September 2009 e-Wealth Coach
Developing a Debt-Free Game Plan
This month’s e-Wealth Coach is Preston L. Cochrane, president and CEO of AAA Fair Credit Foundation, an accredited nonprofit credit counseling organization dedicated to teaching individuals and couples how to save, spend, invest, borrow and manage their finances wisely to improve financial well-being and quality of life. He was instrumental in establishing Utah Saves and is a Past-Chair of the Utah Jump$tart Coalition for Personal Financial Literacy.
Dear Saver,
Chances are you’ll face a financial crisis at some stage in your life that can make it difficult to pay your bills. Whether the crisis is caused by the loss of a job, medical bills, or frivolous spending, it can seem overwhelming. The following recommendations will help you develop a game plan in your pursuit to becoming debt-free:
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Set a Goal. Finding out exactly how much debt you owe is your first step to create an accurate repayment plan. Gather up all your most recent statements on everything you owe (credit cards, car loans, student loans, medical bills, unpaid collections) and list all the accounts, total amount due, interest rates, and required minimum payments. A specific, reasonable and attainable plan is the best path to achieving results. Utilize an online debt payoff calculator to help determine your goals.
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Reaffirm your goal. For some, a simple daily affirmation Dhelps focus their mind to achieve their ultimate goal; consider posting this phrase in a visible location you see daily: "By living frugally, I will have the cash necessary to pay off all my debts in ___ months instead of ____. The $_____ I save in interest will be put into savings so I will always have enough to weather any future financial storm."
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Stop Borrowing. If you’re already in debt, the last thing you need is more available credit. You must refuse all credit card offers no matter how tempting. Think twice before refinancing consumer debt with a home equity or second mortgage. Click here to determine if you should consolidate your debt into a new loan and how much interest you might save.
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Sustain Life, Not Lifestyle. There are only two ways to improve your financial health: make more money or reduce your spending. You may or may not be able to increase your income, but you can always control what you spend. Keeping a written record of your daily purchases and expenses will help you figure out what areas you can cut back on. Money problems are primarily solved by lifestyle changes. Give yourself a raise by taking the Money Diet Challenge and implementing money saving tips.
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Build a Reserve. As you begin to formulate your plan to become debt-free, you should first set aside or save $1,000 cash as safety net for unexpected emergency expenses. Without an established emergency reserve fund, many people have no choice but to revert to credit cards or costly payday loans when an unexpected issue comes up.
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Prioritize. Focus your attention on paying off the debt with the lowest balance first. You shouldn’t be concerned with interest rates or terms unless two accounts have similar balances, then select the debt with the higher interest rate first. Remember, debt reduction is like losing weight so you need to see some immediate results and feel like your making progress.
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Compound Payments. When you have one debt paid in full, take the money you have been paying toward that debt and combine it with the regular payment in your repayment plan on your next highest debt. All extra cash should be diverted towards debt repayment. Online financial calculators can help you improve your financial health and visualize your goal.
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Seek Professional Help. If you’re feeling overwhelmed by debt and financial pressures and don’t know where to start, consider contacting a reputable nonprofit credit counseling agency. Credit counseling organizations can help you navigate your finances and can act as an intermediary on your behalf with creditors. To find an authorized credit counseling agency in your area, contact your local consumer protection agency or the Better Business Bureau.
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Start Small, Think BIG. Wealth is what you accumulate, not what you spend. Once you develop a plan, stick to it. If you pay off your $2,000 credit card balance in 8.5 years (versus 18.5 years of making minimum payments), you will have 10 years to place that monthly minimum payment amount in an interest-bearing bank account, retirement account or other investment.
These steps, and staying focused on your goals, will ensure that you have a debt-free future! Don’t wait! Take action today, not tomorrow.
Sincerely,
President and CEO
AAA Fair Credit Foundation
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