A 12-Step Guide Toward Becoming Debt-Free

   

As the nation continues to deal with the aftermath resulting from years of reckless lending, excessive risk-taking and undisciplined money management, over-extended consumers are taking their cue and trying to put their own financial house in order and regain control of household spending.

There's no better time to do so than after the temptations of the holiday shopping season are behind us. Start the new year off with firm resolutions to pay down debt, shop smart, save more and, in these challenging economic times, preserve and protect your credit like the golden egg it is.

Follow this 12-step plan to rejuvenate your personal spreadsheet and position yourself for a prosperous 2009.

  1. Set goals, and put them in writing. Everyone's circumstances are different, so spend some quality time thinking about your own priorities. Put your goals in writing — it makes it more likely you'll achieve them. Post them in a prominent spot, like near your desk or on the fridge, as a daily reminder to help you stay focused. Your financial goals should coincide with your life goals. Break them into short-, intermediate- and long-term objectives with actionable, incremental steps to achieve them. Revisit them monthly to monitor your progress.
  2. Track spending. Feeling like you've lost control of your finances is not always about lack of income. Sometimes, it has more to do with a disorganized approach to finances or even simple ignorance about where your money really goes. If this is you, track everything you spend for one month, then put your spending into categories (food, utilities, entertainment, etc.). Categorizing your spending and then scanning your list for excesses will quickly reveal your weaknesses, whether it’s Italian leather shoes (“I bought how many pairs last month?”) or your growing DVD collection.
  3. Change your attitudes about money. It's easy to fall off the frugal wagon, but fundamental changes in your outlook are essential to avoid lapsing into old spending patterns. Learn how to say no to your spouse or children without feeling guilty.
  4. Make paying down your credit card debt a high priority. Credit cards carry higher interest rates than any other type of loan, so it makes sense to pay off outstanding credit card debt first, before other types of loans. You'll save in interest payments, eliminate possible late payment penalties and boost your credit score.
  5. Avoid taking on new debt. Aside from a house, car or college tuition, adopt the habit of saving until you can pay cash for any purchase. Deferred gratification until you can pay cash means your purchases will hold more meaning and value for you. Live within your means or, better yet, below your means.
  6. Turbo-charge your savings rate. It's a recession-defense measure and could prove to be a lifesaver in the event of an office downsizing. Specify what you'll save (in writing, again), by what date and how you'll free up money to do it. Be realistic, but challenge yourself. Keep the money in a high yield, online savings or money market account, which often offer better rates than your local brick-and-mortar. And don’t forget to check rates at your local credit union.
  7. Give credit its due. Review your credit report and score and, based on your personal fault lines, resolve to improve your credit by building a track record as a responsible borrower. Doing so could save you thousands of dollars in higher interest payments the next time you need a loan.
  8. Invest in yourself. If your job doesn't make you happy, doesn't pay enough or looks shaky, consider a career move to a growth industry, like healthcare, or one where layoffs are unlikely, like the military. If need be, increase your hours or take on a side job. It doesn’t have to be a permanent move, just something to get you through a rough patch.
  9. Pare down major expenses. Look for ways to cut your biggest expenses, like your mortgage or auto or homeowners insurance. You can save on auto insurance, for instance, by increasing your deductible, taking a safe driver course, installing a car alarm or dropping collision coverage on an older vehicle. Property insurers don’t always advertise the potential savings of these discounts, so call them to learn more.
  10. Trim recurring expenses. If making cuts on big annual bills isn't enough, look next to cut back on frills ⎯ premium cable/satellite, your "8-at-a-time” Netflix subscription, eating out or your gym membership. Decide what you can — and can’t — live without, and remember that an “either/or” approach isn’t necessary; often, all that’s needed is downsizing, not elimination.
  11. Wean yourself from consumer society. Reuse, recycle, repair, or do without. Become a do-it-yourselfer. Grow your vegetables. Barter with others for things you need. Use your innate ingenuity to come up with ways to get what you need without having to buy new (or breaking the law).
  12. Know what's important. People and relationships, not possessions, are the truly valuable things in life. Cherish them, and experience what it’s like to feel truly wealthy.