August 14 is Financial Awareness Day, but everyday can be a day that helps get you to your financial goals. And if debt is weighing you down and preventing you from achieving financial freedom, there’s no time like the present to start your journey.
What is Financial Awareness?
Financial awareness (oftentimes called “financial literacy”) is about understanding where our money goes, how to create and manage a budget and planning for our future.
When we don’t have a clear understanding of finances, we can get ourselves into some financial hot waters - like having too much credit card debt which can prevent us from achieving our financial goals - whether it be buying a new car, buying a home, saving for a fun trip, helping our kids in college, or being comfortable in our retirement.
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 a lot of debt or have never made a budget, but one thing is for sure: 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, or some may have been spur-of-the-moment purchases – a surprise vet bill, a water heater that needed replaced or a splurge on an outfit that was finally on sale.
Whatever the expense, it needs to go down on the list. Start by creating a list of all the bills you know you have – 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 review your statements and list out your expenses, you may be surprised to learn that the 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…and 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. There are some items that we really should use credit cards for – renting a car or booking a trip – because of the additional security using a credit card affords. 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 that 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 so you can always check your balance to make sure you have the money before making that purchase 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, but creating a budget can be overwhelming, especially if you haven’t done steps 1 & 2. And oftentimes people only include the required items in their budgets (house, car payment, student loan) and leave out those extra non-fixed expenses (Starbucks, car washes, annual doctor/vet visits) because they hadn’t realized how much they were actually spending each month.
Since you’ve already created categories of your expenses in Step 1, you can use those same categories to create your monthly budget and put 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 for Personal Monthly Budget which is great for one person and Household Monthly Budget which works well if you have more than 1 income.
The good thing about a budget calculator instead of just using lists is you get the income and expenses calculated and the remaining available each month. You can also go back at the end of each month and enter your actuals to keep better track of those extra costs you weren’t anticipating.
Your Turn: If you haveen'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 just 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: 1) negotiate lower interest rates and 2) 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 your high interest rate loans into one personal loan that is a better manageable rate may be difficult if you do not have good credit. But the best way to deal with this is to speak to a loan officer at McCoy Federal Credit Union to see if this option will work for you. 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 very beneficial if the transfer fee isn’t too much – 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 as well. Be sure to check the terms of the introductory offer because sometimes the interest rates may be for a shorter term than you can realistically pay off the balance and the rate afterward may be higher than what you had with the other card. If you really think you can buckle down and 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 be feeling impatient to start more aggressively paying down debt, but it’s important to first create an emergency fund. If you don’t have money socked away for unexpected expenses, you’ll be tempted to use the money that’s already earmarked for your debt payments to fund this expense.
Experts recommend keeping three months’ worth of living expenses in an emergency fund, but you can start with a modest $1,000 to help prevent you from reaching for the credit card with a home, pet or other life emergency pops up.
Set up an automatic monthly or weekly transfer from your McCoy Federal Credit Union Checking Account to your Savings Account until you have a fully padded emergency fund. This may take several months, but no worries, you can continue following the next few steps towards a debt-free life as your emergency fund grows.
Remember, if you need to use your emergency fund, you need to stop any of the following steps to get that emergency fund back up to the $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, torn up your credit cards (or hid them!), created your budget, negotiated lower interest rates, worked on spending less and have set up 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. And 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 - by including 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 (the original definition of “Debt Snowball”) so you can feel little “wins” faster, but you can also choose to 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 to the debt you chose until that debt is paid off.
Step 4: Repeat these steps with the next debt - by combining 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 and the alternative (making only minimum payments forever) 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!