Getting Out of Debt So You Can Begin Saving and Investing
Debt is a serious problem. According to a recent Gallup survey (source: Gallup http://www.gallup.com/poll/168668/americans-rely-less-credit-cards-previous-years.aspx) the average American has 3.7 credit cards while a whopping 71% of us having at least one card. As you can see, getting out of debt is a serious issue you may have already had to address.
Furthermore, according to a survey by Bankrate.com (Source: Bankrate http://www.bankrate.com/finance/consumer-index/many-americans-living-paycheck-to-paycheck.aspx) a shocking 32% of us say we live paycheck to paycheck, and that staying current or getting caught up on bills is our main financial concern. In uncertain economic times like these, we need a plan and we need it fast.
Here are a couple quick reasons why you pay your debt off as quickly as possible. Don’t like mine? Get a paper out right now and make your own. Write out your personal why.
Increase Your Credit Score to Begin Getting Out of Debt
Reducing your balance-to-limit ratio on your credit cards can increase your credit score. Your credit utilization should be no more than 30% but the lower the better! Paying off your cards each month is ideal.
More Financial Security
Having no debt leads to greater financial security. Monthly payments tie up a good portion of your expendable income. You could be spending the extra money on things you want instead of just things you need. You could be saving for college, retirement, or a down payment for a house or car. You could begin building wealth by making smart investments. No amount is too small.
Now that you’ve got ample motivation to get started eliminating your debt how are you going to do it? Get out the paper you wrote you’re the reasons you want to get out of debt and now add the part about how you’re going to get that accomplished. It’s been proven that if you write down your financial plans and goals you are more likely to reach them. Let’s get started!
Review Your Budget If You’re Ready to Start Getting Out of Debt
Find ANY area you can cut back. I would strip back that budget to what Finance Guru, Dave Ramsey, calls “beans and rice”. You get the idea?
Strip back your budget to the items you have to pay, and get the expendables to as little as you can. Cut out and turn off ALL non-essential-to-life items. These would be the “wants” like cable, manicures, dinners out, vacations, etc.
List Your Debts So You Know Where You Are Right Now
All of them! It doesn’t matter if it’s a $3 library fee, or a $10 loan from Mom or even a $20,000 car loan write them down from lowest to highest. Note: for the purpose of this exercise we are only dealing with consumer debt in this article- do not include your mortgage at this point.
Take all of the money that you have from stripping back your budget to essentials and start putting it towards your lowest (dollar amount) debt paying the minimum only on the rest.
Paying off your littlest debt first will give you a sense of immediate freedom. Once that debt is paid off take the increased money you now have and apply to your next biggest debt. It’s called “Snowballing” and it works well. The snowball gets bigger as it rolls. In the same way, the more funds that become freed up, the more you will be able to add to the next debt and so on.
Make a Plan for Your Finances
Plan out (on a calendar) how long it will take you to pay off each debt. Build in little incentives in your budget for each debt paid off, (or if you have a lot of debt, or will take a long time, celebrate ¼ milestones, or ½ milestones on debts). It will help you to see progress.
Don’t go crazy though. Only use $10, or $50 (whatever is reasonable) of your snowball debt money to treat your family (maybe dinner, maybe more grocery money, a movie, etc.) when you have hit a goal. Your family will be sacrificing for a period of time so it’s good to reward them for short-term goals to keep the long goal in view.
Look for Extra Money
Find ways to add more money to help your snowball grow so you can pay off your debt sooner. Have a yard sale, get a paper route, or deliver pizza, or start an Etsy shop (don’t spend a lot of money on supplies, etc.) to sell your hobby, or start with a direct sales business for a season (one that doesn’t require a huge investment- do your homework!) or _________. Figure it out! You can do this!
With dedication, hard work, and sacrifice, you can get out of debt- quick! And then work a plan to stay that way.
Staying Organized at Tax Time, (Or Any Time)
If tax season brings you dread every year, it’s time to get that under control. There is no reason to be stressed, worried or dreading tax time each year. It’s not good for your mental health, or physical health, either, to be stressed out. The reason you probably feel this way is that you have not taken the time to be organized throughout the year.
However, with just a little bit of preparation, and a simple system through the year, you can regain control of our emotions and make tax time a cinch.
There are basic components you will need for tax season- receipts of payments (think receipts and paid invoices) and records of payments (think bank and credit card statements). If you have a system for filing and obtaining these items, you’re 90% done with tax prep.
For receipts of payments, you need a file for invoices and receipts you pay throughout the year. This system can be whatever works best for you.
Paper Files
Some people prefer keeping a physical paper trail. For physical paid invoices and receipts, you need a physical filing system that works for you. Something like an accordion-style file folder would work just fine, or a filing cabinet with folders, if you tend to have larger volumes.
How you file your receipts and invoices is up to you. There is no wrong system as long as you keep them organized and you know where to find them when you need them. Standard filing practices include categories by month, vendor name, or expense category.
Paper Recording
If you also keep paper records (rather than a software bookkeeping system) you will want a way to track your expenses so you don’t have to spend hours at tax time adding up the totals. Whatever you use, at the end of each month, just be sure you total the expenses in each category and keep that total handy.
You could even staple the receipts for said category to the tally paper. You will only need the receipts for an audit, but you will need your totals so you can calculate your annual expenses at tax filing.
E- files
If you have a software system for bookkeeping, the application often has a mechanism for attaching receipts directly to the payment inside of the program. (i.e. .pdf or .jpeg images can be attached to the payment for easy reference) Alternately, you can set up a filing system in files on your PC, similarly to the paper files above. Receipts and paid invoices that have been received can be saved to the file.
E-Recording
The easiest form of any type of electronic bookkeeping system is accounting software, but for those who are on a budget, this may not be feasible. You can use a basic spreadsheet in Excel or similar program to track expenses. Again, you will need just the annual totals for your tax filings, but you may want to track these monthly for easy tax tracking.
For records of payments, you will need a file (as explained above- either e files or paper files will suffice) to store your bank and credit statements, (and ideally, you should attach your reconciliations to each statement) that you will also need at tax time.
Following these easy steps, you can breeze right through tax time, stress free.
You Got a Tax Refund?
People sometimes get the silly notion that a tax refund is a GOOD thing. They think of vacations, cars, new phones, new toys, new gadgets, savings and more. But think again.
There are a lot of people that plan on their refund each year for certain items (see aforementioned list) and they treat it like a “savings account.” They just LOVE tax time and think a refund is a good thing.
However, a tax refund is really NOT a good thing. Let’s delve into this thought pattern a little more and see just how many silly mistakes you are making when you get an annual tax return.
A tax return means you over-paid the government in your taxes and they owe you money. Essentially, you have lent them money from January of the year before to April (or whenever you file your taxes) interest free. In other words, you’ve thrown away money from interest AND been unable to spend your money for a year or more.
Let’s discuss the interest losses we take on a tax refund. When you consider that a savings account or CD with a modest 1 or 2% interest rate would yield an annual return of $10 or $20 per $1,000 of return, you’ll agree that stuff adds up.
A return of $2,000 would mean losing out $40. If you don’t think that’s a lot then go ahead and take out 2 (two) $20 dollar bills from your pocket now. Go… I’m waiting…. Got them? Good. Now go throw them in the nearest garbage can and leave them there.
Hurts, right? Or, next time you’re at the bank get forty $1 bills and as you’re driving to work each day, throw out $1 every day right out the window… 40 days later, let me know how you feel about it! Obviously, when we see cash loss, it makes the point drive home. If you wouldn’t throw away cold hard cash, then why throw it away in other forms?
Finally, we must realize the loss of use associated with the government holding our money hostage until we file a return and then up to 6 weeks after for processing payment. Have you ever been a little short on cash? Perhaps had the thought, “I could sure use some extra cash today?”
Next time that happens, think of the government holding your latest tax refund in their hand while you scrounge for change in couch for your next coffee. Not such a good idea anymore, is it?
Now you see the light. But now what can you do about it? In cases where you are an employee, you simply need to file an adjusted W-4 with your employer. This is the form your employer uses to withhold your taxes. It’s super easy- request one from your employer or simply go online to the IRS website (https://www.irs.gov/pub/irs-pdf/fw4.pdf) and print a form.
To accurately determine how much you should have withheld, use the IRS withholding calculator. This will tailor your tax withholdings to your particular situation and ensure that you are withholding just the right amount. (https://apps.irs.gov/app/withholdingcalculator/)
For self-employed situations, you will want to consult a professional tax expert to be sure that your estimated tax payments are correct.
In any situation, you want to make sure that you are withholding the correct amount, not too much or too little. Trust me, you do not want a refund even when you think you do.
I’m author, publisher, and entrepreneur Connie Ragen Green and would love to connect with you. If you are new to the world of online entrepreneurship please check out my comprehensive training on how to set up Funnels That Click and learn how to gain an unfair advantage when it comes to building a lucrative online business.
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