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STEP #4. How
much money are you wasting?
Now that you know exactly how much you
have to pay and when you have to pay it,
you need to find extra money in your
income in order to pay it. You cannot get
serious about paying off your credit
cards unless you make cuts in your
spending. And you cannot make cuts in
your spending unless you know exactly how
much you are spending. Right?
In the beginning of 2006,
the Oprah Winfrey show began a wonderful
segment called the America's Debt Diet.
In that series which profiled 3 families
as they struggled to get out of debt, one
of the show's Personal Finance experts
talked about what he called The
Latte Factor.®
If you put just $10 a
day towards your debt rather than
spending it on fancy cups of coffee,
cigarettes, bottled water or fast food,
in one year you could put $3,600 towards
your debt! Every da, you may be
needlessly spending money on little
things that you could be using to pay
down your debt. Take David Bach's Latte
Factor® Challenge form with you
everywhere you go tomorrow and write down
every penny you spend. (Source:
Oprah.com)
Click here for the
Challenge Form: Items to write down
on that form include: Coffee/Tea, Bottled
Water/Soda, Eating out and Fast Food,
Cigarettes, Vending Machine Snacks,
Candy/Gum, Newspapers/Magazines, Long
Distance, Cell Phone charges, Kids
Lunches, Gas/Fares and Tolls. (Source:
Finishrich Media)
Your goal here is to find
a few dollars here and a few dollars
there which you can put to better use by
paying off your credit cards. If you
still need help finding places to save
money, check out our 101 Great Money Saving
Tips. These are no ordinary money
saving tips. We put the best ones
together so you can EASILY save $50,
$100, $150, to $200 a month on your bills
and expenses.
But all the money saving
tips in the world won't do you any good
unless you stop using your credit card.
You've either got to cut it up, or take
it out of your purse or wallet and put it
away where it's not so easy to get to. "But
I need it in case of an emergency!"
- Answer: Unless you are on vacation
or out of town, there are very few times
in your daily routine where you have an
actual emergency and need a credit card.
The only "emergencies" you've
probably had is buying an item that you
must have that's ON SALE
- and those are the
"emergencies" that got you in
this mess in the first place.
STEP #5. Plan
a budget: When you have a
pretty good idea of where all your money
for incidentals is going, it's time to
get your notebook out (from Step #2) and
create a budget which will be your road
map for getting out of debt. There's no
perfect form that fits everyone's needs
and circumstances, but you do need to
consider some basic elements if your
budget is going to work. An effective
budget needs to be:
Realistic:
Forcing numbers to work
out on paper isn't hard but these
numbers need to work in real
life.
Concise
yet comprehensive: You
don't want your budget to have so
much detail that you spend all
your time updating it.
Flexible:
Your budget is a work in
process and will change from
month to month as annual and
quarterly bills are due. You
might also find that you
estimated too low or too high and
have extra money here and there.
Your budget will change and
evolve from month to month but
it's a good idea to have next
month's budget prepared and
written down one to two weeks
before the beginning of the
month. (Source: Getting Out
of Debt, CliffsNotes)
Important
Dates: Remember to write
down the due dates of all your
credit cards. If you ever want to
feel as if you've taken one step
forward, and one step backwards -
miss a credit card payment. Late
fees can cost you as much as $39.
Late fees account for 1/3 of all
the profit for credit card
companies. Do you want to know
what's even worse than a late
fee? How about this scenario
which gets played out a lot. You
have a credit card with a $2,975
balance on a $3,000 credit line.
If you are late on a payment, the
late fee will take your balance
to: $3,014. Okay, so now you are
$14 over your credit limit - BAM!
The credit card company will hit
you again with an Over the Credit
Limit Fee which could be another
$39. You are now $78 more in debt
because you were late. But it
gets even worse. Since you are
still over your credit limit, the
credit card company will hit you
with another late fee next month
if you don't pay that $78, plus
your current month's fee and
finance charges. And just to let
things go from bad to worse, the
credit card company will now
assume you are a higher risk
(because you missed a payment and
went over your credit limit) and
your interest rates will go up by
several percentage points, and
your credit score will go down.
Since you weren't paying close
enough attention to the due
dates, you now have 4 new
problems.
1. Late fee of up to $39
2. Over the credit limit fee of
up to $39
3. Increased Annual Percentage
Rate because you are a credit
risk
4. Your Credit Rating Drops
Allowance:
If you have a problem
with handling money, self-control
or saying NO, you need to put
yourself on a weekly allowance
for all those small items
mentioned in Step #4. Adding this
item to your budget will give you
a firm foundation for future
spending control.
STEP #6. Make
Larger Payments: When
you have completed the steps above, stop
for a moment and congratulate yourself
because you have now become a highly
trained special forces commando when it
comes to doing battle against your credit
card debt (and we feel sorry for the
credit card companies because they will
be crushed and not earn as much profit
from you.) [..Insert
sarcastic laugh here...]
The first credit card you
should launch your debt busting attack
against is the one with the highest
interest rate. That's the one that's
sucking the most money out of you and
that's the one you need to eliminate
first. Take a look at this example from
Oprah.com's Debt Diet Challenge to see
how paying down more can get you out of
debt fast.
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