Many Americans rely on debt to finance their lifestyle. The financial crisis also made things tough for Americans with jobs being scarce and competition for them high. A recent report on U.S. household debt and credit of the Federal Reserve Bank of New York highlighted that American's continue to be addicted to debt with total consumer indebtedness standing at a whopping $11.63 trillion at the end of the second quarter.
Debt clearly keeps our economy going and it ensures that we keep going to work every day in order to make our debt payments and that shelves in supermarkets and shopping centers are stacked with goods, many of which we don't need.
So is debt bad?
Well, there's a difference between good and bad debt. Good debt is the type you take out to buy a house or finance an investment project. Consumer debt, on the other hand, is toxic debt that can hold you down for years as you make payments month after month for something that depreciates in value over time.
If you're weighed down by consumer debt, there are a few critical, constructive steps you need to take to regain control of your finances and get on top of your financial situation. With a little perspective and reevaluation of your priorities you should be able to bounce back and get rid of your toxic debt load.
1. Prepare financial statements
Make an inventory of what you own (your assets such as a home, a car, investments, or savings accounts) and compare them to your debts.
Oftentimes, gaining clarity about your real financial situation can make all the difference. If you're flooded with bills, get on top of them and specify what debts you really have.
It is easy to lose control over your finances, especially if they're in a desperate condition, but listing all your assets and liabilities and making an honest account of what you owe is the first step in regaining freedom from debt bondage. Face your situation.
2. Pay off the highest-interest rate debt first
If you have multiple sources of debt, such as credit card debt, mortgages, or student loans, start prioritizing them, and list the debt that carries the highest interest rate as a priority for you to tackle ASAP.
This requires, of course, that you go through your documents and figure out which type of your debt costs you the most. If I had to guess, I'd say your credit card bills, with their typically high interest rates, are going to top the list.
Once you've gained clarity about what debts you owe and what their respective interest rates are, pay down the costliest short-term debt first, and then work your way down to the lowest-yielding, long-term debt.
3. Reduce expenditures; increase income
You have a variety of tools available to increase the pace at which you'll pay down your debt. Look for some outside-the-box ideas to cut expenses, at least in the short term.
Can you use cheaper, public transportation to get to work instead of using your car? Do you need that cable TV subscription? Do you really have to eat out as many nights as you do?
You can also look for ways to increase your income, even if you come up with only a temporary solution. Maybe you can sign up for a couple of extra shifts at work or take on a part-time job. Any option you have at your disposal that will help you attack those crushing debt balances will be to your long-term advantage, even if it means short-term pain.
The Foolish bottom line
Being in debt is generally not a desirable situation, either for your bank account or your peace of mind. But as long as you tackle your debt situation proactively and make a commitment to paying down the highest-yielding debt as soon as possible, you're already making crucial progress.
The process of unwinding debt can take many years, if not decades, but your primary goal should be to rid yourself from unproductive consumer debt. And, most importantly, stay away from it in the future, no matter how attractive those low teaser rates may be.