Saturday, November 20, 2010

Lessons From the Deficit

Over the past few weeks, I've posted a number of articles discussing the Federal deficit and what needs to be done in order to balance the budget.  Many people are facing a similar situation in their personal life.  Maybe they get caught up pursuing a lifestyle they can't afford.  Maybe they lost their job and the only way they could survive was to borrow.  Maybe a life event like an illness or a divorce or a death threw their finances for a loop.  Whatever the reason, there are many people in our country who are staring down the barrel of thousands or even tens of thousands of dollars in debt.  I can understand how scary it might be to open up credit card statements and see a balances in the four or five figures accumulating interest at double digit rates.  How does one even start to pay down that debt, let alone pay off the entire balance?

Fortunately, there is a tried and true method for doing this.  If you follow this one simple step, you can be debt free:

Spend less than you make.

You can pay hundreds of dollars to buy books, attend seminars, and hire debt consultants who claim to have the formula for getting out of debt.  However, all of their methods are just variations on this one rule.

Now when you have thousands of dollars in debt, it may seem like paying it down is like spitting into the wind.  However, just as every journey begins with a single step, the journey to being debt free must start somewhere, and the only way to start this journey is to spend less than you make.

Now there are two components to this formula.  First is the spend component.  Many people have written about many ways to curb spending.  My advice is to approach it two ways:

Look for the low hanging fruit:  These are things that are relatively easy it give up.  The most famous example is the daily latte at the premium coffee bar.  Examine your spending and cut out the frivolous things on which you are just throwing away money.

Look for the big ticket items:  To get the most bang for the buck, you need to look at the items on which you spend the most money.  For most people, this is housing and transportation.  If you have the means, downside your living quarters.  That will not just save you on your rent/mortgage payment, but also utilities, repairs, and upkeep.  Smaller properties generally cost less to maintain.  If you are underwater on your mortgage and you can't sell, consider renting as an option to cut your housing bill.  As far as transportation goes, consider downsizing your vehicle.  If you have two cars, sell one if you can.  Cutting back in these two areas will yield big savings.

The second component is the make component.  The most common advice in this area is to take on on additional work part time, or sell items on eBay or Craigslist.  However, as Free Money Finance says, the biggest way that you can make more is to manage your career.  Look for opportunities to make yourself more valuable at work so you can get that raise or promotion.  Consider going back to school to get training that will allow you to get ahead.  Those things will give you more return on investment than working a second job at Walmart.

In closing, there are many reasons that people get into debt.  However, getting out of debt is simple if you remember to spend less than you earn.  Maybe our politicians can remember that when they tackle our Government's debt!

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