The economy does not look like it will get better anytime soon. 2009 looks to be a tough year. If you have a job, consider yourself lucky. If you don’t have a job, keep looking and keep your spirits up. Jobs are out there, you might just need to get a little creative. One way to reduce the strain of the bad economy on your personal finances is to reduce your debt. Here are six tips to help you become debt free in 2009.
Pay cash. This seems so obvious. Do not use your credit cards to buy anything. You cannot reduce debt if you keep adding to it. Plus, with finance charges you are paying more than the original purchase price. The more you pay in finance charges, the less you have to reduce your debt. The only exception to this is if you have a cash back reward credit card. Use it, then pay it in full every month before the finance charges kick in (be careful, the grace period is often less than 30 days). Use the cash back rewards you get to pay down your debt. If you cannot pay it in full every month, do not use it. You will lose more in finance charges than you get back. Basically, if you cannot pay cash for it, do not buy it. Save for it, or decide if you really need it. Do not add to your debt.
Have savings for emergencies. One way to reduce debt is not to add to it in times of emergency. If the car breaks down, it is better to pay cash to get it fixed than to use the credit card. Building your savings, even in tough times is easy. Set up an automatic withdrawal from your checking account into an online savings account. Online accounts have higher interest rates and are harder to get to your money. If it is harder to get to your money, you are less tempted to spend it except for emergencies. Having the money taken out automatically keeps one from finding excuses to not save. Believe me, you will not miss the few dollars automatically taken out. If you think you will, look over your budget and decide what can be cut. One less a movie a month is $10 right there. One less eating out is $25. You can still enjoy life and save.
Use spare change to reduce debt. Every time you use cash, toss the spare change into a jar. Every so often, take that change to the bank. You will be amazed at how much you have. Instead of blowing that money on something that you will not even remember what you spent it on in two weeks, use that money to pay down your debt. You already don’t miss the money since it is spare change. You will be doubling its effectiveness by reducing debt. If you use your cash back card or debit card, you can still capture that spare change. Just round all your purchases each month to the nearest dollar and that amount is your total spare change. If you want a spreadsheet that does the rounding for you, one is available here: http://store.payloadz.com/str-asp-i.61784-n._Spare_Change_Calculator_eBooks_Business_and_Money-end-detail.html
Use tax refunds, bonuses, etc. to reduce debt. To get out of debt, you need to think about money slightly differently. It is not a means to a bigger, better lifestyle by spending all you get. It exists to build a solid foundation so you have a solid, safe good life. Instead of spending your tax refund on that cool vacation you wanted, or a new couch, or an electric guitar, use it to pay down your debt. Once you are out of debt and not wasting money on debt payments, you can pay cash for your vacation, couch or guitar. You will actually have more money to do what you want because less will be wasted on nonproductive things like debt payment. So take that tax refund this year and pay off a credit card. Or put some of it in savings for emergencies. The same goes if you get any bonuses at work. Put it to work getting you out of debt. If there is another federal stimulus check, do the same thing. So, in the future, you can use your tax refunds for fun things. You will enjoy it more if you know you are not adding to your debt when you go on vacation, or refurnish the house.
Use coupons wisely. A glance at a coupon and their use seems a waste of time. Oooh boy, a dollar off three items, be still my heart. But, suppose your grocery store has those same items on sale for three for $5. Normally, those three items would cost $7. Already, you are saving $2. Add in your coupon and you get three for $4. A total savings of $3. Again, does not sound like much. However, neither does saving your spare change. Just like spare change, those coupon savings can add up. By carefully matching your coupons to the store sales, you can maximize savings. Weekly savings of $10-20 are not impossible. Just remember, if you won’t use it or your family won’t eat it, it is not a savings. Only use coupons for the things your family will use. Also, stockpile. You might not need three tubes of toothpaste right now. But, you will need toothpaste in the future. Rather than pay full price later, buy it on sale now. That saves your shopping budget in the future. Now, there are a couple of ways you can use this money. You can either take your weekly savings from coupons and store discounts (don’t forget to add grocery reward program savings in) and put that into debt payment. Alternatively, you can take the amount that you are under your weekly budget and put that towards debt payment. Use whichever works best for you. Remember, just like spare change, this is found money. Put it to good use.
Use the roll-up method of debt reduction. Paying more than the minimum payment on your debt reduces the amount you pay in the long run. However, paying a little bit more on each debt means it takes awhile to pay each debt off. Instead of paying a bit on each, choose one to concentrate on paying off first. Do this by listing your debts by amount, and minimum payment. Choose one to pay off completely. This can be the one with the least amount owing or the one with the highest interest rate. Do not use your house payment for this. Whatever you decide, pick one. Then decide how much extra you can afford to pay each month. Start paying that. Continue to pay that amount until that debt is completely paid. Continue making the minimum payments on all your other debts. Once it is paid off, do not start spending the money you put towards that payment. Instead, put the total amount of the payment – minimum payment plus your extra payment – towards paying off the next debt on your list. Continue to pay this amount until that debt is paid off. Then do the next thing. Keep doing this until all your debts are paid off. Here is an example to help you understand it. You have four debts with payments of $100, $125, $150 and $200 a month. You can afford to pay $25 extra each month. So, your first debt you pay off is the $100 payment with an additional $25 paid each month for a total of $125. After that is paid off, you add the $125 to the next payment, which is $125, so you are paying $250 a month. Then for the third, you are paying $400 a month. By the time you get to the fourth debt, you are paying $600 a month to that debt payout. You are not paying anymore that you were back when you are paying the first debt off, but it is more focused. $600 a month makes a much bigger impact on a debt than $200 a month. You will actually pay off debt much faster this way than paying a little bit more than minimum across all the debts each month.
Some of the tips here are fairly simple. They also do not seem like they will generate a lot of money to use towards your debt pay down. First, you did not get into debt overnight; you will not get out of it overnight. It takes time and discipline. Second, those little bits add up. $10 here, $20 here and you can have a significant amount to put towards debt payment every month. The more you pay down your debt, the less you have to pay. All those extra payments go to reduce the principal. The less principal you have to pay, the less interest is generated. So, the little bit each month generates long term savings. 2009 may be a tough year. Reducing your debt will help you weather it better. Good luck.