By David Flores
GreenPath personal finance counselor
It's almost spring time and after a harsh winter in most of the United States, you may be thinking about repairs or remodeling your home or planning that vacation getaway.
This time of year, we still see a surge in calls from people worried about their past holiday bills. Once the excitement of the holidays has passed, they realize they need to get serious about paying off their debt.
Here are some quick tips if you are looking to pay down your debt in 2014:
Plan Your Finances – This is an important first step to take in the New Year. An active financial plan is a tool that helps reduce spending and increase savings.
You shouldn’t simply be content with having money left over in your checking account, at the end of each month. Developing a plan will allow more financial freedom and enable you to get through financial emergencies.
Create a Budget - A budget forces you to get your spending under control, and to “live below your means,” which is exactly what you’ll need to do to start eliminating your debt. Making little adjustments to your lifestyle can add up to big savings. Be sure to give yourself a bit of breathing room in your budget for unexpected expenses.
Prioritize Your Debts – Debts that take first priority are the ones directly related to your ability to survive, such as mortgages or auto loans. If you don’t pay these loans, you can face foreclosure or repossession. Prioritize payments into three categories: high priority (housing, child support, utilities, car loans); medium priority (personal secured loans, student loans, home improvement loans); and low priority (loans for household goods, credit cards, doctor’s bills).
Estimate Available Income – Income can be a weekly paycheck, pensions, public assistance and investments. After you subtract taxes and other deductions from your total income, you will have your available income that you can work with each month.
Check Your Spending - Identify your past spending patterns by reviewing cancelled checks, receipts, and charge statements, for the past two to three months. Place expenses in "fixed" or "flexible” categories. Fixed expenses occur at specific times and rarely change (car note or mortgage). Flexible expenses fluctuate from month to month, and may possibly be altered to balance the plan (credit card bills, electric bill).
Use Cash for New Purchases - Unless you pay off the entire balance every month, you are probably paying interest on new purchases from the date of the purchase. If you stop using your credit cards all together, you will be able to reduce your debt more quickly. Because of compounded daily interest, it is far better to use cash for the things you need and adjust your budget to accommodate those expenses, rather than to use credit cards and then struggle to send large payments.
Review Your Plan - You should review your plan about every two to three months. Do not be surprised if, in the beginning, actual expenses are quite different from what you initially listed. Your plan will become more realistic as you continue the process.
Planning ahead early in the New Year can set you on a path to being debt-free this year.