Credit cards are wonderful tools for building credit, but the problem is that people tend to rely on them for other reasons. In truth, you don’t need a credit card to maintain good credit and getting rid of them can help you in the long run. These guidelines can help you do away with your plastic, so you can enjoy a little more financial freedom.
Create a Workable Budget
While you may roll your eyes at the thought of adhering to a budget, experts in debt management, such as Trout Associates, stress the importance of this first step. In fact, a budget should not be viewed as a hindrance, but as a help. As you compare your income versus expenses, remember that you want to leave at least 5% of your income for savings. If you can’t afford that 5%, you may need to find an additional source of income, because you will need those savings to help you get debt free.
While you may roll your eyes at the thought of adhering to a budget, experts in debt management, such as Trout Associates, stress the importance of this first step. In fact, a budget should not be viewed as a hindrance, but as a help. As you compare your income versus expenses, remember that you want to leave at least 5% of your income for savings. If you can’t afford that 5%, you may need to find an additional source of income, because you will need those savings to help you get debt free.
Use the Snowball Method for Paying Off Your Debt
Owing debts to multiple creditors can be overwhelming, but the snowball repayment method offers a plausible way of paying everything back. As you make the minimum required payments to each of your creditors, put that 5% of your income toward paying off your smallest debt. Once that debt has been repaid, you’ll have that 5% plus the minimum payment of that previous debt free to put towards the next smallest debt. In this way, you’ll tackle one debt at a time, while building up more resources to pay off the next debt.
Consider Consolidating Your Debt
If your debt is considerably high and the interest payments are overwhelming you, it may be better to consult a debt consolidation firm, such as Trout Associates. This can help you compile all of your debts into a single monthly payment. This offers you the possibility of limiting how much you’ll have to pay in interest, while also making it easier for you to keep up with your monthly obligations. A single payment is easier to track than multiple payments to several different creditors.
Create an Emergency Savings Account
Now that you have paid off the balances on your credit cards, you can cancel those accounts. Don’t forget to cut the cards to ensure no one will be able to re-activate them without your permission.
You now have all of that money you were using to pay off your creditors. Since your debts are paid, this is now disposable income that you can stash away in a high-interest savings account. Instead of relying on credit to help you deal with financial emergencies, you will build your own savings account. As it grows, you’ll be able to use these funds to pay for vacations and other big-ticket items that you would normally have charged. Just be sure to keep a comfortable cushion of at least $5,000 or 3-6 months of expenses, whichever is higher, to cover any real emergencies that may arise.
Invest Your Savings
You’ll be surprised how quickly your savings will add up. This can inspire you to stay on track by showing you just how much money you were wasting on your credit card debts. As you do build up a sizable nest egg, you should begin to think about your future. When people age, they begin to experience mental and physical decline. Even if you don’t develop a degenerative disease, you’ll eventually become weaker and unable to care for yourself. You’ll also want to retire at some point in your life.
To prepare for these life events, you should begin dividing your disposable income between your emergency savings account and a retirement investment account. By working with a financial adviser to help you make wise investments, you can build your capital over time. You will be able to use your savings to explore a diverse array of investments, which will help you limit your risks. Building your wealth now will help you avoid having to rely on credit for your care in the future.
Resist Temptation
Finally, it’s important to remember what it took for you to reach a point at which you were able to cancel your credit cards. All of that hard work can be rendered futile if you allow yourself to give in to a need for instant gratification. When a concert comes around that you really want to attend, or you want to buy a new computer, plan ahead for those purchases. Look for alternative ways of paying for them. By saving your money instead of charging, you can get what you want at a later date and preserve your financial freedom.
Even as you follow these suggestions, you will not find it easy to break your credit card habit. However, if you’re determined to achieve more financial freedom, this is a necessary step. Exercising a little self-control and planning ahead will help you escape the cycle of debt that credit card use can create.