend, buy a new XBox game once a week, and online shop everyday.
 
Also by doing a budget you can see where you can cut things out that you didn’t realize added up to so much over time, i.e. Starbucks every morning can cost around $60-70 a month, eating out two times a week can add up to $160, etc.   
 
Next you want to take inventory of what your balances are on your credit cards and any loans you may have, what the minimum payments are, and what the interest rate is for each.  Then you want to call the credit card companies and see if they can reduce your interest rates at all.  You can tell them you got a better offer somewhere else, and want to stay with them if they can lower your rate (even if they don’t lower your rate, don’t run to the next 0% offer you get in the mail…it’s very bad for your credit to continually move your debt around, and even worse to close cards out).
 
After your do the interest inventory, make a list of those debts in order from highest interest to lowest interest and begin putting as much money as you can towards the highest interest debt first, while only paying the minimum on the other debts.  Once you get your first high interest debt paid off, go to the next one, and pay the same amount you were paying on the first debt plus the minimum payment on the next.
 
ie. 
Credit Card 1 @ 17% minimum payment $50 but paying 200 (paying 150 more) Once its paid off go to the next card
Credit card 2 @ 15% minimum payment $50 then adding the 200  (total of 250) from the first card to the minimum  payment of the current card, paid off then,
Credit Card 3 @ 10% minimum payment $50 then add the 250 from the second card to the minimum payment (total payment 300)
 
As you can see there is a snowball affect which helps you pay your debts down faster over time. 
 
Basically you need to find where you can cut some expenses out of your life, in order to add to the payments for your credit cards to snowball the debt down.  Cut all of your credit cards except one for emergencies, do not cancel them!  Don’t eat out but maybe 1-2 times a month as a reward for something good happening or celebrating an accomplishment, and start bringing your lunch to work.  There are tons of things you can do to help yourself out of the situation. 
 
 I hope this helps.

*** (08/19/2010) After floating around the internet, I realize people loath doing a budget and trying to stick to it.  When I mentioned doing a budget, you only do it once (until your financial situation changes).  All you are trying to do is understand where your money is going and not going.  When you do this once, you have all the information in your head to move forward and do what you need and want to do with your money.  If you choose to ignore your budget and continue your cycle of debt, fine.  But if you have your budget in the back of your mind before purchasing that 50″ TV for $600 when two months ago you knew you only have $300 extra a month to spend on the finer things in life, maybe you will wait until next month, when you have that $600 in hand to pay for it out right, and not have to open that 27% interest credit card.

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