August 14 is Financial Awareness Day, but everyday can be a day that helps get you to your financial goals. If debt is preventing you from achieving financial freedom, there’s no time like the present to start your journey.
What is Financial Awareness?
Financial awareness (or “financial literacy”) is about understanding where our money goes and how to create and manage a budget. This will help you plan for the future.
When we don’t have a clear understanding of finances, we can get ourselves into some financial hot waters. This includes having too much credit card debt, which can prevent us from achieving our financial goals.
Where to Begin?
The first place to begin is knowing what you have to work with, so start by answering these questions:
- How much is my net monthly income?
- How much are my monthly fixed expenses?
- How much are my monthly non-fixed expenses?
Next, you may need to change your mindset. You need to want to make the commitment to finally pay down (or pay off) that debt. This may be a long process for you if you have too much debt or have never made a budget. However, if you keep your eye on the prize, you can and will achieve a debt-free life.
Next, you begin at the beginning…we’ve devised a 7-step checklist to help you take control of your finances. Some of these steps can be done together, especially if you’re motivated to get ahead financially. You may already be further along in these steps – that’s great! You can jump ahead or revisit any of these steps whenever your finances need a tune-up. This checklist is merely a guide to help you on your debt-free journey.
7-Step Checklist to a Debt-free Life
Step 1 – Take Stock of Your Debt
Look at your bank account and credit card statements to make a list of all your expenses. Some may be planned, such as utility bills or a car payment. Others may have been spur-of-the-moment purchases – a surprise vet bill, a water heater replacement, or an outfit from a sale.
Whatever the expense, it needs to go down on the list. Start by creating a list of bills you know about – it might be easier to group them together such as:
- Property Taxes- if not paid through mortgage
- Homeowners/Renters Insurance
- Car Payment
- Car Insurance
Once you complete this step, you may be surprised to learn that little things can add up to big money. Don’t blame yourself. Racking up debt, especially on things we don’t need, is very typical in our credit card society. If we all used cash to pay for everything else, we’d know exactly how much everything added up to. Then, when we ran out of money, we wouldn’t be able to buy anything else.
So, this realization brings us to Step 2 – stop using your credit cards.
Your Turn: Click on one of the Microsoft Excel documents to create your budget. You can choose a Household Budget or a Personal Individual Budget.
Step 2 – Stop Using Your Credit Cards
We get it, not using our credit cards is easier said than done. They should be used for some items – booking a trip or rental car – because of the additional security they afford. But for this step, focus on not racking up more debt. Stop using your credit cards for non-emergency items – use your debit card instead.
Some other ideas to get yourself out of the habit of using credit cards:
- Skip your weekly trips that usually have you buying too many non-essentials.
- Start brown-bagging your work lunch.
- Brew your own coffee.
- Carpool to help cut down on auto-expenses.
- Wash your own car.
Once you get into the habit of spending only on essentials, you can make real progress toward paying down debt.
Don’t forget to make the minimum payments on every line of credit and loan you have open. Neglecting your debt will only pull you deeper into the pit.
Your Turn: Download our mobile app, where you can check your balance to ensure you have money available before purchasing. This is important, whether it’s putting gas in the car or buying that outfit on sale.
Step 3 – Create a Budget
Now is the perfect time to create your budget. Some people like to start with making a budget first, which does make sense. Creating a budget can be overwhelming, though, especially if you haven’t done steps 1 & 2. Oftentimes, people only include the required items in their budgets, such as house and car payments and student loans. They leave out non-fixed expenses like coffee purchases and car washes because they don't realize how much they're spending.
Utilize the categories you created for your expenses in Step 1 to create a monthly budget. Organize them into a spreadsheet or use an online tool to manage your budget.
There are many free budget tools out there if you search “free budget calculator.” In this article, we have provided a couple of links to Microsoft Excel budget spreadsheets. One is for a Personal Monthly Budget, which is great for one person. The other is for a Household Monthly Budget, which works well if you have more than 1 income.
Budget calculators are used for more than just lists. They also calculate the income and expenses as well as the remaining available balance each month. You can also enter your actuals at month's end to keep better track of those extra costs you weren’t anticipating.
Your Turn: If you haven't already, create your budget. You can choose either of these Microsoft Excel documents - select a Household Budget or a Personal Individual Budget.
Step 4 – Negotiate or Consolidate High Interest Rates for Lower Interest Rates
If most of your outstanding debt is credit card debt, you may be spending hundreds of dollars on interest alone. Aside from wasting money, this keeps you from moving forward and paying down your debt.
This step consists of 2 action items. First, negotiate lower interest rates. Then, consolidate or transfer high-interest cards and loans into one or more loans with a lower interest rate
Action Item 1 – Negotiation Lower Interest Rates
Most people don’t know you can call up a credit card company and negotiate for a lower APR. Take the time this month to do that. Explain that you are working on paying down your debt and that the interest payments are impeding your progress.
Action Item 2 – Consolidate or Transfer High Interest Rate Loans/Credit Cards
Consolidating high-interest loans into one personal loan with a manageable rate may be difficult if you don't have good credit. The best thing to do is discuss your options with a loan officer at McCoy Federal Credit Union. You can also apply directly for a personal loan or Home Equity Loan.
Transferring your high-debt credit cards to a lower interest rate can be beneficial if the transfer fee isn’t too much. It's usually a 3-5% fee that gets added to your credit card balance up front. Sometimes you can get a credit card with a 0% introductory rate, and sometimes the transfer fee is waived too. Be sure to check the terms of the introductory offer. Sometimes the interest rates may be for a shorter term than you can realistically pay off the balance. Additionally, the rate afterward may be higher than what you had with the other card. If you think you can pay off the balance during that introductory period, you may reach your debt-free goal faster.
No matter which action item you go with, or a combination of both, one this is certain. Lowering your interest rates will allow you to make another real step toward getting rid of debt.
Your Turn: Apply for a new lower-interest loan
or credit cards or contact our financial counseling services
Step 5 – Trim Expenses
Now that we have a budget, let’s trim it down!
Step #2 in this series. Now, it’s time to get serious about it. Take a long, hard look at the money you spend each month and find your weak spots. Where do you spend the most on unnecessary purchases? What’s your particular vice? You may even have several spending traps. How can you cut back on you daily expenses?
Your Turn: Find any extra money you save goes toward your debt payments.
Step 6 – Create an Emergency Fund
You may feel impatient to start more aggressively paying down debt, but it’s important to first create an emergency fund. When you're not ready for unexpected expenses, you’ll be tempted to use money earmarked for debt to fund this expense.
Experts recommend keeping three months’ worth of living expenses in an emergency fund. Start with a modest $1,000 to prevent yourself from reaching for the credit card when a life emergency happens.
Schedule an automatic transfer from your McCoy Checking Account to your Savings Account until your emergency fund is fully padded. These transfers can be set up to go monthly or weekly. This may take several months, but you can continue following steps toward a debt-free life as your emergency fund grows.
Remember, if you need to use your emergency fund, stop the following steps until it's back up to $1,000.
Your Turn: Open up a new savings or checking account that can be used just for these emergencies.
Step 7 - Create a Debt Snowball
Congratulations! You’ve completed Steps 1 – 6. You’ve organized your debt, avoided credit cards, created your budget, negotiated lower rates, spent less, and created an emergency fund. You’re now ready to start getting rid of that debt…for good!
This may be one of the hardest and longest steps, depending on how much debt you have. This includes cars, student loans, credit cards, and equity lines of credit.
Remember the money you used to build your emergency fund with? Now that you have that emergency fund, that extra money can be used to pay off your debt. As you pay off your debt one at a time, that extra money will continue to grow… like a snowball.
For this step, paying off your debt will be your top priority - just follow these steps:
Step 1: List all your debts - include the dollar amount owed, the minimum payment amount and the interest rate.
Step 2: Choose the debt - you’d like to pay down first. Financial expert Dave Ramsey suggests starting from the smallest debt and working your way up (original definition of “Debt Snowball”). This allows you to feel little “wins” faster. You can also start with the debt that carries the highest interest rate so you pay less in interest overall.
Step 3: Combine the minimum payment with any extra amount you can until that debt is paid off.
Step 4: Repeat these steps with the next debt. Combine the money you allocated for the first debt with the payment for the next debt on your list. You’ll continue to work your way through all remaining debt until you’re completely debt-free. Whenever possible, try to add money to your snowball to accelerate your progress.
Try not to feel discouraged if it is scheduled to take years – you didn’t add the debt overnight. The alternative (making only minimum payments) would take much longer and you’d spend much more in the long run.
Your Turn: Use this Debt-Free Calculator Excel spreadsheet to track and pay down your debt. Or, if you only have a few debts, try our nifty online Debt Elimination Calculator.
Doesn’t this all feel great? You’re on your way to a debt-free life!