I have been doing a series in my monthly newsletter about getting control of your finances in 2008 - there are 8 steps to the process. Here is the 4th installment of the series:
This month we're moving on to step 4 to get control of your finances. You've tracked your spending, created your budget, started your emergency fund now you need to....
3. GET OUT OF DEBT.
Now obviously, this will take more than one month to complete, but this month, it's time to get this ball rolling and start the process.
Your first step would be to make a list of all your debts (credit cards, auto loan, student loan etc.) and prioritize them in the order you'd like to get them paid off. I created an Excel spread sheet to help me with this. There are many schools of thought about how you should attack this list. Many say that you should start with the cards with the highest interest rate first-this makes sense as getting these paid off first will actually save you money in interest payments. However, if you are the type of person that needs to see immediate results, this can be a frustrating way to begin depending on your balances because it may take a while to see your first debt paid off.
Another school of thought is the "Debt Snowball" discussed at length by Dave Ramsey in his book Total Money Makeover. The premise here is to list all your debts from the lowest balance to the highest (this is where that Excel spreadsheet can come in handy to sort your columns). Decide how much extra money you can dedicate to reducing your debt in addition to the monthly payment and apply that to the debt with the lowest balance. Continue to pay the monthly payment on your other debts and throw all extra money to the debt you are focusing on first. When you have that debt paid off, DON'T change the monthly amount you are using to pay off your debts, but apply it all to the next lowest balance on your list. Once that debt is paid off, do the same thing again to the next debt and so on. You will see the amount of time it takes to pay off each debt reduce dramatically as the "snowball" increases in size. I encourage you to take a look at Dave Ramsey's website, www.DaveRamsey.com and check out the information that he has there. There are lots of resources available to help you with this process-but be aware, not all of them are free! You can also check out his book, Total Money Makeover for more information as well (check it out from the local library-that's free!)
This may be a time consuming process, but once you get that first debt paid off, you'll feel great and IN CONTROL! Next month, we'll be taking a look at the next step-Opening a retirement account.
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