Perhaps the most encouraging outcome of the latest recession is the increasing emphasis on debt reduction by most Americans. The average American has over $20,000 in debt and most have much more. We are borrowing less and saving more, and, hopefully, developing some more frugal habits that can lead to healthier finances in the future. Still, many physicians continue to struggle with their debt. It takes a firm commitment and a lot of discipline, but most physicians are only a few steps away from gaining the upper hand. By implementing these key step now, you can be more effectively managing your debt and on your way back to prosperity.
6 Steps to Get Control of Your Finances
Most physicians exacerbate their debt problems because they aren’t watching where their money is going and they are oblivious to the destructive power of their unbridled spending habits. The first crucial step to managing your debt is to put yourself on a strict budget to know exactly what is coming in and where it needs to go to get control of your debt.
1. Budget for debt reduction
Your very first budget item should a debt reduction payment. This should be a dollar amount in excess of what you have been paying on your loans and credit cards, and it should be an amount that is sufficient to reduce your overall debt balance by at least 5% a month.
2. Cut back non-essentials
In order to cover your budgeted debt reduction payment, you will need to cut back on non-essentials. Dining out, new outfits, leisure activities, Starbucks, expensive gifts, and premium cable channels should all be on the table for cutting. You’ll find most of your debt reduction payment right here.
3. Pay with cash
Just make the commitment that you will not use your credit cards. Change to a debit card and only carry a credit card for emergencies. Your cash expenditures need to be strictly in line with your budget.
4. Learn to enjoy frugal living
Frugal living is become much more fashionable, and there are whole websites dedicated to living large on less. For some people, it’s like a sport to be able to find the best deals and get as much for their money as possible. Coupon clipping has become hip again.
5. Strengthen Your Safety Net
Debt happens, especially when the unexpected occurs and there is nothing socked away in savings. Whose fault is that? Committing to debt reduction should not come at the expense of building a cash reserve or long term savings.
6. Budget for savings
Just as you need to budget for a debt reduction payment, you need to budget for a set savings amount each month. This should be your second budget item around which the rest of your budget is determined. You goal should be to build a six month cash reserve within a year.
4 Steps to Manage Your Credit
Reducing the cost of your debt can help accelerate it reduction and increase your cash flow even further.
1. Check your credit report
You may be paying more for interest than you need to. If your credit report has errors, or past disputes, you can get those removed and increase your score, which can lower your interest costs.
2. Know your limits
Your score is also impacted by the ratio of your credit card balances to their limits. If you can move your balances around so that none of your cards exceed a 50% debt to limit ration – your score will increase.
3. Take control
Call your creditors and ask for a lower rate or a balance transfer opportunity to a card with a lower rate. They may say no, but it doesn’t hurt to ask.
4. Take offers
If you have the opportunity to transfer a high interest balance to a low or zero interest credit card or installment loan, do it. Just be aware that, at some point the interest rate will increase. Also, you would be making a huge mistake if you allow your payment amount to drop just because your interest charges are lower.
Managing debt is one of the main pillars upon which a solid financial plan is built. Sacrificing today will provide you with options in the future.
Invest in Your Tomorrow
Want more information about creating a financial plan? Schedule a financial planning consultation with a certified professional.