Finance Roll

With this economy everyone is strapped, even those who were living comfortably a year ago are feeling the pressure of this recession. It's time for you to start living your life differently and preparing for the future by becoming debt free. Life changes when you have no debts so here are my top 7 tips to becoming debt free.

Tip # 1. Spend less than you make. The first and most important tip to becoming debt free is to reduce your spending. This is the reason that you are in debt in the first place. If you had the money to buy something you wouldn't need to go into debt for it. Know what you make and keep track of what you spend. Once you are out, you have to stop.

Tip # 2. Create a budget. Most people think of a budget as something that restricts them, where in reality creating and keeping a budget can set you free from financial handcuffs. A budget can be really simple just make a list of your monthly income and a list of your monthly expenses. At the end of the day you subtract the expenses from the income and if the number is positive you are on your way. If it is negative you will have to start making cuts or you'll just dig yourself deeper and deeper into the money pit.

Tip # 3. Reduce your expense. If you are like most people you probably live paycheck to paycheck and think you are not wasting money or that you are already frugal with your money. Here is a tip if you can't think of anything of the top of your head. For a week write down everything you spend money on, whether its $1,200 for your mortgage or $0.50 for a soda at lunch, it all adds up. Think about it someone who goes out to eat lunch every day might spend seven or eight dollars. In a week that could be $35 to $40. In a month it could add up to over $140. This could really help you reduce your debt.

Tip # 4. Pay extra payments. The whole point here is to become debt free. When you identify and cut some unnecessary spending you need to use the added cash flow to pay additional payments on your debt. Just think how much faster you would payoff your mortgage if you just paid an additional $100 or $200 each month. It doesn't seem like a lot but think of it this way. You are paying $100 on the principal and you will be saving five to six percent interest on that $100 for the next 30 years or so. It really adds up.

Tip # 5. Pay highest interest rate balances first. When deciding which debt to pay your additional payments on look at what each one costs you. Usually department store cards and credit cards are the highest and often charge over 18% interest. You will get the most bang for you buck paying the highest rate balance first. Think of it as a guaranteed return on your investment. For example, if you are paying 18% on your credit card and you make an extra payment of $100 you are guaranteed to save 18% that you otherwise would have had to pay. That's like a guaranteed 18% return on your money.

Tip # 6. Roll your payments. Eventually, by paying extra on your debts you will start to pay them off, which reduces your expenses. Once you get to this point you need to roll the amount you were paying on the highest interest debt to the next highest interest debt. Now you are essentially paying the extra payment and the normal payment from the first debt on the second debt along with its normal payment. This is kind of like a snowball effect. Each time you pay a debt completely you roll that payment into the next debt, making a larger and larger payment. As you start to payoff debts you will see how each payment starts paying down the principal balance faster and faster on the next debt.

Tip # 7. Stick to the plan. This is the most important part of becoming debt free and probably the hardest. Each time you payoff a balance you will free up some additional cash flow. When you do this you will also reduce the stress caused by financial burdens. Be careful and don't falter on your plan. Debt can be a vicious cycle that will tempt you to use that extra cash for things you have wanted and possibly have gone without for sometime. What happens with most people as soon as the stress and financial burden gets a little lighter? They think everything is now going to be good and then they go into debt again and start the cycle over again. Just think how much extra cash flow you will have on a monthly basis when the debts are all paid off and how easy it will be to pay cash for things.

All in all if you follow some simple steps you can learn to live debt free and enjoy all of the benefits that come with it.