Digging Out of Debt: Baby Steps That Lead to a Big Payoff

If you're one of the countless Americans who is buried in debt, you're not alone. But don't give up hope - you can dig your way out of debt and reclaim control over your finances - and your life.

Being buried in debt not only has a negative effect on your bank account, it also leads to a constant feeling of stress and is detrimental to your overall well-being. It probably took you awhile to get to this point, and it will probably take you some time to get out of it - but it's well worth it, both financially and emotionally.

The 'Snowball' Plan
It's not instant and it's not glamorous, but working your way out of debt can be very gratifying. There are basically three steps.

1. First and foremost, stop acquiring new debt. It seems obvious, but you simply must stop spending money you don't have. Stop financing things. Stop using credit. Get rid of your credit cards - if you don't it will be too easy to use them and you'll continue to be trapped in the debt cycle. But beware: you can destroy your cards, but do not cancel them if they have a balance. Why? If you close a credit card that has a balance, your interest rate will probably raise significantly. Wait to cancel cards until they have a zero balance. And speaking of interest rates, contact your credit card companies to negotiate lower interest rates. Some companies won't budge, but there are many others that will.




2. Next, you need to create an emergency fund. It may take some time, but it needs to be done - and do it as quickly as you can. Why? You need a way to cope with unexpected expenses. And since you're no longer using your credit cards (right?), you need to have some cash for emergencies. This fund is not for entertainment or new shoes or vacations. It is strictly for emergencies such as car or home repairs. It's advisable to save about $1000, and keep it someplace where you can get to it, but not easily, such as an online bank.




3. Once you've established an emergency fund, it's time to tackle your debt. Go ahead - give it all you've got. Many experts suggest paying off your high interest debts first, but let's face it - we all want instant gratification. That being the case, pay off the debt with the lowest balance first. You'll pay it off faster and be more motivated to continue. Here's how it will work:

• Pay the minimum payment on all of your debts, except for the one with the lowest balance.

• Add as much extra (on top of the minimum payment) as you can each month toward the lowest balance debt.

• When that debt is paid off, use the amount you were paying toward it and apply it toward the next lowest balance (in addition to the minimum payment due).

This 'snowball' method takes time and dedication, but it doesn't take long to start seeing results. If you stick with it, it will work. And the important thing is to not put it off a day longer - start now.

Once you start seeing results, and even once you've reached your debt reduction goal, it's important to not return to the old spending habits that got you into trouble in the first place. Basically, you'll need to make a complete lifestyle change. Trust me, being free from the constant weight of unmanageable debt is a much better payoff than the instant gratification of a new television or exotic trip.