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The following is a post by MPFJ staff writer, Jeff. Jeff blogs about finances, health and the environment over at Sustainable Life Blog.
It’s December, and for many of us, that means holidays, friends, family and fun. These are some of my favorite parts of the holiday season, and I’ve been enjoying them for years.
About 4 years ago however, I started to look forward to something else in December. Back when I was at the beginning of my personal finances journey, every year I’d tell myself that I wanted to get my finances in better shape in January, and every year, 12 months later, I was either in the same spot or worse off. It happens to everyone, and that’s OK. I wasn’t really serious then, but when I finally got serious, I did a lot of research on how to actually achieve my goals.
Here’s what I learned:
1. Figure out where your journey starts.
I never knew how much debt I had, and I could not predict my income very accurately every month because I worked two part time jobs, and the amount of work I did depended on my free time, which depended on my school schedule.
Essentially, I was missing two crucial pieces of my budgeting process: the amount I was making every month, and the amount I was spending. In addition to that, I often had no idea exactly how far in the hole I was. When I wast starting to make changes, I wrote down the balances on my two credit cards, as well as other monthly expenses like rent and food. I subtracted those from my monthly income (which stabilized in grad school) and for the first time, I had an accurate picture of what my finances were doing every month. Armed with this list, I could then start thinking about my goals. If you’re serious about getting your finances turned around in 2013, start by determining your monthly income and expenses. You’ve got until the end of the month to gather all your bills and your paychecks.
2. Pick your most hated debt.
For me, this was easy. I hated my credit cards for multiple reasons. They represented me paying for an irresponsible, previous version of me that didn’t want to wait and save up for anything, and couldn’t say no. Obviously, I didn’t like acknowledging these traits about myself, so it made me angry. In addition to that, the amount of interest that I paid for this irresponsibility made me angry as well. It was clear to see for me what my most hated debt was. Since I hated my credit card debt so much, it was easy for me to pick the first target. In addition to me hating it the most, it was also the highest interest rate debt, so it made lots of mathematical sense and would free up a lot of cash flow when they were paid off.
3. Create a realistic plan.
For years, this tripped me up. When I had a $3500 balance on my credit card at the end of every year, I always wanted to pay off the whole thing come the next year. Of course, it wouldn’t have been impossible, but at the time I was making about $6,600 per year. It wouldn’t have been easy, and given my income, I would have had to spend almost half of my earned income for the year just to credit cards!
Obviously, this wasn’t all that realistic. Instead, I settled down with a two part plan. The first part was the simple part: Don’t use the card anymore and raise the balance. Once the balance stopped going up (and started going down slowly), I was able to put the other part of my plan into action. Part two was to pay an extra $100 above the minimum payment to one of my cards until it was paid off. After I got paid every month, I paid my credit cards and sent an extra $100 to one of the cards. Once that started to happen, the balances started dropping every month, instead of staying basically the same or going up like they normally had.
4. See it through.
There’s going to be a lot of hiccups on the way – those are to be expected. Sometimes, you may not be able to spend that extra $100 for the credit card every month. That doesn’t matter much, but what does matter is how you respond the next month. Keep plugging away and your balances will go down, even if you miss an extra payment one month. If something happens in March and that just knocks you off track, you just lost out on an almost $1,000 reduction from your extra payments at the end of the year! You’ll hit bumps in the road for sure, but how you respond to them is what will ensure your success.
While it took some time for me to finally pay off my credit cards, it was totally worth it. Nothing good will happen over night, and if you want it, you’ve got to keep working at it.
How about you all? What tips do you have for paying off some debt and making your new years resolutions stick in 2013?
***Photo courtesy of http://www.flickr.com/photos/birddogger/4930697767/sizes/l/in/photostream/