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Get 3 Free Credit Reports & 3 Free Credit Scores The Way to Financial Freedom According to a Federal Reserve report, America’s personal debt stood at a staggering $2.6 billion in April 2008. Both revolving credits – the credit card debt and the fixed-payment loans – are on a rise. The total debt increased by $8.9 billion on a monthly basis as on April 2008. These figures clearly indicate that Americans are in dire need of planning their finances. Financial planning isn’t rocket science. All you need to do is get your finances and, more importantly, your lifestyle organized. Some simple yet effective steps and you’ll be on your way to achieving complete financial freedom. The steps mentioned here aren’t necessarily meant for those who are in deep in debt. If you manage your finances well you may never get into trouble. Step 1: Budget your expenses You will find a number of books and fancy software in the market to help you create a budget for your expenses. However, all you really need is a notebook and a pencil. According to Wikipedia, the online encyclopedia, “Budget generally refers to a list of all planned expenses and revenues.” Simply put, a budget means planning your expenses before you incur them. Essentially creating a budget lets you control your money rather letting your money control you. So how do you create a budget? There are two parts in a budget – income and expenditure. Under the income part make a list of the income that you get from all sources. From this deduct your taxes – now you have the net income that is at your disposal. Then make a list of all your expenses. This might take some time, maybe even a month. Categorize your expenses into fixed and variable. Fixed expenses like car payments, insurance payments, rent or payments on a mortgage should be all listed in one section. These expenses will stay relatively the same each month and hence are called fixed expenses. The other category is the variable expenses which include items like food, clothing, entertainment etc. These expenses vary month on month and can be controlled to a large extent. This is the area where you will almost always find scope for improvement. The important thing is to make a list of every penny that you spend. You may need to record all your expenditure and in a month’s time you’ll probably get a hang of where all your money goes. Once you have a list on income and expenditure you can sum both sides and check out whether you are have a deficit or a surplus. In case you have a deficit, you need to make allocations to reduce your spending. This means cutting down on your expenditure. Suppose you spend $300 a month on eating out. You can cut it down to $200 or even $150 and use the rest to pay off a debt. You should draw a budget in such a way that there is no deficit. Better still, you can create a surplus by cutting down on unnecessary expenses and using that money to get rid of your debt. Step 2: Get rid of those enormous credit card bills Ask yourself a simple question. Do I really need all these credit cards? Be reasonable and cancel the cards that you see as unnecessary. Remember, though, not to cancel cards that are old – like over 60 months old – as closing such accounts may have a negative impact on your credit report. Step 3: Pay off the highest rate debts first Out of your debt outstanding you must first seek out the debt with the highest interest rate. Paying out the highest interest rate debt saves months of debts. Once the highest interest rate debt is paid off, attack the next in line. Similarly, try paying off your entire debt. It might seem difficult to stay so tight on expenses but the deal is worth it. Always remember – your goal is to achieve financial freedom! Step 4: Keep your creditors informed In case you feel that you are not able to pay your bills, make sure you keep your creditors informed. This is one of the most effective strategies to help you negotiate with your creditors. If you communicate your financial difficulties to your creditors, they will think of you as honest and willing to pay off your debts. They may even help you out of trouble by accepting reduced payment or lower interest rates during a financial crisis. However, keep in mind that the rates will go back to normal once you get back on track. Step 5: Shop for debts with lower interest rates Research for credit cards that offer low interest rates and get your balances transferred to them. You must, however, read the fine print. These cards might be offering this facility for a short period of, say, 4 to 6 months. Use this period wisely and try to rid yourself of your debts. Step 6: Use debt consolidation Debt consolidation means to create a second mortgage on your property. This can lower your credit cost. This is possible because a debt consolidation allows you to make a consolidated payment for your debts. Interest on this loan is tax deductible and hence you save there as well. However, remember that if you are unable to pay you may end up losing your property. Step 7: Go for credit counseling and debt management programs If all your efforts fail you can contact a credit counselor for help. Many of the credit counseling organizations are non-profit and offer you free help. However, be wary of those organizations that claim to be non-profit but pressure you to make a voluntary contribution. Identify a genuine counselor and get help. These organizations give you advice on managing your finances and provide you with educational material on doing so. A certified credit counselor may offer you a debt management plan (DMP). A DMP is not for everyone. Your credit counselor will recommend you for it only after reviewing your credit situation thoroughly. Under a DMP you are required to deposit your money with the credit counseling organization, which will make payments on your behalf. They may be able to convince your creditors to offer you lower interest rates or some concessions on your loans. Step 8: File for bankruptcy In case none of the above solutions work, you may have to file for bankruptcy. This is the last resort for a person not able to make his debt payments. However, bankruptcies adversely affect your credit report and stay on it for 10 years. They reduce your chances of getting credit in the future. If at all you are still able to get credit be prepared to pay high interest rates. Once you are able to get rid of your debts remember not to repeat your mistakes and do keep to a budget. Get your free credit report and free credit score including free credit monitoring with alerts of activity to your credit file. 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