Wednesday, March 5, 2008
Worried about your debt ! Want to get out of it? Read................
In America, almost all house holders are under the debt trap, whether its small or big in size. And they find it difficult, when they have to pay off other expenses like mortgage, credit card, and car payment. And this would cause them to get pushed into the debt cycle and thus consume a fair share of their monthly income.
There are several debt consolidation companies available in the market, which assure you to get rid of your debt easily. But it would be good if you try it out yourself first.
1) Evaluate your debt:
First you have to find, how much debt you owe? The amount varies from person to person. If the finance onhousing debt is more than 20% on your total monthly income, then it is the case of over-extension. And if you are one of them then do not panic.
2) Set up a monthly budget:
Take a pen and paper, and note down your monthly incomes and household expenses every day. At the end of the month, sum-up the expenses, and divide them into 2 categories necessary espenses (e.g. food, utilities, rent) and unnecessary expenses (e.g. entertainment and meals out). Now you have the clear picture of your spendings. Try to cut unnecessary expenses as much as you can.
There are some more ways to reduce unnecessary expenses like bringing food from home instead of going out to the restaurant at the lunch time. Even you can reduce some transportation costs by leaving your personal car at home and opting for public transportation, which would save the car parking costs. This will certainly help you to find the way your money flows. You can save some bucks from your utility costs than before e.g. you may turn off the lights when not needed or try to make less long distance calls etc.
3) Pay-off your debt:
Now onwards every month, you can save some bucks, which you can use to pay-off your debt. But here you have to analyze whom to pay-off first.
* High interest rate debt - You should consider paying off high interest rate debt first. Assume you owe loans $1000 from two different lenders, which charge 20% and 8% respectively. Now, suppose you have decided to pay-off a total of 6% per month. If you have decided to pay-off 4% towards the higher interest rate and 2% towards the lower interest rate, then that would be saving some dollars in terms of interest.
** Transfer high interest rate debt to a lower interest rate - You can do this by consolidating your several debt into a single and lower interest rate. It will save some dollars in terms of paying the interest and also in the form of postage & paperworks costs.
*** Go for only long term - Homes, education, washing machine or computer will be there even if the debt is paid off, so it is better to borrow only for a long term and make the best use of debt, as this only gains in value. You should avoid using credit card for concerts, vacations or motels, lest you end up paying more in terms of cost of these items.