The average American carries $27,887 in debt, according to the latest State of Credit report from Experian. This encompasses credit card debt and various types of loans, including student, auto and personal loans. Add mortgage debt on top of this, and it’s no wonder so many of us feel caught up in an endless cycle of debt. It’s time to take a step back, look at the contributing causes and identify what needs to change.
The Indebted Mindset
Ten percent of Americans do virtually no financial planning, a 2013 Household Financial Planning survey found. Forty percent in this group owe significant credit card debt, but only half of these people have a plan to pay it off. Not coincidentally, 90 percent of the same group have no savings goals.
All these characteristics reflect a mindset that lacks an intent to save money and eliminate debt. Clearing this “mental debt” is a crucial step toward paying off your financial obligations. To begin cultivating a mindset for eliminating debt, verbalize your commitment to your financial goals. Financial advisor Suze Orman recommends writing and repeating affirmations that express your financial goals, such as announcing your intent to get out of debt this year.
Misplaced Priorities
Where previous generations prioritized buying a home and car and building savings, millennials are prone to run up credit cards to pay for technological gadgets and travel, Buzz Marketing expert Tina Wells told Forbes. The temptation to buy luxury items on credit intensifies during the holidays as consumers rush to purchase gifts, carrying additional debt into the New Year. If you want to get out of debt, you should prioritize paying off your obligations and postponing luxury spending (in short: Stop charging stuff).
Poor Time Management
The best budgeting plan won’t help if you don’t take time to apply it. In response to a 2013 Northwestern Mutual survey, a quarter of Americans described themselves as “too busy” to think about financial planning. Make sure you set aside a regular time to review your finances and plan your budget. A good practice is to review your budget at weekly, monthly, quarterly and annual intervals.
Get on the Road to Financial Health
In order to achieve your financial goals, start with a good budgeting strategy. There are numerous resources at your disposal, including financial advisor Dave Ramsey’s seven-step plan for getting out of debt.
Ramsey’s plan starts by building a $1,000 emergency fund. This may not be as difficult as you think—you can hold a garage sale, sell unused exercise equipment and collectibles or take an extra job for a couple months. If you receive regular payments from an annuity or structured settlement, you may be able to sell your future payments for cash now. You can use this money toward your $1,000 nest egg and to pay down your debt.
After you collect your nest egg, start paying off your debts (excluding your house) in order from smallest balance to largest. Pay off your smallest balance first while paying your monthly minimums on other debts. If you have two debts with equal balance, pay off the one with the higher interest rate first.
Once you’ve paid off your debts, you can move on to other budgeting goals such as increasing your emergency fund, saving for retirement, building college funds and paying off the mortgage.
Great tips and information! I’m a huge fan of Dave Ramsey’s Financial Peace University principles. I don’t follow them to the “t” but have shaped them to work for my family and our finances.