I bet I can guess what your New Year’s resolution is for 2013. Statistically it’s one of two things, to either lose weight or improve your finances. Since your reading this letter I’m going to go with number two.
The first step to getting into a better financial position is to pay off those holiday bills you accumulated. Even if you budgeted carefully and bought some of your gifts well in advance of the holiday season, you probably spent more than you were planning. Those last minute gifts for friends, the Secret Santa gift you didn’t plan on, the surprise meals out to ease your crazy schedule, the flights home to see family…all of it puts a strain on your finances.
If you’re like most people you’ve started to worry about those holiday bills that are set to show up any day now. Couple that anxiety with the resolution you just made to improve your finances and you probably feel like a failure before you’ve even begun.
Do not fear and do not give up. I’ve got a way to clear out all your holiday debt and improve your finances in no time flat.
First things first, pull out all your bills. You can’t improve your situation until you know exactly what state your finances are in. Write down your Visa bill, your Mastercard balance, all the department store charges you have and every other credit card bill you have a balance on. Write down the interest rate you’re getting on each card, the minimum payment, when it’s due and your total credit limit for that card. Total that all up and write that number below. Circle it several times.
On the right hand side of that same page write down all your monthly bills. You know your mortgage payment, car payment, phone bill and your utilities. If you don’t know any of these numbers look up what you spent last month and use that number. All of these bills have to be paid this month, no matter what. If you pay your credit card bill instead of your car payment, you might find your car reposed. Don’t let that happen, then you really will be in a worse off position.
Once you’ve paid off your must haves, then it’s time to work on the outstanding balances. Prioritizing your credit card bills is a must. A lot of people tend to want to pay off the cards with the lowest totals first so they can quickly knock off the number of bills they have. This isn’t a strategy I would recommend. There is a much more financially beneficial way to organize your bills.
Of the credit card bills you wrote down on the left hand side of the paper figure out what your debt load is on each one. Do this by dividing your outstanding balance by your credit limit on the card. That percentage is your debt load. If any of those percentages come out to 50 percent or more put those at the top of the list. Credit cards that have balances over 50 percent of their credit limit hurt your credit score immensely. Doing it this way will give you a double bonus. You’ll improve your credit score and chip away at your debt.
Any card that has a debt load well under that 50 percent mark should be prioritized in a different manner. The next most important bills are the ones with the highest interest rates. Disregard the balance and only pay attention to the ones that charge you the most interest each month. Pay off the debts in order from the highest interest rate to lowest. Starting with the highest interest rate card ensures you’re targeting the most costly credit up front to minimize the total amount of interest you pay.
If you have multiple cards with balances on them and high interest rates (anything over 18 percent is really high) then you might want to consider doing a credit card balance transfer. Doing a balance transfer will switch your debt to a card with a lower interest rate, thus saving you money. The lower the average interest rate you get, the more of a dent each payment makes into the remaining balance.
To do this go to creditcards.com and look for a new card that offers an introductory zero percent (or at least one that is significantly lower than your current rate) APR on balance transfers for a set amount of time (usually six months to a year). Then transfer your debt from your credit card with the highest interest rates. Do not view the introductory zero percent grace period as a reason to not pay on the balance. That will only put you in more of a pickle when the grace period is over. Pay on the debt each month. You’ll actually knock off the debt faster because more of your payment goes towards the balance than interest.
You can also reduce your debt quickly if you cash in those rewards. For those of you with cash back or rewards credit cards, the silver lining to overspending on the holidays is that you will go into January with a big cache of reward dollars. Now is the time to convert them into statement credits to lighten your debt. If you have a credit card that gives you miles or points, you probably have this option too, but you may have to call your card company to find out how and how much you can convert.
All of this advice will be for naught if you continue to add debt to your credit cards. Until you are out of your current debt you need to put your cards away. Cut them up, freeze them, bury them in the back yard; do whatever it takes to ensure you stop racking up more debt. You’ve got to hunker down and live below your means for a bit. It may be hard, temptations will be everywhere, but if you wait, you’ll likely have to cut back in some way for the rest of the year since late fees and interest can pile up. By cutting back now, for just a short time, you can live more comfortably for the rest of the year.
The easiest way to cut back is to go cash only. Paying for things with cash allows you to track your spending. When you spend money on a credit card it doesn’t hurt as much as when you actually part cash from yourself. Pay bills with checks, use your debit card for all transactions that require a credit card (gas), and set up automatic monthly payment transfers. Even if you’re not ready to give up your credit cards completely, take a two month hiatus from using them. You’ll find it’s a lot harder to spend money when you only leave the house with a set amount of cash on you. You’ll notice the savings almost immediately.
Once you’ve succeeded in wiping out your holiday debt, take steps to prevent it from happening again. You know that total I had you circle, that’s how much you spend this past holiday season. Go to smartypig.com and open a savings account. Make that number your savings goal and let Smarty Pig tell you how much you need to contribute each month to reach your goal. That way this time next year, you won’t have to cut back at all.
Keeping Money in Your Pocket,