Experts say that financial management is 20% knowledge and skills and 80% behavior. If reducing debt is your goal, putting some healthy habits into practice can take you a long way toward success.
Emotions and money
Most of us want to believe we make financial decisions based on facts. But often, our emotions are in the driver's seat. Some people unknowingly use shopping and spending money to relieve stress or feel better.
Stopping to think rationally about spending can help. Take emotion out of the equation. Consider the real impact of the purchases you make. You may realize the short-term thrill of buying that new jacket isn't worth the stress of not having enough money to pay your bills this month.
Planning for success
Creating a spending plan will help you master the skills of saving your money and reducing debt.
Start by identifying your income. Make a list of everything that comes in. In addition to your job wages, do you receive child support? Social security? Rental income?
Next, list all recurring expenses. This may be a long list: mortgage or rent, utilities, cell phone, cable and internet, groceries, health insurance premium, car payment, even doggie day care – don't leave anything out.
Now do the math. Compare your income with your expenses. Are you spending more than you're bringing in? This can happen to anyone. If it happens regularly, it's time to do some detective work.
Track your spending. Save your receipts. Write down every purchase you make for a couple months, or use a tracking app like BECU Money Manager or You Need a Budget. As you track your purchases you'll begin to notice patterns. You may even realize that you're spending more on lattes (or clothes or takeout) than you realized.
Take control. Now that you're more conscious about your spending habits, you can change your behaviors. You might try cutting back in certain areas and see how that feels. If it isn't working for you, try something different. The key to success is creating a plan that works for you.
The debt snowball
With a focus on paying down your debt, it may seem like tackling the account with the highest interest rate first would be the best idea. Not necessarily. Another good strategy could be the "debt snowball" approach. Pay off the loan or credit card with the lowest balance first, then move on to the next lowest balance loan. One by one, you're knocking off your debts. And that will feel good.
This is where emotion and the need for instant gratification can actually help your financial situation. The momentum you create will build your confidence and motivate you to stick with it.
Use this calculator to understand how long it will take to pay off your balance
10 tips for cutting back
- Change your behavior, change your life. Think about your financial decisions as money moments. Individual smart money moments add up to a lifetime of financial health.
- Live your goals. Money can't buy happiness, but it can be a tool to help you access the things you value. Be conscious about the things you spend your money on. Don't waste it on things you don't value.
- Pay more than the minimum on debts. In the same way that using a little credit here and there turns into a big problem, paying a little extra against your debt every month can really add up, especially when done strategically.
- Keep in contact with creditors. It's important to tell creditors about your situation and work with them on a plan. Also remember, creditors are human. If you show them you're sincere in your effort, they're more likely to be on your side.
- Start saving. It's hard to know when the car might break down or another unexpected expense might pop up. Having a financial cushion of at least $1,000 can come in handy. Saving every month is an important habit to get into.
- Involve your family/support system. If you're part of a family, it's important to make sure your partner/spouse and family are on board. Cutting back as a family doesn't have to be a pain. It can actually be a creative activity and provide everyone a chance to participate.
- Don't over-budget or under-budget. In order to create a successful spending plan it's essential to be honest with yourself on your spending habits. Don't under-budget. If you know that you spend $100 every month on groceries, don't just budget for $80. Under-budgeting defeats the purpose of a spending plan and may cause you to be frustrated with unrealistic outcomes. Likewise, be careful not to over-budget $100 in gasoline each month if you know you only spend $80. Over-budgeting can lead to excess spending of the “extra money” we think we have.
- Earn more or spend less. A second job or higher-paying job can change your situation. So could shopping around for better prices on basics, using coupons and maybe eliminating some spending categories altogether.
- Tackle one budgeting area at a time. Taking on too much at once can be a recipe for disappointment. Focus on one activity until you see results. Then turn your attention to another area.
- Finally, understand how you got here. Debt can happen gradually. It's often a multitude of small, forgettable purchases. But once you're conscious about how you spend money, it's easier to make rational decisions. And that can lead you out of debt and into a stronger financial position.
Debt relief options
In addition to incorporating new spending habits, it's good to know about the financial tools designed specifically for debt relief.
A debt consolidation loan allows you to bundle all your loans into one, which typically has a lower rate. But be wary. Many people who use these loans find they go back to their old spending habits and end up in debt again. Check to see if debt consolidation is best for you. Evaluate and compare your debt consolidation options.
Home loans and lines of credit usually have relatively low rates, and could be worth considering.
If you like the idea of working directly with someone who's an expert, you might consider talking to an accredited credit-counseling agency about a debt management plan. The agency will work on your behalf with creditors to set up terms and a payment schedule. You send a single check, usually monthly, until the debt is paid.
Debt settlement programs are yet another option. These allow you to make a large one-time payment toward an existing balance in exchange for a forgiveness of the remaining debt. The upside is your debt goes away. The downsides are: you have to come up with a significant deposit, and it can negatively impact your credit rating.
Reducing debt takes discipline, desire and a fair amount of patience. But it's doable—and a smart investment in your financial health.
Use this calculator to figure if debt consolidation is best for you
This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant. Investments are not federally insured, not subject to credit union or affiliate guarantee, and may lose value.