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Start at the Beginning - What do you owe?
Summarize your financial situation and make a list of all your outstanding debts including loans, mortgages, car loans, credit cards, utility bills, student loans, and medical or dental bills. How much do your owe and to whom? What interest rates are you paying and what are your monthly minimum payments? How many months or years left do you have on each loan? Record everything in a simple spread sheet and be as detailed as you can be.
How much are your living expenses?
Record your monthly spending to create an accurate accounting of how much you realistically spend each month. Be realistic and honest when you track your spending. Don't forget the extras like restaurant food, videos and entertainment costs. Try not to be judgmental or too hard on yourself - at this stage you are only recording your actual spending.
Plan and budget for yearly expenses such as house insurance, car insurance, repairs, income tax and movies. Remember it is those yearly expenses we forget to include that sink our budget every time.
(See below for more information.)
What is your family income each month?
Be honest. Calculate what you make after taxes in an average year, not what you expect to make in your best year ever, or after your next big promotion. Exaggerating your income will not help you.
Create a realistic recovery budget.
Using the information you have gathered, your debts, living expenses and income - draw up a recovery budget for yourself. Be realistic, while you may be able to reduce the amount you spend on extras like restaurant meals and entertainment, you should allow for the odd manageable small splurge - otherwise you will not be able to live with the budget. At this point, you might discover that by following your budget carefully you may, when combined with a few practical debt management steps, be able to pay down your debt with out going for debt consolidation.
Some of the debt management steps you can take:
. If your credit rating is still ok, you might be able to convince your credit card company to lower the interest they are charging you. Unless you ask, you will never know.
. Make a conscious effort to pay off your debts as quickly as possible - going without the odd latté is really not too hard to do - especially if you can use that money to pay down your debt. A $5 a day latté habit - costs you at least $1250 a year!
. If you have more than one credit card, pay off the one with the highest interest rate as quickly as possible (you will have to keep making the minimum payments on your other lower interest cards). Once it is paid off, cut it up (do not cancel the card, unless it is too much of a temptation for you), and focus on paying off the next highest interest rate card, and so on.
. You might be able to move the debt from your higher interest card to one of your lower interest cards. If you do this, be sure to cut up the higher interest card - and stop using it altogether.
. Stop using your credit cards. |
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