A key component to a successful retirement is the ability to save, but sometimes debt can get in the way of meeting your savings goals., you can overcome debt woes by changing the way you think about spending, saving, and prioritizing. Here are three steps you can take to improve your debt situation.
Step #1: Budget
Changing your financial situation requires taking a realistic look at your current financial situation. Your analysis should be realistic in that it should include all sources of income and all debt, including rent or mortgage payments, student loans, credit cards, and any other form of debt you are required to make payments.
Whether you use a steno pad, computer program, phone app, or online service – the important thing is that you have a source for documenting the items for which you are responsible. This record of your budget should be reviewed periodically. Optimally, you would include the following information: interest rate accompanying each debt situation, current payment, current payoff amount, and an estimate of how long it would take to pay off the debt at your current rate of payment.
Step #2: Prioritize Your Payoff Schedule
Once you have a list of your financial responsibilities, determine which items you will pay off first. There are many ways to determine your prioritization schedule. You may pay down the lowest balances, first. You may also decide to pay down those items with the high rates of interest, in that those items will require more money attributed to interest than the items that carry a lower interest rate.
Your payoff schedule has to be doable and realistic. Pay too much and you might be stressed in meeting your everyday living expenses; pay too little and you might get caught in the trap of only paying interest and barely chipping away at your balance. Find the balance that pushes you enough to make significant progress towards your goals.
Step 3: Make a Commitment
Now that you have a hold on your budget and a payoff schedule for debt, your next step is to make a commitment to yourself to avoid any unnecessary purchases and debt. That will entail foregoing some activities, extravagances, frills, and perhaps opportunities. After paying off your debt, particularly revolving debt like credit cards, then consider making rules as to what expenses qualify for incurring debt such as auto repairs and other emergencies. Determine which expenses must be paid without incurring additional debt, items such as vacations, furniture, etc. Again, this is your commitment to your financial wellness. Make it work your circumstances and goals, and hold yourself accountable!