Financial Freedom in 2012: 4 Tips to Getting out of Debt This Year

Although the economy is struggling and many are having a hard time making ends meet, 2012 has the potential to be one of your best year’s financially. Instead of struggling to get by, you can take the necessary steps to get out of bed and gain financial freedom. While there are many steps that you could potentially take to get out of debt and get your financial situation in order, there are a few steps that you should focus on this year.

Get Insurance Needs in Order

The first part of the process of getting your financial situation under control involves making sure that your insurance needs are in order. Many people who are struggling financially let their insurance policies lapse because they do not want to spend money on them. Others neglect having a life insurance policy and essentially put their families in great financial risk.

If you want to truly have your financial situation under control, you need to make sure that you have insurance to protect the various areas of your life. Most people need a life insurance policy, homeowner’s or renter’s insurance and car insurance at a bare minimum. Adding a disability insurance policy is also generally a good idea. Once you have all of these policies in place, you can feel confident that your financial plans will not be derailed by something unexpected.

Car insurance is one area in particular that you should focus. Many people throw money away blindly on expensive car insurance because they do not take a few minutes to shop around and get the best deal. If you are really serious about getting out of debt, you should take the time to make sure that you get an affordable car insurance policy.

Cut Back on Expenses

In addition to saving money on your car insurance, you should also look for other ways to save money on the various expenses that you have. For this year, focus on cutting out unnecessary things that you don’t need to have in order to survive.

If you’re in debt, it doesn’t really make sense to pay $200 per month for the premium television channel lineup from your cable or satellite provider. You may want to get the cheaper package or completely eliminate TV altogether.

If you have any other unnecessary expenses such as a movie rental subscription or magazine subscriptions, these expenses could be cut as well. Do you spend $5 every morning on a latte? These seemingly small expenses really add up over an extended period of time. This money could be better applied to your debt. Many items are purchased frequently by consumers that may not be necessary. These items include:

Many of these items could be completely eliminated without any problem. For example, instead of going out to eat at lunch everyday, simply pack your lunch and you’ll save hundreds of dollars per month, in most cases. Even if you don’t want to get rid of these things forever, just consider dropping them until your debt is gone. Once you have no debt payments, you can venture out and spend some of the money that you bring in.

Start an Emergency Fund

Another important step in getting your finances under control is building an emergency fund. Many people make the mistake of going through life without any kind of emergency fund and it ends up derailing their chances of paying off debt.

Although you might think that it’s most important to start tackling the debt, building an emergency fund of around $1,000 is usually best. This way, you will not have to periodically stop paying your debt once you get started, every time an emergency expense comes up.

For instance, if you immediately start paying off your debt in you have no emergency fund, what will you do if your car breaks down? You’ll have to take on more debt in order to pay for the work. If you had an emergency fund, you can simply use the money from that and you can avoid adding more debt.

Create a Debt Snowball

Once you have your emergency fund in place, it’s time to start working on the debt. For this part of the process, use a strategy known as the debt snowball. With a debt snowball, you make minimum payments on all of your accounts except for the smallest.

On the smallest, you pay as much as you can each month until it is paid off. Then you take all of that money and apply it to the next smallest debt, and so on. Pretty soon, you’re paying more and more money to your debts until they are gone.

By using these strategies, you may not be able to fully get out of debt and one year, depending on how much you have. However, you’ll put yourself on the right track to getting out of debt as quickly as possible.