- 1). Make the decision to change your spending habits. Stop all nonessential spending for which you don't have the cash in hand to pay for. Make a list of all unnecessary spending that you do throughout the week and find ways to cut back. For example, pack your lunch instead of buying out during your work lunch breaks. Also, buy generic brands when shopping instead of the more expensive, name-brand foods. Cutting back these spending habits--no matter how small--may give you a little extra "breathing" room when it's time to pay down your debt.
- 2). Establish an emergency fund. Save at least $500 to $1,000, and place it into a separate savings account or bank. Keep the emergency fund to pay for unexpected expenses, such as car repairs or unexpected home repairs. Gathering an emergency fund first ensures that you won't skip your debt payments to pay for emergency expenses.
- 3). Create a budget. Make a list of all your fixed expenses--those which are necessary and/or those which don't change from month to month--such as mortgage or rent payments, utility bills and transportation costs. Create a section for food and groceries, estimating the monthly amount you need. Create a section for entertainment and clothing, setting a minimal amount for spending in these areas. Make a separate section to list all of your monthly income; add this total up.
- 4). Take inventory of all your debt. Separate your bad debt--such as credit card accounts, payday loans and department store charge cards--from "OK" debt like home mortgages and student loan accounts. Create a list of all your bad debt accounts with their associated balances and minimum monthly payments. Order these debt accounts from the smallest balance to the largest.
- 5). Begin paying off all your bad debt accounts. Pay the minimum monthly payments on each account, making sure not to skip payments on your OK debt. Pay an additional chunk of money on the credit card or bad debt account with the smallest balance. Repeat this process until all credit card and bad debt accounts are paid. Paying extra money toward the smallest balance first builds momentum in your efforts to get out of debt completely.
- 6). Pay down OK debt--such as mortgages and student loans. Pay extra money toward each of these accounts each month, using part of the money that you spent previously on getting rid of your bad debt.
- 7). Review your budget. Create a section specifically for savings and monthly discretionary income. Continue your efforts of making more than the minimum monthly payments on your OK debt while putting back extra money into your emergency fund and other savings accounts.
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