Debt Free

How to get out of debt fast is one of the most sought after answers among American consumers today. If you saw my post Tuesday on U.S. credit card debt statistics, you’re doubtlessly aware that excessive debt is a problem for a significant percentage of our population, if not a majority. You probably had a pretty good idea about such things anyway. How to get out of debt fast is one of the questions with the most interest from people today and one of the finance related subjects I’m asked about the most.

How to get out of debt fast isn’t rocket science, or missile science, as one of my friends once said. It is like a diet, but with your finances. If you take in fewer calories than you burn, the caloric deficit will result in weight loss. Similarly, if you take in less money than you spend, the deficit will result in debt. So, the trick to getting out of debt is to reverse the trend.

As with any equation, there are at least two sides. You can either reduce the money going out, or increase your income, preferably both. The key to getting out of debt is to optimize the combination of income and spending. Here are the keys to get out of debt fast:

Before you change anything, contact one of the three credit bureaus and get a copy of your credit report. It’s free once a year from each of the major credit reporting agencies. You can stagger these reports to get one every 4 months. You can also get a more comprehensive service from FICO, the fine people behind whole credit scoring system, that includes neat graphs and charts with your score from all three agencies at the same time and such niceties as real time credit monitoring. This isn’t free, but it is pretty inexpensive and does provide much more information in a timely fashion. You can get a free trial here.

Once you get your report(s) go over them with a fine toothed comb to make sure that all your debts are, in fact your debts. Only once you’ve done this can you be sure you’re not starting the debt dig out procedure from a hole that’s deeper than it should be. Start that process first, and while you’re waiting to get your information, jump into the rest of the steps (with both feet).

Get Out Of Debt Fast Key #1
Control your spending. This is the single most important thing you can do to get out of debt. The average American consumer is about $11,450 in debt. You have to spend at pretty fierce clip to amass that much debt. This debt calculation counts those all Americans age 18 and over as consumers. There are about 220 million Americans in that age group and the total amount of consumer debt in the U.S. is about $2.524 trillion. Controlling your spending as a means to get debt free is important on two fronts.

First of all, the majority of those who exhibit high levels of consumer debt, not including mortgage or emergency medical debt, got that way through poor spending habits. Here are some things you can do to help control your spending, and most importantly developing a lifestyle that precludes excessive spending.

 

1.      Control your spending by developing a sensible budget. – This step to getting debt free is numero uno. You can’t plan if you have no basis for it. Many people have a poor idea of how much money they really spend on various items. To prevent those seemingly insignificant expenses that really add up to significant ones, a budget is a must. I posted on how to make a budget recently.

 

2.      To control your spending, check every expense to make sure it is legitimate. - It’s a real pain the backside, but you’d be amazed at how much money you have that you give away unintentionally. Look at receipts and billing statements closely to ferret out all those charges that maybe shouldn’t be there. In addition, make sure that actually get those sale prices at the store that you’re supposed to. It’s fairly common to have the price in the computer not agree with the promotional sale tag on the shelf.

 

 

3.      Control your spending by reconciling all your medical bills with your insurance statements. - Most medical insurance plans limit the amount health care providers can charge for certain procedures for those on preferred plans. The allowable cost will be listed on your insurance statement for each procedure. Make sure that you are not being charged more than the allowable amount for any of the procedures you’ve had performed. If you’ve checked the cost of medicine lately, you realize that it’s gone up. No, really, it has. Being overcharged for a single procedure can easily cost you hundreds of dollars, so it’s worth it to take steps to prevent it.

 

4.      Control your spending by putting as many of your recurring bills as possible on auto-pay. Make sure you set this up so the money is withdrawn from your account at a time when you have money in there. Setting up your finances this way reduces the time you spend paying bills, but not as much as you may think, because you still must check everything to ensure the proper amount was debited from your account. The real reason to setup auto-pay for your bills is that it prevents you from paying financial institution fees and charges associated with late payments. A strong secondary reason for doing so is that helps protect your credit score from the effects of late payments.

 

Get Out Of Debt Fast Key #2
The other side of the equation is how much money you bring in to feed your budget beast every month. A two pronged approach to get out of debt fast requires you to not only control your spending, but increase your income as well. There are myriad ways to increase your income. These range from increasing the income you make at your current job, to starting an second job, to plunging into your own business on the side. As with getting out of debt, it’s best to take a multi-pronged approach to increasing your income.

Since there are so many opportunities available to accomplish the goal of increasing your income, it’s silly not to avail yourself of more than one. For example, try to increase how much money you make from your current job and investigate home business opportunities (many great ones, even more scams). The advantages of a home business are flexibility and almost unlimited possibilities. The disadvantages are risk and the possibility of sinking endless hours into something that may not pay off as well as you would like.

To maximize your income, it’s usually best to create multiple streams of income. These would include your primary job, side business(es) and investments. One caveat here; it is very easy to get yourself torn in many different directions when developing multiple income streams, so it’s important to approach this with some semblance of planning.

The other advantage of creating multiple streams of income is that diversification of your income, as with diversification of your investments, provides you with some measure of protection. You won’t be as effected by things such as outsourcing, your company going out of business, or company mergers if you have a secondary or tertiary source of income. You’ll not have all your eggs in the same basket. At some point you’ll have multiple baskets, each with more eggs than you started with.

Get Out Of Debt Fast Key #3
How should you go about paying your debt down, once you begin doing so? There are multiple schools of thought on this, but I prefer a combination approach to paying down debt. As with the snowball approach, you’ll pay off your highest interest obligations first using as much money as you can dedicate to doing so, while paying only the minimum payment on all your other debts. After you pay off the highest interest debt, you’ll use that money toward the second highest rate, and so on.

With the hybrid approach however, you’ll first pay off any cards that are at, or close to their credit limits. Why would you do this? The reason to get all your cards at a target of about 60% of their individual credit limits is to improve your credit utilization score, a measure of what percentage of your available credit you’ve used. Having a few credit cards at or near their limits decreases your credit utilization score and lowers your overall credit score.

If you can raise your score, you’ll usually qualify for lower interest rates on your credit cards. You won’t be given this lower rate out of the goodness of the lender’s hearts though, you’ll have to ask (beg??) them for it, so get on the damn phone!! Lowering your interest rate will obviously lower your monthly payments and allow you to get out of debt even faster.
 

Debt Freedom Tip:
Talk with your accountant, tax professional or financial planner to make sure your tax burden is as low as legally possible. If you haven’t done a very good job in this regard, you may free up enough income from this alone to propel yourself toward debt freedom more quickly than you could have imagined.