how to take control of your debt

simply stephen / November 23, 2009

Here are 7 simple steps to take care of your debt (there are a lot of assignments for this one):

STEP 1 – Track your spending (and that means everything) – on a daily basis you need to find out everywhere that you spend money and how. Most people are able to cut out 20% of their unnecessary spending after they have figured out where and how they are spending money.

For the next month or two carry a notepad and jot down all expenses for the day. Don’t forget to add the bills that are coming out of bank accounts for automatic payments and withdrawals.

STEP 2 – Take an inventory of all your monthly bills and accounts. Be sure to include the Company Name, Account Number, total debt, payment terms (weekly/monthly), number of payments, Interest Rate, Payment Terms (weekly/monthly etc.). This should include your regular expenses like rent and mortgage too.

write down the details of all your bills and expenses.

STEP 3 – Get your Credit Rating to give you an idea of the areas you need to fix to have more leverage with your banks and creditors. A strong credit rating will also help you negotiate the loans and terms you need for the future and will keep the lion from the door.

get your credit rating (In Canada you can go to Equifax Canada and Trans Union Canada – they have an US equivalent). Find the companies that do credit ratings for your country. Make sure you get more than one to verify discrepancies.

STEP 4 – Negotiate with your creditors by contacting each creditor to negotiate the terms directly. Initially they will not be receptive but if you persist they will usually come up with an option for you.

call all your creditors and negotiate your terms.

STEP 5 – Counseling or Consolidation is an option if creditor negotiations didn’t go well (or maybe they did). You could still consider a consolidation loan or line of credit with a lower interest rate and greater terms. Do your research and consider a Credit Counselor to help you negotiate better terms and discover your options.

STEP 6 – Make a debt payment plan – create a plan that is workable. You should now have the amount of each debt, the terms and your monthly expense & income figured out. You know the exact amount for the payments you have negotiated. Pay each of them right away when you receive your income. You should allocate 10% of your money to savings every month. If not start now and include one in your budget.

Instead of using that savings apply it to the either the smallest debt or the debt with the highest interest – that’s called snowballing. Do this on top of the minimum payment you are making to that debt. When you have eliminated it you can take the minimum amount you were paying and the 10% savings and add it to eliminate the next smallest or highest interest bill. This will compound the time it takes you to pay of your debt.

make a debt payment plan and stick with it

STEP 7 – Create a simple budget and stick to it! Don’t forget to review often. You should include an area for savings and emergencies. Now that you know your debt payment and all your expenses you can start trying to follow a simple budget. There are various methods for money management and budget skills. Try using an online tool or seek a simple budgeting system that works for you. We will help you come up with one in a future posting.

create a simple budget. You can elaborate as you get more comfortable with the principles. Try using a free online tool like mint to help make it a little more simple.

All of this should lead you to one conclusion – debt is bad.

This experience does not have to be painful but it is about one thing – the choices you are making. You need to start spending less. Don’t let your debt control you you need to take the steps to learn how to take control of your debt. Consumption has us all in a lot of trouble.

Reduced consumption will help lead you to a happy life that you control.

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