We live in a credit economy which means that our entire commerce is based on debt, not savings. It is so ingrained in our lives here in America that we even have a system to determine how well we handle that debt.
It is called our credit score. Sadly, many people are defined by or define themselves by their credit score.
However, at some point, we do need to pay our debts back and start saving. I do not mean retirement savings, as that can happen automatically before taxes.
I am talking about creating a large savings account that can be used for emergencies or vacation or just to have it on standby.
The problem is the most North Americans are so burdened by their debt service. They do not even have enough months at the end of their paychecks to start saving. So another 12 months goes by and no savings and in many cases, larger debt! How about stopping this downward spiral and start savings.
I am suggesting that saving in tandem with debt reduction will benefit your life immensely. Here are some ideas.
Organize your Debts
I am mainly discussing consumer retail debts here. We will consider your house mortgage and vehicle obligations as separate just normal living expenses. However, it is the retail consumer debts and medical debts that get most North Americans into difficult situations.
To get started with your debt reduction program, organize your current debts on an excel spreadsheet, complete with the amount, interest rate, creditor information. List from the least amount to the highest amount!
Do not concern yourself with the interest rates for listing. You will be paying the minimum amount on each debt.
If you cannot cover them, make a deferred arrangement with the creditor.
If you have 10 different creditors you have 10 different monthly payments. So assume that the total for all ten is $600 per month and assume you can handle this. The least amount creditor is only $45 per month and you pay that off in 6 months. You then take the $45 you were paying to the least creditor who is now paid off and add it to the second creditor. You now have to increase your payment to the second creditor from the minimum payment.
As soon as the second creditor is paid off, you add the original $45 from the first creditor, the minimum from the second creditor and add it to the minimum on the third creditor.
For some serious debt reduction, you simply keep doing this through all 10 creditors until all are paid off.
Your total monthly debt service outlay is still always going to be $600 per month. However, you now have a systematic plan for paying them all off and accelerating the payoff time.
It will allow you to get your debts paid off in a shorter time than simply trying to juggle them each month.
Saving in Tandem
Now what most Americans end up doing is telling them that they will save as soon as they are out of debt! However, the getting out of debt never happens unless some sort of systematic payment plan like the one stated above is implemented.
They always feel like they are not in control of their own money.
To combat this, I am suggesting the paying yourself first principle. I will assume that you are paying yourself into your pre-tax retirement plan at work. This is an additional saving account that you will build up at your bank. Here is the suggestion.
Whatever your total debt service payment is, in our example, it is $600 then take 10% of that number which is $60. That is the amount that you will put into a savings account each and every month as you are paying down your debt.
You are not to touch it, spend it or otherwise use it for at least until you are down to maybe 2 out of the 10 creditors left to pay.
Consider yourself as your own creditor on this one that has to be paid. So at the end of the first year, you would have $730 built up, and at the end of the second year, you would have $1,440 built up and so forth.
Two things have just occurred now.
a. Your debt obligations have been systematically reduced each and every month.
b. You now feel great about yourself because you have built up a nice little nest egg.
Quit Incurring New Debt
As you implement this debt reduction plan, it is paramount that you do not keep adding to your debt every month. Aside from unexpected medical debt, you do have control over your spending habits.
Just keep one or two major credit cards as simply a paying for life service and pay the living expenses off each month.
Do not add to your retail department store cards. I am not suggesting closing them unless they are paid off.
The reality is that you only need a few credit card services like a MasterCard or Visa to manage your life, buy clothes other things.
It may even be better to simply have your bank debit card as the main monthly living expense card such as gas, food and so forth. This is like paying with cash and will not be adding to your debt.
I hope and trust that this plan made sense to you and that you can be on the road to financial recovery.