But how do you know if your family qualifies as low income? The government has its definition, but here is a more practical explanation. If there is no chance of a vacation this summer, no prospects for a new car to replace an aging one, living paycheck-to-paycheck with no savings — this is what low income in America looks like.
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The cost of living has risen by about 30% in the last ten years, forcing most people to borrow something just to live. But check it out, there are some shortcuts to get debt paid off.
In this guide, we offer a list of suggestions that, when followed, can greatly reduce the principal balance owed. We include information about easy-to-follow practices designed to reduce spending, avoid common mistakes, and efficiently tackle your debt. Along the way we offer some suggest some sponsored services who specialize in negotiating down debt.
The Big Picture
Getting out of debt requires a clear understanding of how much money is being owed. A surprising amount of people ignore how large their debt actually is, believing that paying off their bills is enough to eventually get rid of it.
Although it is certainly true that getting out of debt may seem like an impossible feat, many Americans have reduced or eliminated their debt altogether in the past.
Doing so requires discipline, determination, and a comprehensive understanding of the problem’s dimensions. Knowing exactly how much money is owed is a good first step.
Financial institutions are willing to provide detailed information about your debt, and from there you can start working towards reducing it. Remember, as high as it may be, your debt will go nowhere else but down if you follow the suggestions in this guide.
If debt collectors are calling already, that could mean trouble is coming. But it could mean they are ready to negotiate with you.
Don’t go at it by yourself. Your next step could mean the difference between getting out of debt or getting further into it from fees and deferred payments.
Let the professionals negotiate on your behalf.
Control Your Spending
Controlling spending, especially spending financed by debt, must be done before getting into the business of paying off existing debt. Your debt will continue to grow if expenditures are higher than monthly payments.
A general rule to follow is “if you don’t really need it, don’t buy it.” Unnecessary spending is one of the main causes of excessive credit card debt in the United States, downgrading families’ credit scores as a result.
Some families have a hard time cutting spending due to lack of organization with their finances. To fix this problem, households can track all of their expenses during a month and determine which items should go away.
Reducing unnecessary spending is important because it gives people access to additional money that could be put towards paying off debt.
Create a Budget
Spending control goes hand in hand with a responsible budget. Families should always have a list of mandatory expenses, including food and utility bills, to understand how much money they have to spend on a monthly basis.
A budget will help them identify which expenses are unnecessary as well as the difference between their earnings and expenditures, which is called a deficit. The main purpose of a budget is to quantify the deficit and cut the items that generate it.
Subscriptions and other recurrent expenses may seem insignificant at first. However, when added up, they can represent a large part of a family’s expenses. For example, a $65 monthly Cable TV subscription may not look like a sizable expenditure, yet it becomes a significant money sink when compared with Netflix’s comparable $8 monthly service.
A family could save up to $50 if they are eligible to get free phone service from the government through the Lifeline program.
This is only one example of how creating a budget can help families single out expenditures that could be replaced with cheaper options or removed altogether. It also helps them determine if they need financial assistance. A family with elevated food spending may want to request assistance from the government.
Almost all states have home energy programs that subsidize heating and cooling for families within the required income levels. Contacting local agencies to find out which programs can help reduce spending is a good next step after a budget has been designed.
Organize Your Debt
Organizing all outstanding debt is the next step after you go through the process of creating a budget and cutting unnecessary spending. To do this, you must have all the relevant information, including amounts, interest rates, minimum payments and more. Remember that most financial institutions will provide this information if requested through a call or online banking system, if available.
There are two methods to organize debt. The first one is where all debt is listed from smallest to largest regardless of interest rates. People can build momentum with this method because smaller debt is paid off quickly, consolidating efforts on larger debt like student loans. The downside of this path is inefficient exploitation of low interest rates, which saves the most money over time.
The second method does take into account interest rates. It’s called “laddering” and it works by listing all debts beginning with those with highest interest rates. Due to it focusing on eliminating high interest debt before everything else, laddering is considered to save the most money in the long term.
Debt with high interest rates generates larger monthly payments. Working to reduce it first will help you ease the burden on paychecks and improve your credit score at the same time.
Paying Off Your Debt
Whichever method you choose, the trick is to stick to it. Switching plans along the way will have a negative effect on your finances. If needed, a family could design a hybrid plan to work with, paying off small debt right away.
Subsequently, they can switch to a laddered approach to tackle high interest rates. Excess cash generated from spending control and budget analysis can be used to speed up the process of paying off debt.
When you’re ready to start paying off your debt, make sure you keep the following suggestions in mind. First, always try to pay more than the minimum payment established by the financial institution.
Contrary to popular belief, minimum payments do not contribute towards reducing outstanding debt. In many cases, they end up enlarging it instead. Banks and other financial institutions set minimum payments low enough to make sure debt either grows or remains intact over time.
The second recommendation is to throw as much money as possible towards paying off debt. In the previous sections, we offered suggestions to cut spending and responsibly organize a budget. Excess money that will no longer be spent on unnecessary stuff should be used to tackle the debt.
You may ask why is this useful, but remember that the more money being put today, the less interest being paid tomorrow.
Try to avoid common mistakes people make on their way out of debt. Among the most common mistakes is closing accounts once the balance has been paid off. Although reducing the number of open accounts seems like a good idea, in reality it tends to have the opposite effect.
In our guide about how to improve credit scores we talk about the credit utilization ratio, which is obtained by dividing a household’s credit card balance by their total available credit. Paying off debt reduces credit card balance. However, if you close an account, it reduces your total available credit.
It’s no secret that despite the promising economy, many Americans find themselves with more debt each year. The average household in the United States owes at least $130,000 between their mortgage, student or auto loans and credit card debt. That number can be daunting, but with discipline and determination it could go down significantly in a few years.