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By Mai Nguyen
Millions of Americans are struggling with debt. It’s a scary metaphor, but not an unfair one: According to the latest statistics from the Federal Reserve, the average credit card balance among indebted households is $16,140, while the average student loan debt is $31,946. And this holiday season, shoppers will spend an average $805.65 on gifts and other seasonal items, according to the National Retail Federation. Many of those purchases will be paid with a credit card, leaving them with bigger balances in the New Year.
Steve Rhode, a consumer debt professional in North Carolina, sees the country’s debt issue as a simple maths problem, with a simple solution. You should spend less than you earn. “People make it so complicated,” Rhode says, “when all they need to do is take action.” But even the idea of taking action can seem overwhelming. When you’re ready to give it a shot, here are the five things you should consider.
1. Track your spending
As the “Get Out of Debt Guy,” Rhode helps people overcome their debt woes. The first thing he tells clients to do is track their spending for three months before they start trying to change their habits. “People’s knee-jerk reaction is to create a budget right away,” Rhode says. “But a budget is nothing more than a page of lies if people are overestimating their income and underestimating their spending by $400, which is usually the case.” Instead, he says, take the time to form an accurate picture.
Rhode suggests using expense management software, which lets you pick your spending categories and gives you insight on your spending habits. Rhode says that people tracking their expenses often find that their discretionary outlay immediately drops as much as 20 per cent, just because they’re paying attention to it.
2. Then you can set up a budget
Budgeting is a question of knowing how much money comes in and controlling how much goes out. Calculate your monthly after-tax income. Then create a list of your mandatory expenses (rent, groceries, bills, gym membership, etc.) and their average cost per month. Use bank statements and receipts to determine patterns and get accurate figures. Tally up your expenses and subtract it from your income. In the red? Shift your budget so more money is coming in or less is going out. In the black? Allocate that discretionary money toward savings or another goal, like a sunny vacation.
Michelle Bisaillon, a 28-year-old writer in Chicago, builds a new budget from scratch at the beginning of each month. It helps her stay on track toward her goal of dedicating $1,000 each month toward paying down debt. She and her husband owe more than $60,000 in combined student loan and credit card debt, and she blogs about her repayment plan at Fit is the New Poor. The key is to keep plans realistic, she says. “I don’t like the idea of having one budget that doesn’t factor in special expenses like birthdays and weddings,” she says. “So I make sure mine is flexible.”
Mary Hunt, a personal finance professional and founder of Debt-Proof Living, recommends what she calls zero-sum budgeting. That means that every dollar that comes in should be allocated as an expense or saving, whether it’s gassing up the car or paying down the credit card. This way, there’s no question about where the money has gone. To set up your budget, you can use an online service that helps you easily track expenses. But a notebook and pencil can do that job well, too. “You don’t want to make it so complicated that you give up,” Hunt says.
3. Match that budget with a debt-reduction plan — but a sensible one
Before you get started on paying off your debt, position yourself for success by first establishing an emergency fund. Hunt recommends saving up till you’ve got at least $10,000 set aside, paying only the allowed minimums on all your debts while you’re saving. “The fund is meant for emergencies that would otherwise drive you back to using a credit card, like when your car falls apart,” Hunt says. This’ll help keep you from getting back into debt — but only if you set some rules. If you’re forced to dip into the emergency fund, you need to replenish it as soon as you can.
Though this method may not be the right choice for everyone — even experts disagree on the “save first” approach — socking away cash helps cover unexpected expenses that would otherwise keep you stuck in a cycle of debt.
When you’ve got something set aside, first tackle your credit card debt, which will almost always have a much higher interest rate than your student loans. Hunt likes to use the popular “snowball” strategy. Line up your debt balances from smallest to biggest, and pay off the card with the smallest balance first (while making the minimum payments on others). “Wiping out that first debt gives you the stamina to keep going,” Hunt says. Then use the money you were putting toward the first card and use it to start paying off the second (plus the minimum you’d been paying to the second), and so on.
4. You should also start cutting your expenses — but sensibly
Steve Rhode had a client who spent $200 on fresh-cut flowers for her home every month. Even though she had crippling debt, she didn’t want to stop buying flowers; she felt like those flowers were part of who she was, that giving them up meant failure. “We make a connection between our finances and our self-worth,” Rhode says. “Debt becomes an emotional negotiation about what we’re willing to give up.” So ask yourself what you can live without, but don’t push yourself to an extreme that sets you up for failure. Instead of forgoing flowers completely, Rhode’s client bought new bouquets only every other week, saving $100 a month.
There’s a lot of room for savings in your food and dining budget. Hunt suggests enforcing cost controls by only using cash for food. Anticipate what you’ll spend each week, he says, and then put that cash into an envelope marked specifically for its purpose, like “lunch money” or “Friday’s potluck dinner.” “Envelopes are a fabulous way to save,” Hunt says, “because when the cash is gone, it’s gone.”
5. And, finally, pick up a side gig
If you’re really serious about cutting debt, find some new ways to make extra money. Deliver groceries via Instacart. Rent a room out on Airbnb. Sign up for an odd job through TaskRabbit.
Yuri Cataldo drives for ride-share service on Friday and Saturday nights. The 35-year-old is the director of Business and Creative Enterprises at Boston’s Emerson College. He wanted extra cash to pay down his $5,000 credit card debt and remaining $20,000 student loan, so he drives during the peak hours of 10pm to 2am, which earns him $25 to $30 an hour. Sure, there’s a downside. “Sometimes when I drive it feels like I’m the sober guy at a party where everybody else is cutting loose,” says Cataldo. But in his first month, he pocketed an extra $500.
For more tips and resources on mastering your finances, visit chase.com/financialfitness.
Mai Nguyen is a freelance writer in Toronto who covers business and personal finance.
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