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Debt Reduction

Getting out of debt is key to financial freedom. Being debt free gives you great financial flexibility. Paying off those debts, however, can be a struggle. Here we provide a comprehensive guide on how to get out of debt for good.

CLIMB DEBT

Along with losing weight, getting out of debt is probably the most popular goal in the United States. It’s almost always one of the top three New Year’s resolutions made each year. In fact, 42% of people vow to make better money choices. With the average American’s credit card debt once again on the rise, debt freedom is surely on many of our minds.

This goal, though — like so many others — tends to be forgotten within weeks of New Year’s Day. We get overwhelmed with managing a bare bones budget. We have to field unexpected expenses. Or we simply lose motivation when it seems like there’s no way out.

It’s time to stop the cycle. If you have resolved to get out of debt this year — whether it was for New Year’s or because you simply got fed up on a random Tuesday– here is how to finally meet that challenge, once and for all. To help, here are some ideas for not losing sight of the goal.

Related: Which Comes First: Paying Down Debt or Building an Emergency Fund?

Financial Freedom > Zero Debt

At worst, debt is slavery. At best, it’s willful indentured servitude.

Say your family takes home $2,500 per month from your job after taxes. Now imagine your credit cards, loans, and rent/mortgage total $2,000 each month. This means that you work only one-fifth of your hours for yourself.

The remaining four-fifths of your time at your job is exclusively for your creditors. You might as well just hand your paycheck over or work off your debt directly for the credit card companies. Depressing, right?

Unlike slavery, though, you are free to leave this arrangement (your job) at any time. You just need to simply quit and look for another job with a pay increase. However, that is not always a simple or practical solution.

Learn More: My Two Best Financial Decisions: Leaving My Jobs

If it motivates you, think about what you would do with your freedom from debt. Without having to pay credit card companies, you would have the freedom to choose where your take-home pay goes. Then, use those dreams to fuel your motivation. For instance, if you want to save up for a vacation, place pictures of your favorite getaway spot around your house.

Replace Bad Habits

Excessive shopping can be a habit. Many compulsive shoppers find shopping helps them deal with difficult emotions like anger, frustration, and stress. The excitement of shopping helps to temporarily improve a person’s mood.

But you can replace this habit with healthier alternatives.

If starting a shopping trip helps you deal with difficult emotions, replace shopping with jogging, running, or another physical activity.

While the act of spending money improves the mood of habitual shoppers, physical activity improves anyone’s mood. This is due to endorphins — natural, mood-altering chemicals the body releases in both situations.

And what about the bad habit of wasting time watching television? This could be costing you actual money if you’re paying a fortune for cable. But you could also be missing major opportunities to make money. Instead of watching TV, spend time working on a side hustle or listening to podcasts to further your career (and make more money).

It may sound crazy, but just try to find a different habit that better serves your goals.

Make Getting Out of Debt Fun

The concept of “fun” is subjective. What one person finds fun, another might find mundane.

For example: when I was in debt, I liked watching the colorful monthly reporting graphs in Microsoft Money get close to crossing the x-axis of $0 net worth. I fully understand that might not motivate everyone the same way.

Related: How and Why to Track Your Net Worth

Rewards can be great motivators, too — just make sure they aren’t big rewards that will impact your finances negatively. Paying off a student loan and then blowing $200 on a steak and lobster dinner, for example, isn’t very smart.

Do something small, yet still enjoyable. You could treat yourself to a movie night every time you pay off a credit card, or plan that weekend hike that you’ve been meaning to do.

Celebrate at every possible milestone to keep up your motivation, but choose reasonable rewards.

Visualize Your Debt Reduction

Losing weight is easy to visualize. Improving finances? Not quite so easy.

I’ve seen videos posted online involving time-lapse photography to illustrate weight loss over time. The person takes a photograph each week in the same location and same position. When the photographs are laid side by side in a video, the change is apparent.

You may not realize it, but you can do the same with your debt.

Here are a few visualization tips:

  • When you pay off a credit card, cut it up using a shredder. Save the plastic confetti in a bag. Watch it expand as you blow through card after card.
  • Look at your credit card statements before you go to sleep each night. Your bad dreams will subside when your statements are small enough that they don’t cause anxiety.
  • Here is an extreme option, for those who REALLY need a motivator: If you’ve paid off 20% of your mortgage, paint 80% of your house in a color you don’t like. Once a year, determine how much more you’ve paid off, and paint the corresponding amount in a color you do like. You’ll be encouraged to pay off your mortgage in full just so you can live in a house painted the way you prefer.

Learn More: Should You Ever Cancel a Credit Card?

Need some other ways to boost your motivation? Try these tips:

Do something positive every day.

The key to making a resolution stick is to keep it in front of you every day. If you can do it without additional fees, make a small payment on your loan or credit card every day before you go to work. Look at your net worth in Mint if that reminds you of your goal. Work an extra hour if it means you’ll get more money for paying off your debt.

Recruit your family and friends.

Having a support system is vital, but many people don’t want to let people know about their financial troubles. It’s important to have at least one person you trust to talk to about financial issues. It helps to share goals like this because goals often don’t seem real until you speak them aloud to someone. Plus, you can add some accountability just by telling someone about your goals

Consider your financial options.

To truly get started, you need to make some financial decisions. It is true that anything you do is better than nothing, but you need to have a plan. First, can you consolidate your debt onto one low-rate card? Call your credit card issuers and ask. Do you qualify for a loan through a peer-to-peer network? If you have a good credit score, you might find favorable loan terms.

Decide how fast you want to get out of debt and how much you want to pay. If you want to pay the least and succeed the fastest, you’ll want to examine the Debt Avalanche method. If you believe that a small success earlier on the path is important to keep you motivated, check out the Debt Snowball. Research your options and give it thorough thought. And if you aren’t sure which approach to take, check out this debt snowball vs debt avalanche calculator.

What tips do you have for keeping a resolution to get out of debt?

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Unless you’ve been living under a rock, you’ve probably heard whisperings of the Federal Reserve’s rate hike last month. This is only the third time since the Great Recession that the Fed has increased rates… and, well, it’s both a good thing and a bad thing.

A Fed rate increase means that the economy is on the upswing. The Fed will only raise the benchmark rate when the economy no longer needs stimulus. Janet Yellen, chairwoman of the Fed, said that her organization plans to go slowly with such rate increases. So, it’s best to assume that the Federal Reserve is cautiously optimistic about the economy and where we stand today.

The most recent benchmark increase was only a bump from .75 to 1 percent. It doesn’t seem like much, but even a tiny change in the benchmark rate can spell major changes for your personal financial situation. Let’s take a look at what the latest increase may mean for you.

How the Fed changes interest rates

The Federal Reserve doesn’t directly affect interest rates. Instead, its benchmark rate affects the federal funds rate — the rate that banks charge each other. The banks then pass those costs (or savings) on to consumers by changing the rates of short-term loans. Then, when short-term rates increase, long-term rates increase, as well.

In short, when the Fed increases its benchmark rate, you’ll first feel the pinch with your credit cards and other adjustable-rate or new shorter-term loans. But you’ll eventually feel the pinch if also you try to take out a longer-term loan, like a mortgage.

Here’s how the current rate increase is most likely going to impact your wallet:

If you have adjustable-rate debt

Variable- or adjustable-rate debts — like credit cards, HELOCs, and variable-rate mortgages — will likely be the first place to feel the difference, post-rate hike. A quarter-percentage interest hike doesn’t seem like much, but it can really add up over time. This is especially true if you’re carrying around a lot of credit card debt.

Let’s assume that you’re holding the average American family’s $16,000 worth of credit card debt. Depending on your terms, the rate increase could potentially cost you several hundred dollars per year.

Learn More: How Is the Nation REALLY Doing With Credit Card Debt?

Just how much more can you expect to pay on your variable rate loan? Dig into your statements to ensure you always know your rates, even as they change. Then, use an online calculator to see how much you’re going to pay in interest when your rate increases.

The best way to deal with this particular issue? Just pay off that debt as soon as you can. Right now, you may only be looking at a difference of $100 a year or less. But if the Fed continues to increase their benchmark rates, the interest rates on your already higher-interest debts are only going to increase.

Need a boost to get you started? Consider transferring some of your debt to a card with a 0% APR introductory period. Paying no interest for even 12 or 15 months can make it much easier to get that principal paid down before you end up paying through the nose because of rate increases.

If you have, or are in the market for, a mortgage

Fixed-rate mortgages, which remain the most popular option, may not skyrocket immediately. But the pinch will come.

According to Freddie Mac, the average 30-year, fixed-rate mortgage in January charged 4.15% interest. In March, that increased to 4.2%. That’s a fairly large increase from this time last year, when rates were more like 3.69%. But from February to March, that much of an increase would probably only make a few dollars’ worth of difference in your monthly payments.

With that said, even a point’s difference on a 30-year mortgage can have a big impact on your finances over time. That’s because you’re paying interest on this loan for so long. Even a few bucks a month will add up over the course of 30 years!

Read More: Can This Simple App Get You Out of Debt?

So, what should you do with all of this in mind? Well, if you’re in the market for a mortgage, you might try to buy sooner rather than later. But only if you have a sufficient down payment and good credit. It doesn’t make sense to pay more for a mortgage, simply because you’ve rushed in before you’re financially ready.

With the Fed’s cautious outlook, it doesn’t seem that interest rates are going to skyrocket any time soon. So, it doesn’t make sense to lock in a lower rate if you’re not financially prepared to buy yet.

What about those who already own a home? If you’re still paying pre-Great Recession interest rates of 5% or more, you might want to consider refinancing while the rates are still low. This is especially true if you’re also in a better credit and all-around financial situation now than you were last time you bought or refinanced your mortgage. If nothing else, it’s worth looking into your refinance options now, before rates increase any more.

In the Know: Can You Refinance Your Mortgage With Bad Credit?

If you have savings and investments

Just as interest rates on consumer debt are rising slowly, so will rates on savings products. Chances are you’ll see a slight increase on the rate on your interest-bearing accounts, including savings accounts. Other interest rates — like those on CDs — will also rise, albeit slowly.

Bottom line: now could be a good time to shop around, Make sure that you’re getting the best interest rate on your high-yield savings accounts and, if you’re not, think about switching.

What about your longer-term investments, including those in your retirement account? It’s much harder to predict a rate hike’s impact on savings vehicles like these. When it comes to long-term investing, just stay the course and keep paying attention to the basics, like asset allocation.

Related: The Perfect Asset Allocation Plan

So, what exact impact will the Fed’s rate increase have on you? It really depends on your current financial situation, especially your debt and savings account mix. Just be sure to pay attention to interest rates on both debt products and savings products, so you can take advantage of the best deals around.

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National averages for credit card and other consumer debt can be a good barometer of consumers’ financial capacity and goals. For instance, when debt decreases, Americans, as a whole, may be spending less and saving more. Of course, that’s a good thing.

So, when SmartAsset released its average credit card debt study recently, we took notice. The survey looked at median individual income and credit card data from 2006 to 2016. It even broke down the data by state!

trend

What did the survey find? Here are some of the topline results and what they might mean for consumers like you:

Americans were dropping credit card debt… but now they’re reversing that trend.

The data show that from 2006 to 2015, the average total credit card debt went from about $3,175 per person to $2,800 per person. Total credit card debt dropped — in every region except Virginia, Maryland, and Washington, D.C. — during this time period.

What does that 11.6% decrease mean? It’s hard to say exactly. But it could have been a result of the financial crisis, and people understanding how dangerous credit card debt can be during a time of personal financial upheaval.

During this time, though, there was a peak in the average credit card debt. In 2008, the average debt was $3,670, and the average American had debt equal to about 14% of their annual income! From that high point, we started cutting back on credit card debt quickly and efficiently. This is definitely a good thing.

So for several years, Americans were dropping debt at a significant rate. But then, a new trend happened.

The average credit card debt bottomed out at $2,730 in 2014, bouncing back up to $2,800 in 2015. Over this same time period, the total national credit card debt rose from $733 billion to $799 billion. So, is this the new normal?

It’s hard to say. But the report speculates that the Great Recession incentivized Americans to lower their credit card debt. But once the recession turned around, Americans seem to have forgotten the struggle and gone back to their old ways… taking on significant amounts of credit card debt.

What does it mean for consumers?

Boiling complex statistics, in a survey like this one, down to a few talking points is risky. The challenge is to avoid reading too much into the results. With that said, I think there are a few lessons that financially savvy consumers could take away from this study.

It’s all too easy to go back to bad habits.

What we see here in these trends is that, when given a big enough push, Americans are capable of buckling down and paying off debt. In some states, credit card debt levels shrunk by 30% or more, during and right after the Great Recession!

Necessity tends to breed discipline, in finances as in everything else. But when that necessity is no longer spurring you on, what happens? It’s way too easy to go back to former bad habits.

Time will tell whether the recent uptick in debt levels is a trend that will continue. But it does show that once the worst of the crisis is over, people may be willing to slide back to where they were before.

If you really want to change your habits, whether in the realm of personal finance, your health, or elsewhere, you have to keep going. And that means even after the crisis that spurred your change has passed!

We should all be prepared for the worst, at any time.

If consumers had known beforehand that the Great Recession was coming, do you think they would have had thousands of dollars in credit card debt lying around? For many, probably not!

It’s easy to live large when things are good, and not to worry too much about things like credit card debt. After all, you can afford the payments, so what’s the big deal? The problem is that you never know what’s just around the bend.

Illness, stock market crashes, job loss, and other disasters can strike at any time. While you don’t want to live in a doom-and-gloom mindset, it’s best to be prepared. And, financially, this means being as debt-free as possible and having emergency savings available.

Focusing on staying out of credit card debt is still important.

Personal finance blogs like this one have been around for decades now, but many people still need to go back to the basics. One of those basics is the importance of paying off credit card debt.

Sure, sometimes taking on credit card debt can be justified. But it’s important to pay it off as quickly and efficiently as possible. Otherwise, you run the risk of trying to pay down such debt while you’re already in the middle of a crisis.

So, what’s your story from the Great Recession? Did your credit card debt go down? Are you letting it slide back up again? Tell us in the comments.

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It’s a good thing I’ve been saving a good portion of my income for the past year. Even with making estimated tax payments — the last of which was due on January 16 — I still have a significant tax bill this year, thanks to increased income.

Many taxpayers dread filing their taxes, even if they receive a refund from the IRS. It’s often a time-consuming process that can be fairly stressful. Plus, pressing Submit on your electronic return (or licking the stamp of your paper return) can bring out fears and anxiety over the possibility of an audit, no matter how diligent you were about your records.

Some people, like me, have a stronger reason for the lack of anticipation: we will end up owing money. And for those who haven’t saved enough money throughout the year, this is a dreaded situation.

TAX BILL

What If You Can’t Afford Your Tax Bill?

First of all, you don’t want to owe the IRS money. This type of debt is one of the hardest types to erase. There is no statute of limitations on IRS debt, either, so it won’t just go away on its own if ignored long enough. Even if you declare bankruptcy, it’s very difficult to get rid of tax debt.

Related: How to Adjust Your Witholdings for a $0 Return

Sometimes taxpayers receive a notification saying they owe money, but it might not be accurate. The IRS is a system subject to human error, just like any other agency. You can dispute the amount you owe if it doesn’t match your records and you have a reason to believe your calculation is correct.

Need More Time to File? How to Get an Extension on Your Taxes

The government is sensitive to the issue of whether you can afford to pay, so they’re willing to work with you a little bit. The best option is to avoid using a credit card to pay your debt, which would ordinarily be many consumers’ first choice. When you file your taxes, don’t pay online at that time if you can’t afford it in cash. Instead, wait until after you submit your form and it’s accepted by the IRS. Then, visit the IRS website to file an Online Payment Agreement.

If you take long enough, the IRS will send you a tax due notification, but there’s no need to wait for that to arrive. If you have your adjusted gross income (AGI) from your tax return, the amount you owe, and, of course, your Social Security number, you can get started. The form will first ask you how much you can pay and when you can pay it. Then, it will come up with a payment plan that works for you.

The payment plan will allow you to spread your tax bill out over a longer period of time. This improves the chances that paying your bill won’t cause you a financial hardship, and the IRS still manages to collect the monies due —  a win-win in their book. There is a fee for creating a payment plan, ranging from $43 to to $225.

If your financial hardship is only temporary, the IRS may delay collection, though interest and late fees will still be added to your bill. The IRS could also file a federal tax lien, even if they delay collection. This means your property could become property of the government in order to satisfy your debt.

The last line of negotiation with the IRS is an Offer in Compromise. There are only a few situations in which the IRS will accept a lower tax payment than what they believe is due. If the IRS believes you’ll never be able to satisfy your tax liability, but you agree to the amount you owe, an Offer in Compromise might satisfy the IRS.

If there is legitimate doubt about the tax bill — this will usually happen only in complicated situations — the IRS might consider an Offer in Compromise. Also, if you could afford your tax bill, but paying it would create a significant economic hardship, the IRS might consider an Offer in Compromise for you, as well. This is only in exceptional circumstances.

Because the IRS does charge you interest and penalties when you don’t pay in full or on time, the best solution is to pay the bill in full as soon as possible to reduce these extra costs, even if you agree to payment plans. I prefer the above options over other payment types (such as a high interest credit card) when cash isn’t available at the time the bill is due. However, the IRS offers these additional suggestions:

I’m not a big fan of any of these, but it is important to take care of your IRS debt above many other financial priorities.

Have you ended up with a big tax bill you couldn’t immediately pay? What was your plan of action?

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Will P2P Platforms Continue to be Solid Investments?

by Kevin Mercadante

In your personal finance journey, you may or may not have come across peer-to-peer (P2P) lending platforms. The great news is, these have proven to be solid investments over the past few years, providing much higher returns than what you could earn on bank investments. But we have to wonder:  will P2P platforms continue to […]

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The Financial Checklist Manifesto

by Jeff

There are so many different ways to organize, prioritize, and classify your tasks and responsibilities. You’d probably need a couple years just to sort through all of them on your own. You can have an organizer on your computer, your phone, in your pocket, or a notebook. If you’re short of paper, you can just […]

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9 ways to reduce student loan debt before you owe

by Richard Barrington

It’s late May, and a new crop of students is preparing to go on to college. One of my less pleasant memories was the agonizing process of securing financing so I could pursue my degree. Though it’s many years later, I’d like to share what I learned that can make paying student loans more manageable […]

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Balance Transfer Cards for Fair, Average or Excellent Credit

by Richard Barrington

[Editorial note: This offer was last updated on July 13, 2016.] Are you still wrestling down holiday debt? Zero-interest balance transfer credit card offers can help you meet this challenge, but only if you know what to look for. Otherwise, you will end up paying interest anyway, which is exactly what the credit card companies […]

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Psychological Advantages of the Debt Avalanche

by Luke Landes

The realist in me recognizes that the best plan for getting out of debt is any plan that allows someone to achieve that goal. The realist is constantly at odds with the optimist in me, the part of me that wants people to be high achievers, to strive for excellence, and to seek an informed […]

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Do Something About Debt

by Donna Freedman

This is a guest article by Donna Freedman. Donna has been a staff writer for MSN Money and Get Rich Slowly. She now lives and writes the frugal life in Anchorage, Alaska for Money Talks News and her own blog, Surviving and Thriving. Got debt? Do something about it. That’s the focus of a new […]

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