A 4 Step Plan to Get Out Of Debt…And Stay That Way

four step plan to get out of debtDebt is an ancient phenomena. Yet, as recently as the 19th century, those who couldn’t pay their bills on time were usually thrown into dark, cobweb-filled cellars known as debtors’ prisons. It was a sane option considering the alternatives-indentured servitude, disfigurement, or death. Talk about debt to die for.

These days, penalties aren’t as brutal. However, the emotional toll of overwhelming debt can create a personal prison equally painful.

As of July 2015, consumer debt in the United States totaled $11.86 trillion, with credit card debt alone at a staggering $15,863 average per household.

Consumer debt has increased as jobs have decreased. To cover the gaps due to unemployment or lower wages, many Americans are tapping into consumer debt and ignoring savings. Personal savings have dropped to a pathetic 5.1 percent of after-tax income — even though the rate was more than 10 percent as recently as the 1970s. Not surprisingly, credit card delinquencies are on the rise.

If you want to buckle down the spending belt, experts agree on tried and true measures for viewing the light at the end of debt’s tunnel.

Step 1: Just Say No
The first step to a debt-free existence is to stop accruing more debt. Temptation is the devil’s playground. In order to resist a chronic descent into debtor’s Hades, you often have to cut up your cards.

Step 2: Track Your Daily Spending
Try to keep a running total of what you spend for 30 days and compare it to your income. If your expenses exceed your income, you’ll need to either cut back your spending or increase your earnings in order to get out of debt permanently. Once you have these numbers, you can develop a spending plan consistent with your cash flow.

Step 3: Consolidate
Move all your debts into one account to make things simpler to manage and cheaper to re-pay. Choose a low-interest credit card or, if you’re a homeowner, take out a home equity loan. Cutting your interest will enable you to pay off your principal more quickly.

There are other, more risky ways to consolidate debt, but they’re not available to everyone. You can borrow against your life insurance policy’s cash value which you can then generally repay at a comfortable pace. Interest rates are usually below commercial ones.

As a last resort, you can borrow 50 percent of your 401(k) monies, if your plan allows. But beware: there are three drawbacks. One, the loan must be paid back within five years; two, if you leave your job, the loan is payable immediately; and three, if you’re under age 59 1/2, there’s a 10 percent early withdrawal penalty.

Step 4: Start a Savings Plan
Even if it’s a small amount, it’s important to get into the habit. Replace your old pattern of getting deeper into debt with a new pattern of saving to prevent it.

It’s okay to want the better things in life. But, if you learn to live within your means, the happiness and peace of mind you’ll acquire will be worth more than all the debt in the world.

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