debt free life - Steps Continued....3

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Part 4: Which Credit Cards to Tackle First

When you have a lot of credit cards, figuring out how to pay them all off can be pretty daunting. Do you pay a little on all of them at once? Or should you concentrate on one card at a time? And if so, which one goes first? Follow these steps and your credit cards will be Dead on Last Payment.

The basic idea here is to reduce the amount of debt you're carrying on the credit cards you have as fast as possible. Why is this important?

The fewer credit cards you use, the better!
The more credit cards you have the greater the chance you have of being hit with late fees (up to $39 a month), over the limit fees (up to $35 a month) and annual fees on your cards that can range from $25 a month to $150 or more.
Getting the amount of cards you have paid off is a huge emotional boost. You'll see yourself make progress quickly!

Here's what you do:

Make a list of the current outstanding balances on each of your credit card accounts.
Divide each balance by the minimum payment that particular card company wants from you. For example, say your outstanding VISA balance is $500 and the minimum payment due is $50. Dividing the total debt ($500) by the minimum payment ($50) gives you a number of 10.
Once you have figured out the number for each account, rank them in reverse order, putting the account with the lowest number first, the one with the second lowest number second, and so on.
You now know the most efficient order in which you should pay off your various credit card balances.For each of your other cards, you make only the minimum payment.
Once a card is paid off, don't close it! Leave the account open so you have credit you are not using, which will help improve your credit score.
Finally, ask the credit card companies to waive your annual fees on the cards you have, whether you use them or not.

Step 4: Stop Spending

The quickest way to get yourself back on the right path is to stop spending. Use these suggestions to help cut back so you can move forward!

Don't carry credit cards in your purse (only debit/ATM)
Write checks, pay cash
Turn down credit line increases
Create specific funds for special occasions, like holiday presents, vacations, anniversaries, etc.
Tell friends what you're trying to do to rally support
Don't run up bills you can't pay in full at the end of the month
Pay credit card bills on time to avoid late fees
Make no more than one ATM visit a week
Don't be seduced by credit card offers such as airline miles

Step 5: Create a Monthly Spending Plan

Part 1: The Monthly Spending Plan Worksheet

Debt Diet Budget Pie Chart You have a choice in how you spend your money, so having a spending plan in place is always proactive and empowering. A spending plan, like this pie chart, is the road map you need to get to your destination—a debt-free life.

A new spending plan should be developed for each month, detailing your estimated monthly expenditures. It should be completed 15 days before the month starts. By following this timeline, if you have a shortfall—more money going out than coming in—you will have time to cut expenses or generate additional income.

To free up as much money as possible for debt repayment, create a bare-minimum spending plan worksheet. This exercise will show you the minimum amount of money you need to get by during a given month.

Here's what to do using a spending plan worksheet:

Take a look at your calendar and note any special events that may cost money.
Complete your spending plan by making the best estimate of your upcoming bills and other needs for the month. Tweak the payments in all categories to determine the minimum amounts that can be spent without creating a sense of deprivation.
Don't forget to include an amount for your savings cushion so you have a resource available for emergencies.
Calculate your cash flow. What is the amount left over after you subtract the total expenses from the net income you will have for the month?
Include the "Murphy's law factor," which means anything that can go wrong will. Add an extra 10 percent to the spending plan once it's done. That figure is realistically what you're going to spend if something goes wrong (like car problems, plumbing, falling and getting hurt, etc.)
Apply remaining cash to your debts.

Part 2: Use the Monthly Spending Plan Calculator

Housing 35%

Debt 15%

Yransportation 15%

Other Living Expenses 25%

Savings 10%

Part 3: Assigning Paychecks to Expenses

If you get paid more than once per month, the next step is to determine which bills to pay from which paycheck. Verify the due dates on your bills and plot them on a calendar. Then pay as many bills on time as possible from each paycheck. An expense like groceries should be allocated based on pay periods. For example, if your monthly plan is $400 and you're paid on the 1st and 15th, you can allocate $200 per check.

If you and your spouse agree to a cash allowance for personal expenses, use the same process to determine how much cash each person needs for lunches, gasoline, personal care items, etc.

Remember, fine-tuning your spending plan is a process. If the plan you put in place for one month doesn't work, it doesn't mean you should quit the Debt Diet. It means you should continue to tweak the plan and figure out how to make it work to accomplish your goals. Plus, just doing this exercise will inevitably make you more conscious of how you choose to spend your money and how motivated you are to pay down your debt.

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