Get Out of Debt, Part 1

Debt is smothering Americans.  According to the Federal Reserve, Americans carry an average credit card debt of $8,000.  The average household owes $69,227 for their mortgage and $19,000 in consumer debt (a 41% increase since 1998).  In addition, personal bankruptcies have doubled in the past decade.  Americans are truly living beyond their means to repay and it’s showing up in the form of troubled marriages, increased medical problems, and stressed-out lives.

Getting free of the debt monster’s grasp is the heart of Principle 3.  It will take some time and discipline, but everyone can take responsibility for their finances and live debt-free. This article will show you how.

Two Options

There are really only two sources to obtain the extra cash needed to reduce or eliminate debt: spending less from your current income to create a surplus (Principle 2); and finding creative ways to bring in more income to apply towards the debt (Principle 1). (See my previous post for some creative ways to create cash.)

Looking at Cash Flow

Before you can count on your cash flow to generate any cash, you need to know where you stand. This requires you to make a budget.  It doesn’t need to be complicated – even a simple listing of what you make versus what you spend each month can be surprisingly valuable.  We'll talk more about the b-word in a later post.  For now, here's a short primer.

On one page, list all the money you receive monthly (or monthly average if you’re income varies) to determine your “Monthly Gross Income”.  Subtract from this your taxes and automatic deductions (insurance, retirement, etc.) to get your “Net Income”. 

Next list all your monthly expenses – housing, utilities, food, transportation, clothing, medical, insurance, debts, entertainment, savings, charitable giving, and miscellaneous.  Record your average spending in each of these categories by reviewing your checkbook, bank statements, and receipts over the past three months. Remember to include things requiring annual payments, like insurance, additional taxes, or subscriptions.  Finally, track your cash spending for 30 days, adding every unaccounted-for penny to the proper category.  When finished, subtract your expenses from your Net Income to (hopefully) get a positive number.

If you find your monthly expenses are greater than your income, you’re not alone.  According to MSN MoneyCentral, 43% of American families spend more than they earn each year.  But never fear, you can get back to even – and even better – by evaluating your budget and taking some reasonable steps.  We'll discuss some practical ways of doing this in part two.

Comments

[Louis Crisci]

Hands down I can say from personal experience that the best way to get out of debt is to increase income w/o increasing debt level.

Opportunities to increase income are greater now than ever before due to technology.

[all_about_credit_card]

Here is the way to do it.
1. Stop using credit cards.
2. Make a list of all of your credit cards, the interest rate, the total balance owed, and what your minimum monthly payments should be. Put that list in order by the interest rates...highest first.
3. The credit card with the highest rate is costing you the most. Pay the minimum balances on all of the other cards. Any additional money that you might have each month should go to the card with the highest interest rate. Pay more than the minimum. By not eating out or making additional cuts in your monthly expenses (beer, movies, etc...) you will be able to pay more toward your highest card. Pay that off. Once that is paid off, take all of the money that you were putting toward it and put it woward the card with the 2nd highest rate. Pay it off and then on to the next.
The trick is to avoid the temptation of using the cards you paid off and putting some additional balances.

[Patrick]

Good article and solid advice. I wish all Americans would view your blog and take your advice. The quickest way for wealth building that I have found is to find someone successful and get them to mentor you on how to repeat what they have accomplished. There is no better time to start. All the best.

[shonna ritchey]

Excellent articles. My husband and i ran into serious credit card issues after the birth of our son. these people were great helps to us. If anyone is in serious shape that they cant get out the way that is described, these people really helped us avoid a serious bankruptcy with never any obligation. Although temptation to use credit cards are still there and its very hard to do, but must be avoided.

[RJ Smith]

Credit card debt is the worse. So hard to get out from under once you get in trouble. Its easier to lose weight or stop smoking.

[Julie]

Credit card debt is hard to get out of. I suggest paying off the highest interest rate card first. Always pay more than your monthly suggested payment. Also try to cut your expenses when possible, and if you have to, get another job.

[get out of debt]

Getting out of debt is really not easy to do especially if one is already burdened by it. The method of listing all your expenses can be helpful because you can track down where your money goes. And to add, in order to be completely out of debt, one must be very careful not to use the credit cards until they are all paid off. Discipline is really needed to become successful in the debt-free endeavor.