From credit card bills you’ve accrued during a period of unemployment to medical expenses, student loans, or a mortgage that has fallen underwater, it can seem as though it’s never been easier to find yourself carrying high-interest debt. In fact, the median net worth for families under age 35 is just $11,000, which means that many young families are still operating in the red.
Fortunately, financial missteps can be common, which means that digging out is easier than you might expect. Read on to learn about three of the most important steps you can take when planning your financial comeback.
Address Where You Went Wrong
First and foremost. Don’t panic. When you suffer a setback, or when you realize you’ve made a mistake, your stomach gets tied up in knots. It’s easy to feel overwhelmed. Relax. Take an hour or two to distract yourself. Better yet, sleep on the problem — it’s amazing how a little time can provide an increased perspective.
Learn from your mistakes. Figure out where you went wrong. How did that traveling salesman sell you those over-priced leather shoes? What can you do in the future to prevent yourself from doing the same thing again? It’s a fine line to walk: you don’t want to beat yourself up, but you don’t want to keep making the same stupid mistakes, either.
Check Your Credit Reports
You can’t tackle what you don’t know—and while the prospect of facing your debt head-on can be intimidating, the key to overcoming financial obstacles is to know exactly what you’re dealing with. Request your free annual credit report from each of the three main reporting bureaus to have a comprehensive, handy list of each of the debts you owe, the interest rates, and the lenders.
Snowball Your Debts
Once you’ve identified your debts and are ready to start the paydown process in earnest, you may find the “snowball method” to be the most effective. There are several ways to build a snowball, but a few of the most common (and popular) include:
- Pay minimums towards all your debts but the smallest, putting any extra funds toward the smallest balance. Once this balance is paid off, take the amount you were paying toward this loan and start working on the next smallest debt.
- Instead of paying off the smallest balance, focus on the balance with the highest interest rate.
- Instead of paying off the smallest balance or highest interest rate, focus on the loan with the largest minimum payment. Freeing up this payment once the loan is paid off can accelerate the repayment of your other debts.
Track your spending
If maintaining a budget hasn’t been your forte, now is a great time to start tracking your income and expenses.
Don’t look at budgeting as a necessary evil. Instead, focus on the benefits it offers: knowledge of where your money is going, better cash flow management and peace of mind as you stop living paycheck to paycheck
Ditch cards. The best-kept secret (not!) is to ditch all credit cards and yes, even debit cards. Living underneath your means is one of the best ways to come out of the debt hole. Put all your cards away and head to the bank!
In order to be successful at a cash-only budget, you need to actually get the cash and separate it into categories. Distributing a specific amount for each trip to the grocery store, gas, etc. This way you know exactly where each dollar goes and you have no choice but to not go over your designated dollar amount.
Start Building For Your Future
Paying off debt is only half of the equation for financial success—don’t ignore the power of compound interest when it comes to building wealth. Even if you’re still working on some debts, sidelining your retirement savings or other investments under the assumption that you’ll increase your contribution later can leave you playing catch-up in a decade or two.
Instead, make sure that you’re contributing at least enough to a retirement account to get any match your employer offers. After this, continue upping your contribution each time you get a raise or a bonus, until setting aside part of your paycheck becomes second nature.