Personal debt is something that nobody likes to talk about. For many, it's extremely painful to think about the fact that they owe multiples of their annual income to creditors. Being in debt is like trying to drive a car up an icy hill. You progress 10 yards, and slide back 15. For many, this cycle continues until they find themselves standing at the bottom of the hill, staring at a mountain of debt, with no financial progress to show for their past efforts.
As desperate as this situation may sound, for many people it is all too familiar. If you have found yourself at rest at the bottom of your own personal mountain of debt, it can be an overwhelming experience. But there is hope. Today can be the first day of the rest of your financial life. Hopefully this can be the day that you finally decide to change your life and transform your debt into wealth.
If you find yourself staring a mountain of debt in the face, with little to no savings and no plan for how to escape the endless cycle of perceived progress and inevitable descent further into debt, consider reading The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey. This book provides an excellent starting point for most people in beginning their final climb out of debt to experience freedom from debt.
Dave Ramsey is a great resource for those about to engage in a personal war on debt. But before you can begin to transform your financial life, you must first take stock of your overall economic health. An excellent resource for a step by step guide to financial freedom is our guide entitled Your Checklist for Financial Freedom.
In the first few steps of our guide, you will be prompted to determine your net worth, create a budget and know how much you owe. These three steps are absolutely imperative to building long term wealth and stopping the cycle of debt.
The First 3 Steps in Debt Recovery Explained:
Determine Your Net Worth: Net worth may be defined simply as your assets (what you own), minus your liabilities (what you owe). In order to determine your personal net worth, simply add up the value of all of your possessions and savings and deduct the amount of personal debt that you and your family have incurred.
In order to determine how much debt you have racked up, one excellent resource is to order your free credit score and report. Getting a free credit score and credit report will allow you to finally see in black and white how much you owe to your creditors while also giving you the opportunity to review your credit report for errors.
As you embark in this life changing journey to pay off debt, you may want to consider signing up for a credit monitoring service such as TrustedID or Credit Sentry. Both offer competitive rates, and will protect you from fraudulent charges on your credit report (an extremely serious matter, especially for those paying off serious debt.) Visit our recent post 4 Ways to Monitor and Protect Your Credit Rating for more information.
After reviewing your credit report, you will want to subtract the amount of outstanding debt on your credit report from the total sum of your assets will yield your personal net worth. Write it down. This is now your starting place. The point at which your journey to a better financial future began. For many this will be a negative number. That's OK. You have only just begun.
Create a Budget: Creating a budget is the second step on your road to debt elimination. This is because without a working budget, it is impossible to know how much money you can apply to debt repayment on a monthly basis. If you are lost when it comes to building your first budget, there are several simple ways to go about it. The first is to visit a site such as Mint.com which will help you in building an online and fully automated budget. The second is to use budgeting software such as Quicken or Excel. If you are a low tech kind of person, you could always consider a traditional, hand written ledger or even a cash budget. The important thing is that you know how much money is coming in, and how much is going out. Only then can you begin to pay off debt.
Know How Much You Owe, and To Whom: Now that you know how much you owe and to whom you are in debt, you can begin to prioritize your debt. In The Total Money Makeover: A Proven Plan for Financial Fitness, you are prompted to order your debts from smallest balance to largest. Once you have created this list, you can begin to pay off your debts.
Most people will want to prioritize their debt beginning with their credit cards. These generally carry the highest rates of interest and the lowest balances. For more information on credit card repayment, visit our article A Guide to Paying Off Credit Card Debt.
Beyond Steps 1-3:
Paying off debt is a journey, but one with amazing intrinsic rewards both psychologically and financially. It's never too late to start steps 1-3 of this journey.
Once you have gotten to step 3, it's time to really focus on your debt repayment strategy. To this end, we highly recommend checking out Dave Ramsey's Web Site for more information on the 7 Baby Steps to building a better financial future.
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