1. Cut up your credit cards unless you can pay the balance in full every month.
Most people don’t realize that using a credit card and paying only the minimum payment is like having a mortgage. It may take as long as 20 years to pay off a credit card by making minimum payments. Depending on the interest rate charged on the card, you could pay as much as three dollars for every dollar you charge in interest and other charges. By simply not using a credit card, your standard of living will increase by 2/3 because you will not be paying all that interest to the credit card companies.
2. Prepare and live on a budget.
It is simply amazing how many people have absolutely no idea how much money they spend and what they spend it on. If finances are a problem for you, you have a tendency to spend more than you earn. One way to change that is to determine and prioritize what you need to buy. A budget is a tool to help you determine what is important and what is not. Obviously, you must pay for food, clothing and shelter and they need to be the first items on your budget. The next level is transportation and related expenses to enable you to go to work. Beyond that, everything is a luxury.
3. Do an expense journal.
Write down how much you spend and what you buy for every single purchase for a month. You will be shocked at how the money slips away. Eliminating the unnecessary purchases can save money.
4. Pay for your needs save for your wants.
We don’t need every item that would be nice to have. Eating out is a want not a need. That includes Starbucks, fast food and buying lunches. Understanding the difference between a want and a need can free up funds that seem to mysteriously disappear every month. By saving for wants you not only build up financial discipline but you also get a greater satisfaction when you can buy something that you truly want while reducing impulse purchases for items that will be discarded shortly after you get them.
5. Pay down your debt.
If you are serious about achieving financial independence, start by making the minimum payments on your credit cards and using the money freed up from eliminating paying for wants and apply it to the smallest balance until that card is paid off. Then take the money that you used for that card and apply it to the next smallest balance until one by one all of your credit cards are paid in full. By doing it this way you will actually see progress that will encourage you to keep going. That is not the most efficient way, however. It would be more efficient to pay down the highest interest card first, but you may get discouraged by not seeing the progress. Either way by paying down your debt and not using credit cards you will ultimately raise your standard of living by using your money for actual goods and services rather than interest and finance charges.
6. Don’t take out a home equity loan or a debt consolidation loan to pay off your debt.
Home equity loans are bad for two reasons. First in Florida in many cases the equity you have in your home is exempt from most creditors’ claims (except for most mortgages and the IRS). Your home equity loan is a mortgage. By taking a home equity loan, you turn an unsecured debt that could in a worst case be eliminated in a bankruptcy into a secured debt that may have to be paid unless you surrender your home in a bankruptcy. Today many people will end up losing their homes because they have no equity in their home and can’t sell it for what they owe. Second, the reduced payment from a debt consolidation loan could tempt you to spend the extra funds rather than use them to pay off debt. Shortly thereafter, you will be in the same position without being able to borrow more against your home. When you rob Peter to pay Paul, you still have to pay Peter.
7. Search for the best interest rates on credit cards.
Some credit cards charge nearly 30% interest. Others charge much less. If you cannot pay the balance in full every month, the interest rate can make a big difference. Search for the smallest rate you can find and if necessary transfer balances from a high interest card to a lower one. Be sure to apply any savings to paying down your debt!
8. Avoid department store credit cards.
Department store credit cards generally carry very high interest, so don’t get suckered into applying for them to get a discount on your first purchase. You lose in the long run. Also department stores often claim a security interest in items you purchased which means they can repossess the item if you don’t pay for it. You can generally purchase the same item with a bank credit card (such as VISA or MasterCard) and there will be no security interest.
9. Pay yourself first.
Each month you should set aside an amount for savings and pay that first. If you don’t save each month you will not have money when something suddenly breaks and needs to be replaced immediately or you unexpectedly lose your job. Ideally, you should have a rainy day fund that could pay your living expenses for 3-6 months. With that cushion, you don’t need to worry about needing a credit card for emergencies because you have cash to pay for them.
10. Sell the stuff you no longer need.
Most people have a lot of stuff that they no longer use. Look through the garage and house and collect the stuff you don’t want or need. Have a garage sale and turn the stuff you don’t need into cash.
11. Buy used rather than new.
Many used items work just as well as new items and cost substantially less. Let your neighbor buy the newest and latest fad. By waiting you can avoid the mistake of paying top dollar for something that doesn’t live up to it expectations and buy at a fraction of the original cost for something that does.
12. Delaying gratification is the cornerstone to building financial security.
By waiting, you not only buy what is important and you often pay less for it. You achieve financial independence by saving not spending. The earlier you begin saving the more you will have to support yourself in retirement and the sooner you will be able to retire.