Debt Management Guide: 8 Steps to Becoming Debt Free
1. Acknowledge the problem
The first thing you need to do is recognize that you have debt, and that this debt is a problem. Make a goal to get out of debt.
2. Figure out how much debt you have
Create a list of all your debts. Write down to whom you owe the money to, how much you owe, your monthly minimum payment and the interest rate you are paying.
3. Stop using debt
Don't get into any more debt. Stop using your credit cards until you have become debt free. If you are going to fix this, you need to stop digging the hole.
4. Prioritize your debt
Put your debts in the order you want to pay them off. Student loans and mortgage debt should be moved to the bottom of the list. Your car loan should be on the list just ahead of your student loans. Your other debts (credit cards, payday loans, medical bills, etc.) should be organized according to interest rate. Put your highest interest debt at the top of the list, to be paid off first. This will maximize your debt payments and reduce the amount of overall interest you pay.
5. Cut your expenses
Find "extra" money in your monthly budget. Go through your expenses and find ways to cut back. Financial experts estimate that 10 to 15 percent of a household's monthly income is wasted. Recapture the wasted money and put it to good use. Decide how much money you can spare for an extra monthly debt reduction payment.
6. Make extra payments on the first debt
Go to your debt priority list. Take that money you "found" in step 4 and apply it -- on top of the minimum -- to the first debt. You are now moving from debt management to debt reduction. Continue making minimum payments on your other debts. If your first debt has a minimum payment of per month, and you have freed up 0 in your budget for an extra payment, your total payment is 5.
7. Move to the next debts on your priority list
When you get your first debt paid off, take the entire amount you have been paying and apply it to the second debt on the list. This means that, for the current example, you take the entire 5 and put it toward the next debt. If there is a minimum on your second debt, your new total is 0. Continue the process down your debt list. If you would like, you can even apply extra to your mortgage when you get to that point to help you build equity faster and pay it off sooner. Paying off the mortgage early is optional.
Enjoy a little celebration each time you pay off a debt. Keep it small and relatively simple. You don't want your reward to put you further into debt! You can have a bigger celebration when the debt is all gone.
Bonus step: Continue living debt free
Hopefully, by the time you get out of debt, you will have no further need for debt management. Throughout the debt reduction process, you should be cultivating positive financial habits that will keep you on the path to financial freedom.
Video: Dave Ramsey's Total Money Makeover Live! - 7 Baby Steps
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