In our recent series on creating a budget we covered some of the basics of getting your expenses and bills under control. Now it is time to take a look at ways to pay off debt. It is time to make a serious commitment to getting this task done. It never seems to fail, once you start paying off your debts something always happens but usually these things only happen and drain your finances when you are without a plan.

It is important to be able to do your best to reduce your overall debt load, without the need to go bankrupt. If your situation is that severe that you are actually considering bankruptcy then my suggestion would be to contact each of your creditors and ask for a reduction in the interest rate. Now of course this strategy works only with some companies and it depends on the jurisdiction you live in and even what country you live in. The thing is when you contact each company you need to speak to a manager or executive who is in a position of authority to grant your request. The only purpose of this strategy is to lower the amount of interest coming off each payment or being charged to your account so that when you do pay your monthly payment more goes to the principal therefore the debt gets paid out faster.

What do you do if you don’t get a positive response when calling your credit card company?

You always have options, some good some not so great. We have taken some time to review this very concern that alot of you may be faced with. We came up with three powerful strategies to get you out of debt and financially free you from the grip your debt has on you. The one thing all of these plans have in common are they work and each strategy gets your debt paid down quickly.

Before we go into the first plan, understand that anything you can do to avoid bankruptcy is definitely the better option as long as it remains legal and morale. To put a plan together and make it work takes huge comittment and perserverance, as well as will-power, and self-control.

The first strategy is known as the snowball method. In this method you list out all of your debts in order of their current balance. Next you make the minimum payment on all of these bills except for one – the lowest balance. On this particular account pay as much as you can afford to pay so you can get this one paid off as quickly as possible. Once this is paid in full, take the payment you were making on that debt and apply it as an additional payment to your next lowest balance. Then once this account is paid in full take the payment you were applying to this one and pay as an additional payment on the next lowest balance. Continue this strategy until all of your debts are paid out. Now this plan is not the best one for raising your credit score, but if you are in financial trouble it is still the better alternative than completely giving up. As each debt is eliminated it will give you a huge psychological boost that will give you even more incentive to agressively attack your debts.

Strategy 2 – In this particular method you concentrate your efforts on the account with the highest interest. What you need to do is list all of your debts as you did before but this time order them by interest rate being charged. Pay the minimum payment on all of your balances with the exception of the higher interest account. On this one pay as much as you can afford to pay extra and once this one is paid in full, take the payment you were paying here and apply it to the next highest interest account. Any additional income you get should be paid directly to this strategy. This plan can be a help to improving your credit score, but it could take a bit longer to pay off all debts than the snowball method.

Strategy 3 – The one downside to the two methods we just mentioned is you have to pay more than the minimum on one of your debts. If you are already on a tight budget, this can make it harder to come up with extra money. This third method is perfect for any of you who find yourselves in this situation. You still pay the minimum balance each month, however instead of paying your bill once a month, you pay half of the minimum every two weeks. By doing this it will help to lower the average daily balance, which is used to calculate your interest each period for some companies. Over the course of a year you will be making the equivalent of 13 monthly payments. This technique works best for those who pay their credit cards online, as it is very easy to select the payment date you wish.

Of all the strategies we have reviewed, which is the best one for you? Excellent question, that depends on you and your situation of which only you know best. However, any plan is better than no plan. It can be easy to get discouraged, but having a plan to pay off debt gives you control over your financial health.

In part 1 of 2 we discussed the strategy on how you should review all the expenditures for the month for you and your family. This was step one in the process of creating a budget, so if you need to quickly review that particular article before moving on please take a minute to do so now. In step 1 it is often the case you will see major areas of spending which you never realized were even there. I mentioned before that I had to take a look at my expenses a few years back and to my surprise I found a $400 leak in my finances which I had no clue was even an issue. Once I found this leak I could have stopped there and not continued the process however I continued on and found another $150 of overspending for the month. What ever you do, don’t stop going through this exercise when you find one thing, finish the process and you will be amazed at what you find. It could mean a savings of a few thousand dollars for the year. My total savings for the year was $6,600 – that is huge!

While you are tracking expenses, you also need to track any money which is coming into the family unit. Make sure you include everything – employment related income and bonuses, dividends, earned interest and any other sources of income. Once you have this information the next step is easy really, all you have to do is add up your expenses for the month and subtract that number from the total income you have coming into the family unit. This is where the real eye opener is.

For most of you it can be very painful to realize that you may be losing money every month. You need to keep in mind the goal isn’t to create a painful experience – the goal of budgeting is to make sure you never spend more money than you earn – you need to live within your means.

At this point your research has come to a close and now it is time to put your budget together. As you go through the process of resolving your debt you will use your budget to reveal where you may have extra money to put towards your debt, while at the same time ensuring you are not digging further in the hole. List your income for the month and start allocating expenses. By categorizing and labeling your expenses this will help you to know where the money should be going. If you love working with spreadsheets, why not create a budget in your favorite spreadsheet program. Of course if your not computer savvy then just use the old fashion pencil and paper.

Now that you are at a point to see what your financial picture looks like most of you may find you have more expenses than income. There will always be a handful of you who have more income than expenses. This is the better picture to have, and now you need to decide where your budget surplus is best suited but that is a lesson for another day. For those of you who have no budget surplus as your expenses are higher than your income, you need double check your figures and don’t be discouraged. You have a challenging road ahead. Even if you aren’t able to pay extra toward your debts right now, staying on a budget will eventually help you to have a surplus when other bills get paid out, you can then take that particular payment and put it as extra on another debt.

Now that you are successfully on a budget, you can appreciate how money and budgeting are new tools. With these new tools at hand, you can be sure you are now in control of your financial future instead of the other way around. Everyone of you are different therefore you need to be realistic for your circumstances and needs, rather than living by statistical data and percentages. After creating a budget you will soon feel great about the finances in your life.

When it comes to buying a big ticket item $200 or more, we often purchase these items on credit, only because we normally don’t have alot of cash on hand to buy these items. Financial institutions have made it easy for you to buy things you normally would have to wait to save the cash for. However as much as the financial companies are there to give you the credit when you qualify, you are the only one who really knows if you can afford the extra payments. Getting into debt is often the result of bad habits which we carry on until we have no choice but to take a step back and restructure our financial habits. One such way of restructuring your finances is by creating a budget.

You may be wondering why should you make a budget and how is that going to help you get out of debt? Well the first thing is if you are at a point where you need to set up a budget then you are probably feeling the stress of your financial spending therefore by having a budget will put financial picture into perspective very quickly. Now there is one very important thing to understand regarding a budget, it takes some serious committment and self control in order for your budget to be a success, as well you need to be realistic in the budgeting process.

Contrary to what most of you may believe and I am saying this as a result of the feedback I have received to date, budgeting is not that hard to set up. It does take time, especially when for the first timers, but like anything else it gets easier with practice and becomes second nature after a bit of time. It can be an exciting process but it can also be very frustrating as you are taking a real picture of your financial health. Like any health checkup there is the risk of bad news – basically put a serious reality check.

One of the main things you need to understand is budgeting is nothing more than writing down what you have for payments, bills, charity etc – basically all of your expenditures for the month and then writing down how much real income you have coming into your household each month.

The first step requires a bit of detective work, but it is well worth it in the long run. Take a piece of paper and write down all the expenditures you have every month. One of the best ways to do this is gather up your bank statements, receipts, your checkbook register and even bill stubs if you keep them. One thing that worked great for me when I was trying to find out why I had little money left every month a few years back is making sure I had a receipt for every thing I spent my money on. When it wasn’t possible to get a receipt I would write down in a notebook I carried with me, the date, the amount spent, where I spent it and why. (sometimes the why is self explanatory)

To properly complete the first step with accuracy you really should take the first month to go through the exercise of gathering receipts and notes on how you spend your money. If you are doing this as a family, it is important to not pass judgement on anyone during this setup period – basically it is business as usual. More than anything you need to have an accurate accounting of how much money is going out so to play with the numbers is only cheating yourself. Remember this budget process takes committment, self control but it also means you have to be honest with your family and yourself. Cheating yourself also means your cheating your family!

In our next message we are going to be discussing the second step to budgeting, for now think about what we have gone over today and we look forward to seeing you in part 2 on creating a budget.