Living debt-free is an impossible dream for many Americans, especially if you own a home. But taking on debt isn't a bad thing, as long as you don't let it spiral out of control. Once you become financially savvy about things such as good and bad expenses and budgets, you'll be on the road to controlling your debt.
Track Spending Patterns
Tracking your spending makes you more aware of unnecessary purchases and helps you control your debt. Write down everything you spend money on for one month. Include every purchase you make and every bill you pay, including drive-through drinks and movie rentals. At the end of the month, look at how you spent your money.
Create a Budget
Once you know where all your money goes each month, create a budget. Put your expenses into categories such as mortgage or rent, auto expenses, utilities, communications, entertainment and groceries. Cut back on unnecessary expenses -- movie rentals, eating out, impulse purchases -- and place the extra cash in a savings or retirement account. For instance, if you normally spend $5 per day on a designer coffee drink, cut your spending to once a week and put the unused $20 in savings each week, totaling $80 per month or more. In one year, you'll have banked $1,040 before interest.
Avoid Opening Too Many Credit Card Accounts
Avoid the temptation of taking advantage of credit card offers that come your way. The more accounts you open, the more debt you will potentially acquire. In addition, your credit score may suffer if you open too many accounts and get too close to their credit limits. To control your debt, use no more than 30 percent of your total credit limit, according to information on the Consumer Financial Protection Bureau website.
Pay in Full or More Than the Minimum
Charge only what you can pay off at the end of the month and control your debt. When you carry a balance, your creditor will charge you interest. If you pay off your charges within the grace period, you'll avoid interest charges. If you can't pay in full each month, up your payment by $15 or $20 to pay off your bill in record time and save thousands of dollars in interest charges. Look at your credit card statement for specifics. Federal law requires your creditor to detail how much money you can save in interest if you make more than the minimum payment toward your credit card debt. For example, according to information on the Federal Reserve website, if you have a debt of $3,000 at 14.4 percent interest and you make the minimum required payment of $90 per month, with no additional charges it will take you 11 years to pay off the balance. If you increase your payment to $103 -- which is $13 more -- you'll pay off the balance in 3 years and save more than $1,000 in interest charges.
Build an Emergency Fund
Build an emergency fund that contains three to six months of living expenses. Then, if an emergency expense arises or you or your partner lose a job, you'll have a cash cushion to fall back on instead of drowning in debt. Budget a certain amount of money each month from your and your significant other's paychecks toward your emergency fund. For example, if your living expenses are $3,600 per month, try to save $300 each, per month. In one year, you'll have two months of living expenses saved.
Pay Your Bills on Time
Pay your bills on time. If you allow yourself to sink into a cycle of late payments, you can rack up expensive late fees -- and over-limit fees in some cases -- and blow your budget. Set up automatic payments via your creditor's website to nix the possibility of late payments.
Avoid Charging Large Purchases
Even though credit cards or personal loans are a quick way to get what you want, don't use them as a way to pay for large, expensive purchases or you'll sink yourself further in debt. Instead, save money over time for that luxurious family vacation or backyard pool. One exception: an interest-free loan, for a long enough period of time, which allows you pay your debt in full before interest charges take effect.
Know When You Need Help
If your bills begin to overwhelm you and you find it difficult to make payments on time, check into your options. Look at a personal loan with a decent interest rate and pay off several existing creditors in favor of one loan and one interest rate. Only do this if it makes sense. For example, if you have three credit card accounts with interest rates that are 18 percent and above, getting a loan at an interest rate considerably less than 18 percent to pay off the accounts is a smart move. You can also talk to a reputable credit counseling service or look at options to refinance your mortgage to save you hundreds of dollars each month.
- CNN Money: Controlling Your Personal Debt
- New York City Department of Consumer Affairs: Debt Stress?
- Delaware State Treasury: Taking Control of Your Personal Finances
- Federal Deposit Insurance Corporation: Managing Your Money in Good Times and Bad
- Board of Governors of the Federal Reserve System: New Credit Card Rules Effective Feb. 22
- Consumer Financial Protection Bureau: How Do I Get and Keep a Good Credit Score?
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