At one point or another, we’ve all accumulated some type of debt.  While it’s easy to rack it up, paying it off is a different story.  NerdWallet reports that nearly 1 in 4 American adults don’t pay their bills on time.  Late or missed payments can result in penalties, higher interest rates and of course, lower credit scores.  Instead of watching the bills pile up, it’s time to take charge and get your finances under control.

Get real with yourself

How much money do you owe your creditors?  It’s a simple question but the reality is many people rather live in denial than face the music.  Finding out how much money you owe and to whom isn’t that difficult.  Start by grabbing your bills for the last month and downloading a copy of your credit report.  Every year you’re entitled to a free copy from each of the three credit bureaus – Experian, TransUnion and Equifax.  Be sure to check for inaccuracies because they can hurt your credit score.  Once you have your records handy, make a list of your debts including the creditors name, your total balance, minimum payment and due date.  You’ll need this information when deciding on a debt repayment strategy.

Come up with a budget

Despite a budget being one of the most useful financial tools, U.S. Bank reports that only 41% of Americans actually use one.  Creating a budget you can live with isn’t as hard as you think.  One method that’s worth a shot is the 60% solution.  With this approach, 60 percent of your income goes towards committed expenses such as rent, groceries, utilities, insurance and transportation.  The other 40 percent is split in four equal amounts and used for retirement, long-term savings/debt reduction, irregular expenses and fun money.  Let’s say you earn $2,000 a month.  Following the 60% solution, your breakdown is as follows:

  • Bills (60%) – $1,200
  • Retirement (10%) – $200
  • Long-term savings/debt reduction (10%) – $200
  • Irregular expenses (10%) – $200
  • Fun money (10%) – $200

If you’re having a hard time making the budget work, cut out the things you don’t need.  Remember, needs are things essential to your well-being.  For example, a roof over your head and food on the table.  Wants are things that are nice to have but you can live without.  Big screen TV’s, lobster dinners and exotic vacations all fit into this box.

Start with the smallest bill

You can’t just snap your fingers and expect to be debt-free.  Instead, you’re going to need a plan and some patience.  One of the most popular debt repayment strategies is the snowball method.  With this technique, you’ll focus on paying off the smallest debt while only making the minimum payments on the other bills.  Once that bill is paid off, you’ll move on to the smallest remaining balance.  Continue this cycle until you’re debt-free.  By watching the bills slowly disappear, you’ll gain the confidence needed to stay motivated.

Pay your bills on time

Since 35 percent of your FICO score is based on your payment history, it’s important that you pay your bills on time.  An easy way to keep track of your due dates is to write them on a calendar along with the estimated costs.  This way, when payday rolls around you’ll know exactly what needs to be paid.  You can also setup automatic bill payments with your bank to ensure nothing slips through the cracks.

Build an emergency fund

Although you may feel secure at your current job, life can change in the blink of an eye.  As a rule of thumb, everyone needs to have at least 3 to 6 months’ worth of living expenses saved.  This will help you stay afloat in the event you’re laid off or hit with an unexpected emergency.  If that amount seems unattainable, aim to save $1,000 and work your way up.

Swap your credit cards for cash

Before you get yourself into anymore trouble, put away your credit cards and switch to a cash only diet.  Don’t cancel the cards because they’ll ding your credit score, just cut them up or freeze them in water.  Whenever you get paid, withdraw enough money to last you until your next payday.  By using cash, you’ll see exactly how much you can afford to spend and when to call it quits.

Use extra money wisely

What do you do with your spare change?  Rather than toss it away or tell someone to keep it, store your coins in a jar and cash them in when it’s full.  You’ll be surprised how quickly it all adds up.  Any money you’re able to save needs to go towards your debt.  The same rule applies to any raises, bonuses and tax refunds you receive throughout the year.  Don’t forget, you’ll receive the biggest possible refund guaranteed when you do your taxes with ezTaxReturn.com.  The more money you put towards your debt, the faster you’ll be debt-free.