By Kelly Trageser
Unfortunately, there is no quick fix to eliminate debt. Not only does it take patience, time and diligence, but also a clear understanding of why we get ourselves into debt in the first place. Was it that our wants were greater than our means? Was it thinking we could pay down our debt, only to realize after our bills, we had nothing left over? Determining how fast we can and should eliminate debt starts with a few simple steps.
1. Write it down. Get a visual handle on where you are with your mortgage, home equity, auto, medical, student loan and credit card debt. List on each line the lender, balance, current interest rate, rate change date, final interest rate, minimum payment, monthly payment and due date. You can't fix it until you face it.
2. Understand your cash flow. We can't save, invest or pay down debt until we clearly understand what funds are coming in and what funds are left over after we pay our taxes and living expenses. When you enter what comes in and what goes out, subtracting them allows you to see whether you have a monthly surplus or deficit. A surplus indicates you are living within your means. A surplus allows you to save, invest or pay down your debt. A deficit indicates you are living above your means and most likely using your credit cards. If that is the case, review your monthly living expenses to determine what can be reduced or eliminated.
It is important to be realistic. If you have not figured in all your expenses, such as the $2.29 daily iced coffee, you'll be tapping your credit card once again by month's end.
3. Reduce your debt. Once you've examined your cash flow and determined what is left over after your taxes and living expenses, you will know how much is available each month to pay towards eliminating your debt. Additionally, now that you have written it all down and recorded the minimum payments, you'll know what you must pay. If the minimum payments total more than the surplus available, you'll have to go back and start eliminating some of your discretionary expenses. If the total is less than your surplus, you can pay more than the minimum. Just be careful not to get over-zealous.
Paying beyond the minimum payment could leave you short of cash at the end of the month, forcing you to pull the credit card right back out of your wallet. Another strategy to consider when reducing or eliminating debt is to pay the smallest balances off first and pay the minimum on the rest of your debt. Although you may save some money tackling the highest rate debt first, the mental relief that comes with paying off each debt burden far outweighs saving a few dollars!
4. Avoid future debt. Part of the reason we get into debt is because we don't save! Start an automatic transfer each month into a savings account. In order to live within your means and not have credit card debt, it is critical to have a petty savings account. A petty savings account will hold money you are setting aside for pleasurable things like vacations or home improvements. You don't want to relapse back into debt.
5. Seek professional guidance. The best approach to determine how fast you can and should eliminate debt is to work with a Certified Financial Planner. These individuals are highly trained and specialize in improving the financial well-being of single professionals, couples and families. (Full disclosure: I am a fee-only CFP and a member of the National Association of Personal Financial Advisors, a group of financial planning professionals.)
Kelly Trageser is the Principal of Sea Clear Financial Planning, LLC. She is a Certified Financial Planner and has an MBA in Finance. She has over 20 years of experience in the financial services industry. Mrs. Trageser is a NAPFA-Registered Fee-Only Financial Advisor.