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Five Steps to Debt Management

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When consumers find themselves over their heads in debt, the prospect of digging their way out can seem impossibly overwhelming. Taking these five simple steps will make debt manageable, however--and eventually make that debt disappear altogether.

1. Cut up credit cards and open a pre-paid card account. This first step should be taken before any other action. It’s wise to hold onto one high-limit card for emergency use, keeping it safely at home rather than in a wallet, where it might be tempting to use for an “emergency” caffeine-fix or the like. This card should be saved for real emergencies only, such as a vehicle break-down or unexpected illness. Opening a pre-paid card account to be used instead of credit cards will ensure that a person doesn’t continue adding to debt by spending money they don’t have.

2. Write down ALL expenses for a month, then see where spending can be cut. The spending-records should include even the small expenditures like a coffee or a vending-machine soda. It may be a surprise to see how even the “small” things add up! At the end of the month, total the expenses in various categories (groceries, eating/drinking out, clothing, gas and transportation, etc.) and take a look at where spending can be cut. It’s critical to focus resources on paying down debt, which may mean some short-term sacrifices in expendable categories like eating out or buying new clothes.

3. Create a comprehensive list of monthly bills and debt payments. With the information gathered about spending (and the planned adjustments to that spending), it becomes possible to compile an accurate list of monthly expenses. Divide the list into two categories: (1) monthly bills and expenses, and (2) minimum monthly payments on debts and loans (including car payment, credit card payments, mortgage payment, student loans, and so on). Trimming the first list of expenses to the bare minimum allows a person to apply those freed-up funds to paying down debts, starting with those that have the highest interest rates.

4. Rank debts-list according to interest rate, and begin paying off the most expensive debt. Now it’s time to tackle the debt itself, starting with the loan or debt that carries the highest interest rate. Identify the most “expensive” debt--a credit card in most cases--and pay as much as possible toward that balance every month. As each loan balance is paid off, move on to the next debt on the list.

5. Look into possibilities for consolidating under lower interest. If a person is able to take out a lower-interest loan, possibly even a second mortgage, they may be able to pay off the balances on high-interest credit cards. They will then be able to pay off the total debt more quickly because it’s not accumulating as much interest.

Management and elimination of debt takes some sacrifice of spending-habits for the short-term, but the financial health and freedom of getting out from underneath a debt load is well worth the effort.

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