When it comes to reducing your spending and keeping your debt under control, it first starts with the recognition that there is a problem. Then, you should identify the sources that are zapping your wallet the hardest and the deepest. I’ll cover the areas that deserve the greatest attention.
Yellow Wealth Belt (YWB)
Break the Credit Card Habit
The biggest source of debt for most people is from credit cards. If used too much for the wrong purposes, they can be wealth killers. So if you want to get your debt under control, the first word of advice is to cut up all but one of your credit cards. Keep one for emergencies only.
Also, don’t close all the accounts at the same time for the credit cards you cut up. That could hurt your credit score. But going forward, until your debt is way down, you should “pay-as-you-go” in cash. Later on, you can contact the credit card companies and ask them to send you replacements. Of course, if you’re an impulse shopper you should probably stick with one card.
As a rule of thumb, you should limit the number of credit cards to no more than 5 or 6. Personally, I only use three credit cards and two of them are for my business. I have a few more that are active, but I never use them. This hasn’t hurt my 800+ FICO credit score one bit.
If you have a ton of cards and want to cancel some of them, then do it slowly over a good period of time. But keep a handful of them active (even if you don’t ever use them again) so that potential creditors can see that you have a credit history and access to more credit. Also, when or if you close accounts, send a letter to the credit card company requesting that they report to the credit bureaus that the account was closed at your request. You don’t want potential creditors to think that the credit card company deemed you a poor credit risk.
Reduce Your Major Expenses for the Greatest Impact
Other than putting the kibosh on using your credit cards, the best strategy for saving money is to determine if your major expenses can be reduced. Doing this will have a bigger impact than going after the nickel and dime stuff. Here are the typical big money-sucking areas and ideas for reducing them:
Home mortgage – consider refinancing your mortgage to get a lower interest rate. This can save thousands of dollars over time. If you can’t refinance, think about selling your home or renting. Don’t let pride get in the way of making the right decision.
Apartment rent – consider moving into a less expensive space or getting a roommate.
Car payment – you may be able to work out a deal with the dealer where you can trade in your fairly new expensive car for a more economical used vehicle. You also may be able to get them to eat part or all of the outstanding loan balance on the expensive car. Sit down with them and see if the numbers make sense.
Student loans – if you have multiple student loans, talk to the bank and see if they can be consolidated into a single amount with a lower interest rate. If you have government loans, talk to the financial aid department at your university and explain your situation. For some types of student loans, your payments could be greatly reduced, stopped for several years, or even cancelled.
If you’re able to implement even one of the above, you should begin to see and feel a noticeable improvement in your financial health. Just make sure that all the money you save is going toward paying off your credit card debt.
Now, if none of the above options apply to your situation (or even if they do), you will have to be a bit more creative.
Creative Money-Saving Strategies
Here are some other areas that can lead to great savings and put a sharp axe to the expenses you face every month. Notice that many of them won’t negatively change the quality of your life that much.
- Electricity consumption – This is one of the costliest utility bills and since it can’t be avoided altogether, the trick is to shrink it. To do this, turn off any lights not in immediate use. Same goes for televisions, computers, and other electronics.
Pay attention to “phantom” energy consumption. Plug your electronics into a power bar with an off switch and shut it off when you aren’t using the items plugged into them. That little clock on your DVD player, microwave, or coffee maker drinks electricity that adds up over time. So does that tiny light on your television or computer monitor!
Make sure that you only use compact fluorescent light bulbs. You’ll be shocked at the difference it makes over time.
Use your washing machine and dishwasher only when you can run a full load.Use your dryer as little as possible and air-dry your clothing instead.
- Reduce your heating and air conditioning costs – In the winter, wear a sweater. In the summer, wear your lightest clothing. Turn up you’re A/C by three degrees and turn your heat down by three degrees. The temperature difference is barely noticeable (especially when you’re properly dressed for the season) but the savings certainly are. Avoid electric heating as much as possible.
- Television – Analyze your cable bill and its service package. Do you really need all those channels? How much would you save in a year without them? Consider using an inexpensive service that will stream your favorite shows to you over the Internet.
- Telephone – Find the best rates (especially for long distance). Consider VoIP (calling over the Internet) to save on long distance calls and cancel your long distance plan altogether.
- Mobile phone – Are you using the minimum package for your needs? Do you really need to use your phone that much? How about switching to a pre-paid phone that you only use for emergencies? Do you really need a landline and a mobile phone service?
- Groceries – There are tons of opportunities to save money on food. Clip coupons (from print flyers or find them online), stock up when items are on sale, and switch to generic/store brands.
- Clothing – Buy only clothing you need and let the “want” items wait until your debt is gone. Most people shop for clothing out of gluttony and as a form of entertainment, as opposed to actual necessity. When you require new clothes, shop for sales, head to outlet stores, and head to Goodwill and other high quality second-hand and vintage shops.
- Medical expenses – Look for generic drugs and products that are sold for a surprisingly lower price than their brand name alternatives. Go over your health insurance once a year to make sure that you’re paying a reasonable amount for the coverage you want.
- Auto and home insurance – If you aren’t reviewing your policy every year and comparison shopping for better rates, then you are likely paying more than necessary. Use better quotes from other insurers to negotiate lower premiums with your current provider or switch if they refuse to budge.
Ask about various discounts that are available on each policy and what kind of reduction in premiums a company will offer if you bundle multiple policies (car and home) with them instead of having one form of coverage with each company. The monthly and annual savings are often quite significant.
Most importantly, stop impulse shopping. Always shop with a list and buy only what you need. A deal is only a deal when you’re not spending on something unnecessary!
Mistakes to Avoid
To help make sure that you stay on the right track, be sure to avoid the following common mistakes:
- Don’t deviate from your budget.
- Do not think in the short term. It is the future that concerns you right now.
- Don’t be unrealistic. Give yourself a good reality check on a regular basis.
- Never spend more than you earn.
- Don’t forget to pad your checking account for unexpected expenses.
- Don’t rely on the accuracy of your credit card or bank statements. Check those numbers against your own records.
- Create a budget based on your monthly income and expenses.
- Trim away all expenses that aren’t absolutely necessary.
- Get creative and save money on the expenses that are unavoidable.
- Avoid common mistakes that can hold you back.
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