Paying down debt can be a daunting task. But with a little
self-discipline and some faith in yourself, your financial picture
can change for the better in about six months.
The following three-part strategy may help you control your cash
flow and encourage saving so you can pay off your debt and handle
the unexpected expenses that may have gotten you into debt in the
Step 1: Track Spending
Begin by tracking your typical income and expenses for one
month. Also figure your unexpected expenses for a year's time --
auto and home repairs, gifts, vacations, etc. -- and divide that
number by 12. Once you have a record of your spending, compare your
monthly outlay with your monthly income. If you have a surplus, you
can apply this amount to paying down debt and building savings. If
you have a shortfall, you'll need to cut expenses.
Step 2: Build Savings
Next, you'll need to establish good saving habits. Each month,
use your income to first pay expenses, then dedicate whatever is
left to savings or reducing your debt. Here are some tips to get
Ask your bank to set up two savings accounts that are linked to
your checking account. Label one "cushion" for emergency cash and
the second, "investments."
Whenever you're paid, put only what you need to live on into
your checking account.
Begin building your emergency savings by depositing a portion of
each paycheck into your "cushion" savings account. If your goal is
to have three months' living expenses, you could reach your goal in
30 months by saving 10% of each month's pay -- or in 15 months by
Put whatever is left into your "investments" account, including
found money such as birthday and holiday checks, annual raises,
If you find it hard to control your spending when access to your
savings is easy, ask your employer about direct deposit. You can
have money taken from your paycheck and placed in a savings account
Step 3: Reduce Debt
The third step -- and the one people typically find most
challenging -- is actually paying down their debt. But now that you
are starting to get more control over your finances with steps one
and two, you can get a better grasp of how much money is available
to begin chipping away at debt. To get started:
List your debts in order of interest rate, from highest to
Add up your liquid assets, including savings and investment
accounts, if any.
List any major purchases needed in the next year. Subtract this
amount from your liquid assets. What remains is the amount you may
have to pay your debts.
Be smart and systematic about paying off your credit cards. Here
are a few tips to help:
Pay off your highest interest card debt first, making sure you
avoid the "minimum balance trap." You can eliminate debt and save
money by paying more than the minimum monthly amount on your credit
cards. The table below shows the difference between making an
assumed $20 minimum payment on a $1,000 debt versus paying $40 a
|Pay Extra and
||Months to Pay
||Months to Pay
|Assumes a monthly compounding of the annual
percentage rate and that the amount due (principal plus accrued
interest) must be paid in full. This is a hypothetical example
for illustrative purposes only.
Consolidate debt. Competition between credit card issuers is so
intense that you can often negotiate your interest rate. Just be
aware that some of the low rates quoted are "teaser rates," which
only apply during the first 6 to 12 months you have the card.
Cancel your old cards. The most you need is two. And leave them
at home unless you really need them.
- Set up a realistic payment timetable and stick with it. If you
need to readjust your timetable, do so. If you have trouble, talk
to a professional. The counselors at the nonprofit National
Foundation for Credit Counseling can develop a more structured plan
for you, if needed. To find their nearest location, call