Debt sneaks up on people. It’s easy to find yourself over your head. One purchase was affordable, so was the second. The third, fourth, fifth, and the interest payments on all of it makes money vanish before you know it. There is a whole industry out there to convince us that we need the newest thing, always, at all times. They don’t just sell us “items” like the newest cell phone, iPads or tablets and that giant TV that’s even bigger than the giant bigger TV. They are selling consumerism itself and all of it can be financed with the swipe of a card. Easy – Right?
That easy part is why it’s so hard to pay off debt.
Price, Interest and the Real Cost
When we take out a student loan or a mortgage for a new house, we see the final cost on the last line when we sign. We’re used to that and it becomes part of our financial planning. That’s not true when we take out that credit card and even when we think we’re getting a great deal on that giant TV, that’s not the price we are paying. A few great deals down the road and we’re committed to bills that add up to $500, $600, $800 each month. That’s a lot of money gone from our monthly income. Over the course of time, a few hundred dollars turns into thousands and we’re behind the eight ball.
Credit cards aren’t just there to make things easy for you. They are there for lenders to make money. The interest you pay is why they are interested in you. They are a useful tool and can help you get the things you need or want, but only if you stay in control. Lenders don’t care about your control. They care about the money they will make from you.
We Feel the Pain, But What Can We Do About It?
Whether we weren’t being responsible or we thought we were, debt snuck up on us. We know why it’s so hard to pay off debt, interest is killing us and the longer we pay, the more everything costs. The real question is how to pay off debt and get back to living a solvent life.
Like everyone else, you have a limited, defined amount of income. The first step is to understand how much you’ve got coming in and how much you’ve got going out each month. There’s no doubt about it, you need a plan.
- Some people think they don’t need a budget. Forget that. You do. Understand your monthly income, your living needs and make a realistic assessment of what you owe.
- Stop making only minimum payments wherever possible. The minimum payment is the creditor’s way of making sure you will pay the highest possible price for whatever you bought. Yes – you will continue to make your bills (unless you are in even deeper trouble), but you will pay off debt over a period of years! No one gets ahead of anything on minimum payments.
- If you cannot make higher payments (say on a credit card) at the time payment is due, make that minimum and see if you can’t make an extra payment between due dates. There are a number of benefits to doing this. You will of course pay off debt faster, but what most people don’t understand is that the extra payment will go against the principal and the interest you will pay on the following bill will be figured on a lower amount. Doing this throughout the course of the year will save you a ton of money!
- Assess your bills and assign priorities. What are your highest monthly bills? If you can make an extra payment on them, you will save the most since that interest is costing you more. Do you have one or more bills that are lower and might be “retired?” Nothing feels as good as reducing not just the money you’re paying, but reducing the number of bills you have. It’s an accomplishment! It will be a big help in making you feel good as you pay off debt.
- You’ve made a budget. You know what money you’ve got. It’s time for some life adjustments. Cutting out the things you want so you can take care of the things you need can be a little painful, but it’s not like losing what you need. There is plenty you can do. Gone are the lunches out and triple-sized lattes. Make a decent shopping list, eat at home and buy the food you need to take your lunch to work. Spending $.15 to bring your own coffee to work is great. Spending $5.00 a day can mean making a credit card payment each month.