Studies show a discernible connection between debt and stress, and while that’s certainly interesting to hear, it should really come as no surprise to those of us who’ve ever been in the red. It’s simply taxing to live behind the proverbial eight ball, regardless of whether we are talking about personal finance, work, or even something as mundane as household chores.
So, the obvious question we need to ask ourselves is how do the 69% of people who report money being their main source of stress, according to the American Psychological Association, lessen the burden on both their wallets and their minds by becoming debt free?
There are indeed a number of strategies you can employ to both minimize the impact of stress while you are working to pay off what you owe as well as make your journey to debt free living as short and inexpensive as possible.
Gaining a Healthier Perspective
The first step is to take a deep breath and realize that not all is lost. It’s easy to get overwhelmed by the hodgepodge of numbers, notices, and disheartening account statements that characterize the debt collection landscape, but allowing such things to paralyze you or trying to hide are about the worst things you can do. Like Chia Pets, financial problems only grow when left alone, since interest continues to accrue, delinquency progresses, and you’ll slowly but surely alienate your creditors.
You also need to look on the bright side: the economic recovery is underway. While it has been admittedly sluggish to date, we are nevertheless seeing money-related stress levels fall. According to the Associated Press’ annual Debt-Stress Poll, the median Debt Stress Index Score has fallen from 33.3 in 2008 to 29.2 in 2011 (a score of zero reflects “no debt stress whatsoever,” while 100 “indicates extreme debt stress”).
Finally, a bit of organization can go a long way in alleviating your worries. Make a list of everything you owe, to whom you owe it, the rates at which you are being charged interest, and any relevant due dates. This will help you make a strategic plan to become debt free.
Then, develop a budget for future spending by ranking your monthly expenses (including debt payments and emergency fund contributions) in order of importance and eliminating any non-essential spending that exceeds your monthly after-tax take-home.
Next step to becoming debt free, transfer any credit card balances that you have to one account, while designating another for everyday spending. Not only will that give you a better sense of exactly how much you owe, but since you should never have to leverage debt to cover ordinary expenses, finance charges on your everyday spending account will naturally signal the need to cut back.
Getting Down, Dirty & Debt Free
Now that you are armed with a healthier perspective, a viable budget, and a built-in warning system for future overspending, you can turn your attention to cleaning up the debt mess already at hand.
Well, almost. Before you actually start paying off amounts owed in earnest, you’ll need to build a financial safety net of sorts through monthly contributions to an emergency fund. The rationale for that is without an emergency fund, the slightest setback will put you right back in debt even if you have managed to claw from its grasp to the comfort of a zero-dollar balance.
Your ultimate goal should be to squirrel away about a year’s after-tax income in case you find yourself jobless for an extended period. That obviously isn’t an overnight task, but you can at least give yourself a solid buffer in the short-term.
After starting up your emergency fund, your top priorities to become debt free should be to:
1. Amass the Best Possible Collection of Terms
The other main benefit to the aforementioned strategy of segmenting debt and ongoing expenses on separate credit cards is that you can nab a lengthy 0% introductory term in order to save on interest as well as lucrative rewards to effectively subsidize ongoing expenses. You simply won’t find both on a single card. This strategy actually has a name – the Island Approach to personal finance and becoming debt free (given that expenses are isolated yet ultimately connected, kind of like a chain of islands).
2. Treat Debt like a Snowball
Most indebted consumers have multiple balances with varying interest rates. While you could attribute the same monthly payment to each, a more cost-effective strategy is to make minimum payments on all but the balance with the highest interest rate, to which you’ll designate the result of the funds you’ve earmarked for debt payments. In other words, you should pay off your most expensive debt first and then repeat until amounts owed are owed no more to become debt free.
3. Seek Free Advice
The personal finance world can be a confusing place, and no one understands every aspect of it perfectly. So, if you’re confused about a given subject, do some research online and perhaps even reach out to an expert in the field.
For example, many bankruptcy attorneys offer free consultations and law/business schools often offer free clinics that anyone can visit to have their questions answered. This can be a great way to find out about tax breaks, government programs, etc. that are designed to aid struggling consumers. Just make sure to vet your sources properly, as there are a lot of bad/misinformed apples out there.
4. Use the “too Good to be True” Test
Severely indebted consumers are understandably susceptible to promises of an easy way out, and unscrupulous debt relief/servicing companies have no qualms about basing their sales pitches on such promises. So, if you hear about a special offer to become debt free and make all your promises go away, approach it with a critical eye. After all, no matter what “it” is, if it’s as effective as the company says it is, why isn’t everyone doing it?
At the end of the day, we can say a couple of things for sure when it comes to the relationship between debt and stress:
1) Notorious B.I.G.’s famous “more money, more problems” line clearly doesn’t apply to everybody; and
2) Things probably aren’t as bad as they seem. No matter how serious of a debt problem you have, there are a number of options and resources at your disposal. Plus, there are few things more reassuring than a well-crafted plan of attack, which you now have in your corner.
What are your expert tips on how to become debt free?
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This guest post comes from John Kiernan – senior writer for the credit card comparison website CardHub.com as well as the new personal finance social network WalletHub.com.
Image Source: StockMonkeys.com
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