Financial Literacy 2008 - Debt Management
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6-step debt-elimination program

3. Set aside some savings 
While it may seem counterintuitive, saving is a crucial aspect of a sound strategy to pay down debt. If you have three to six months of living expenses saved up, you're golden; otherwise, build an emergency savings buffer while paying down your debt.

"The No. 1 problem we see consumers fall subject to is when someone is good-intentioned and wants to pay their debt down, they put every dollar toward it and as soon as an unexpected expense happens, they find themselves using credit again," Viale says.

Think about it: If you're in debt, it could take you years to get out. During that time, you are bound to face an unexpected expense or setback. A savings cushion can keep you from falling back into the deficit-spending cycle.

"We see consumers who are doing really well paying their debt down, then they get to the holidays and charge things because they don't have any savings," Viale says. "They see that they've been good all year and have been paying it down, so they figure they can pick up again next year. Well, it doesn't get any better -- it's a trend that just continues."

After paying your minimums, put half of any extra money into savings and half into paying down debt.

Boost your income
Once you've checked for coins under the couch cushions, try looking at these places for additional income:
  • Ask for a raise.
  • Get a second job or work overtime.
  • Use your tax refund to pay down some of your debt.
  • If you have plenty in savings, apply a portion to debt.
  • Rent out a room.
  • Sell anything you haven't used in a year on eBay or hold a garage sale.
  • Move in with family, at a lower rent.

Don't sit on too fat a cushion if debt is a problem for you, Bilker says.

"If you save the money, you're going to get 4 percent interest -- and you'll only see interest that good if you've got an online money market," he says. "On your cards, you're paying 20 percent. No way does it make sense to earn interest at 4 percent while you're paying 20 percent."

4. Pay more than the minimum 
Do you understand how much you're paying if you only make minimum payments or how long it will take you to repay your debt?

It is crucial to pay down more than the minimum each month. If you can't afford to pay down more than the minimum, sit down to figure out where you can save more. Leave no stone unturned.

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