Getting Back in the Black
Nine Steps to Get Out of Debt
Source: Jennifer Openshaw

You’re probably carrying a lot more debt than you wish. If you’re like most people, you’re carrying the burden of credit card debt -- lots of it.

People didn't save. In fact, according to the Commerce Department, nationwide we Americans spent 1 percent more than we earn.

The facts suggest we all need to take some realistic steps for getting and staying out of debt. If you're in debt, that means putting a halt to the behaviors that got you there.

It's not as easy as it sounds. It takes an understanding of the problem and its causes. Then it takes some committed behavior from you and your family members to change.

But for me, the real solution lies in changing habits and behaviors that dug the hole in the first place, and keeping good habits in force once back in the black.

Nine Steps to Move Out of Debt

1. Pay more than just the minimum

With interest rates on credit card balances ranging as high as 18 to 23 percent, credit card companies would love for you just to pay the minimum amount every month. If you do this, the interest keeps compounding, and the credit card company keeps getting fatter as your debt rises. Pay at least double the minimum every month on your balance. In a crunch? Cut out a few of life’s everyday luxuries and you’ll find yourself with the extra cash to put towards your balance.

2. Live below your means

Consume less than you earn. For those who don't know their "means," or for that matter their spending -- a budget is in order.

A recent Bankrate.com survey found that 53 percent followed a budget. But of those "not feeling guilty" about their current debt situation, 76 percent used a budget. The budget is only a tool. The strategy is to live within your means. A budget by itself doesn't make this happen, especially if you don't followed it.

3. Sacrifice your savings

Draining your savings account is a great way to get out of debt. Put it this way: the miniscule amount of interest you’re getting from your savings account is nothing compared to what you’re paying in credit card interest. If only you could get an 18 percent return on your money! Pay that balance off in full, and it’ll save you big in the long run.

4. Absolutely Pay Bills Monthly

According to the same Bankrate.com survey, 55 percent pay their credit-card balances each month. Nice, but what about the other 45 percent?

There may be some exceptions for those with irregular income, but for the rest of us, paying in full monthly or double the minimum is essential.

5. Create an Emergency Reserve

Here's another one you hear about all the time -- create an emergency savings reserve. Most financial planners suggest a six month liquid savings to draw upon for emergencies and unexpected expenses.

But I can't stress enough the importance of this reserve as a debt-avoidance strategy. The emergency reserve plays defense for you. Use the reserve instead of going into debt.

6. Use Credit Only With a Plan

Contrary to what you might hear, you don't have to avoid credit and debt entirely. Credit is OK as a purchasing tool to get a good deal on something you need or have budgeted for. If a new outdoor grill is in the plan for next summer and one is for sale in February at 30 percent off, go for it! But...only if part of a plan, not an impulse.

7. Get Family Commitments

The best-laid spending plans fail if you, and only you, are committed to them. Other family members must be in on the game too. That means being part of the planning process and part of making it happen.

Too many times I see one family financial "leader" making the plan solo for everyone else to follow. That gets in the way of shared understanding at best, and can bring resentment at worst. Remember the adage: "People who create tend to support."

8. Drop the “B-Word” on creditors

If you still can’t seem to make your payments, call your credit card companies and have a financial heart-to-heart with them.

Tell them that your back is against the wall financially and you’re going to have to declare bankruptcy unless you can work out a plan with them. Credit card companies’ least favorite word is bankruptcy.

If you go that route, they don’t get paid. They have no choice but to work with you. Ask for a lower interest rate and a slower repayment plan. While they’ll do everything they can to help, remember, you got yourself into this mess, you need to get yourself out.

9. Paid off? Stay that way

So you’ve begged and borrowed and somehow got your credit cards paid off. Now the challenge is to stay that way. First, rid yourself of surplus cards. You should only have one, two tops.

Close out the rest of those accounts as soon as you get them paid off. You’ll be less tempted to use them, and fewer cards are easier to keep track of. The next step: stop using credit cards all together. Leave them at home, cut them up if you have to, but don’t use a credit card unless it’s an absolute emergency.

Source: Getting Back in the Black by Jennifer Openshaw Friday, April 13, 2007
provided by: http://www.marketwatch.com/

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