A thorough assessment of your financial situation is needed to construct your foundation for financial recovery. Knowing where you are today and what you need to bridge the gap is essential. It also helps to ensure that your plan is realistic, reasonable, and one that you can commit to over time. By maintaining your spending plan, the day-to-day worry about what you can and cannot afford will be removed. It will also help provide you with the single most important thing you can do to improve your situation – stop using credit cards to bridge the gap.

Identify Your Trouble Areas

We all have our own attitudes, anxieties, and myths that we have developed about money. We believe that these beliefs are not inherited but are learned. They are learned from prior experiences and they impact our money decisions- how we spend, how we save or don’t save, and how a feeling, emotion, or situation can trigger an impulse buy.

It’s important to identify your beliefs and feelings about money especially when they contradict your goal of becoming debt-free. This identification process is sometimes easier when you are able to take a step back and look at your patterns as opposed to individual instances. Identifying patterns and emotional drivers will improve your awareness. When aware, we can deal with our problems more effectively.

 

Understanding the Cost of Debt

Of all the things that affect your debt situation, the most significant is the cost of debt. What is the cost when we can only pay the minimum payment or only pay the late or over-the-limit fees?

To illustrate the consequences of making only the minimum payment, consider the below example.

• 1. Debt Amount: $26,000
• 2. Interest Rate: 18%
• 3. Minimum Payment Amount: 3% of debt owed

Below is a short-term snapshot. Over 4 years, total payments made equal $26,443 with $12,778 still being owed in year 5. It will take 14 years to pay off the entire debt balance.

	Annual Payments	Interest Charges	Principal Reduction	Balanced Owed
Beginning Balance				$26,000
1 Year	$7965	$3,982	$3,982	$22,018
2 Years	$7,304	$3,652	$3,652	$18,366
3 Years	$6,093	$3,046	$3,046	$15,319
4 Years	$5,082	$2,541	$2,541	$12,778
End of 4th Year	$26,443	$13,222	$13,222	$12,778

You can find similar information on your credit card statement. In 2009 a new law required credit card issuers to disclose the consequences of making only minimum payments each month, showing how long it would take to pay off the entire balance.