Get Out of Debt - Big Y® World Class Market®

Make Cents and Save More Improving family finances saves you a lot more than money — building a budget, paying down debt and nurturing that nest egg all contribute to a lower stress level. And they make it easier for you to buy and do the things you and your loved ones enjoy.

Step 1: Build a Budget
Don’t groan! Rather than think about a budget as a constraint, look at it as a tool that gives you a clear picture of how you spend your money and how you can make it go even further. Use home finance software to create your budget, or just pick up a pencil and paper — both high- and low-tech approaches work fine. Add up all of your family’s sources of income on a monthly basis, including pay checks and investment income that is not automatically reinvested. Next you’ll need to list your expenses. In order to get the most accurate picture, track your expenses for one month. Carry around a small notebook and write down every expenditure you make, from the spare change you put into the tip jar at your favorite coffee shop to what you spent on that movie Saturday night. Keep receipts for all of your purchases as a backup in case you forget to jot something down. After a month of tracking expenses and saving receipts, you should be ready to list your monthly expenses. Lay them out by category: Fixed, Fixed-Other and Discretionary. Fixed expenses include necessities that don’t vary from month to month, such as your mortgage, health and auto insurance premiums and car payments. Fixed-other includes necessities that do vary from month to month, such as utility bills, groceries, school supplies and clothing. Discretionary includes all nonessential items, including eating out, vacations or school field trips. Go category by category and see where you can cut expenses. Fixed expenses may be harder to shave, but don’t let that stop you from trying. Shop around for lower premiums on the insurance policies you carry. If you use different carriers for each, see if consolidating might work; companies often offer discounts if you hold multiple policies such as auto and homeowner’s insurance. Be sure you’re taking advantage of every other available discount your carrier offers, such as for alarm systems or being a safe driver. When it comes to other fixed expenses, make it second nature to call your telecommunications, mobile and cable providers at least twice a year to inquire about lower rates or new promotions you might be able to benefit from. Discretionary expenses typically offer the most opportunity for savings.

Step 2: Bust Debt
As a general rule, pay off debts with the highest interest rates first, regardless of the balances you owe. While it might be tempting to pay down your mortgage, the interest rate you’re paying is likely lower than those on your credit cards, and mortgage interest paid is deductible on your tax return. That said, if you have a credit card or other debt with a low balance that you’re anxious — and able — to pay off, go ahead and pay it. You’ll feel more motivated with one less check to write each month. Pay more than the minimum payment on the debt with the highest interest rate (the one you’re paying off first). If your monthly budget allows, double the minimum payment; better yet, triple it if you can. Be sure to pay the minimum amount on all of your other bills at the same time. And don’t skimp on your retirement account contributions while you pay down your debt or borrow from your 401(k). The interest and tax advantages you’ll forego are likely to add up to more than you’d save. When you pay off the first creditor, use that extra money to double (or triple) the monthly minimum payment on the next debt in line, and so on. If you have credit card debt, call each issuer and ask if you’re eligible for a lower interest rate or balance transfer promotions. When considering offers, opt for rates that are fixed until you pay off the transferred balance, and skip “teaser” rates that increase in just a few months. Don’t forget to ask about balance transfer fees. Many card issuers let you transfer balances for free, so be careful. Pay with cash whenever possible to avoid running up your balances again. Designate one credit card for emergency expenditures only, and leave the rest home — or cut them up — to eliminate temptation. Contact creditors immediately if you fall behind and can’t make the minimum monthly payments. Many will work with you to negotiate alternate repayment plans. Once a creditor turns your account over to a collection agency, however, it’s often too late and your credit will suffer.

Step 3: Save
Now that your debt is down, start stashing that money. Don’t wait any longer to sign up for the 401(k) offered by your employer. Contribute as much as necessary to qualify for the full employer match, if such a benefit is offered. If you’re self-employed, talk to your accountant or financial planner about setting up a similar plan on your own. Unless you’re extremely tight on funds, put your yearly raise right into the bank. (If you need the money, take half to spend and save the rest). Once you’ve paid off credit card and other high-interest debt, add “kids’ education fund” and “family savings” to the fixed section of your budget. Arrange for your bank to transfer funds electronically each month, so that saving is not optional. Do sweat the small stuff. Cut back wherever you can, within reason. If you normally have coffee out five times a week, brew at home three or four days. Pack lunches rather than eat out; rent DVDs and microwave popcorn and skip the theater. If all you do at the gym is use the treadmill, bank the monthly fee and find a nice outdoor path or hiking trail instead. Do the comparisons to see if it’s worth joining a club store. Ask your kids for their ideas too, and make achieving financial goals a family effort.