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Reducing Debt, Investing in the Future


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People go in search of easy ways to fix their credit and get out of debt. I am going to tell you this right up front; There is no easy way to fix your credit or get out of debt. It takes a lot of hard work and discipline. If you have the will, there is a way.

Step One - Chart Incoming and Outgoing Funds
In order to get out of debt, you need to know how much you are making, and how much is going out to pay expenses. So, take the amount of money you bring home (as that is what you have to work with), and keep track of that. Next, add up all of your monthly expenses (rent/mortgage, car payments/leases, utilities, groceries, credit cards, installment loans, etc.), and subtract that from the money you make. If it comes up as a positive number (i.e. you make more than you pay each month), you are in good shape. This means you have some leverage to pay off your debts. If it comes up as a negative number (i.e. you make less than you pay out each month), you have some problems. This means you definately need to make some changes. There are two things you can do: spend less or earn more. You could also do some combination of the two. This means you may have to stop doing things you are used to doing; eating out, going to movies, etc. For most people, that will probably be sufficient. In extreme circumstances, you may need to do things like cancel cable/satellite tv service, cancel cell phones, reduce home phone service perks, sell a vehicle, move to more affordable housing, etc. Here is an example:

Incoming funds
$1800 after taxes

Outgoing funds
$600 rent
$212 car payment
$70 car insurance
$40 credit card #1
$32 credit card #2
$27 credit card #3
$200 groceries
$50 home phone
$40 cell phone
$120 student loans
$80 electricity
$80 gasoline

Incoming $1800
Outgoing $1551
Leftover $249

Now, you have $249 to work with in order to reduce your debt. Use this in order to start eliminating each of your debts, one at a time.

Step Two - Organize Your Debt

You determine which debts to reduce by finding the one with the highest interest, and paying it off first. Here is a list of the total balance of each debt, and its interest rate:

Credit card #2 - $32/mo. - $800 @16.99%
Credit card #1 - $40/mo. - $1200 @ 15.99%
Credit card #3 - $27/mo. - $600 @14.99%
Car payment - $212/mo. - $10,200 total @ 11.99%
Student loans - $120/mo. - $15,500 @ 5.3%

So, Credit card #2 is the most expensive debt, because it has the highest interest rate, and it has no tax deductions. So, you will pay the minimum payment on all of your debts, including Credit card #2, and then the extra $249 to Credit card #2, until it is payed off. It should be payed off after three or four months. When it is payed off, move to the next most expensive debt, and take all of your extra money and pay it off, you will not have $281 extra. Continue to do this until all of your debt is payed off.

Blogger Frugal Work at home mom Says:

August 21, 2005 7:20 AM 

Welcome to finanical blogging! I am enjoying your blog so far.

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