The following is a guest post from our friends across the pond – MoneyCrashers.com
David Bakke is a financial contributor for Money Crashers Personal Finance. After digging himself out of over $30,000 in credit card debt, he made it his mission to help others do the same.
The level of consumer debt in both the U.K. and U.S. is shocking. The average American carries just under $8,000 in debt, and the current average debt stands at €7,900 for U.K. citizens. Dealing with debt is an international problem for individuals and governments alike. But as individuals, we can’t depend on anyone else to bail us out, so the task must be taken into our own hands.
Climbing out of debt can take time. However, it doesn’t have to be a difficult process. Here are five tips to get you well on your way:
1. Get Organized
The first thing you must do is identify exactly where your money is going by making a personal budget. Americans should investigate using a website such as Mint.com for their budgeting needs, while those in the U.K. can do well with BankTree. Personal budgeting software gives you an in-depth look at how much money you bring in relative to what you spend and how you spend it. You can use this information to identify what expenses to eliminate.
Your first goal is to have more money coming in than going out, and your second is to eliminate enough expenses so you can focus on reducing your debt.
2. Choose Your Strategy
Two of the most popular strategies for paying off credit cards are the debt snowball and debt avalanche strategies. By applying the snowball approach, you pay off credit cards with the lowest balances first. By using the debt avalanche strategy, however, you address accounts with the highest APRs first.
The debt snowball option is good for those who need the motivational boost of paying off one account quickly. The debt avalanche approach, on the other hand, saves you more money in interest in the long run, but may be harder to stick to since it takes longer to see results.
3. Slash Personal Spending
Get in the habit of identifying whether a purchase is a want or a need before you make it, and eliminate as many wants as possible. For example, if you like updating your wardrobe every few months, you should put that habit on hold at least until your debts are paid off.
Furthermore, consider saving money on ongoing expenses by using extreme couponing strategies at the grocery store, or by raising your thermostat by several degrees over the summer. It can also pay off to regularly visit the idea of refinancing your mortgage, as refinancing programs and products are often updated.
4. Set Goals
Set monthly, quarterly, and annual goals for how much you plan to pay down. If you get ahead of schedule, update your goals to reflect this. If, on the other hand, you see yourself falling short, don’t lose hope and give up. Instead, identify what caused your shortcomings and, until you can get back on track, ratchet back your goals.
When you create your budget, include a modest amount for celebration when you meet your goals. Since half the battle of paying off credit card debt is psychological, it’s vital to acknowledge when you’ve done a good job in order to keep yourself motivated.
Having credit card debt is not an unavoidable part of life – it is possible to be debt-free. If you’re currently carrying balances, you’re likely wasting loads of money on interest. So if you need motivation to get out of debt, pull out last month’s statements to see exactly how much you spent on interest. What else could you have done with that money?
What other strategies can you think of to eliminate credit card debt?