5 Tips for Altering Your Mental Approach to Debt

What if your debt was all in your mind? Before you get your hopes up, I don’t mean that it’s a figment of your imagination, but rather that your outlook on spending could be contributing to the problem and a change in perspective might very well be part of the solution.

In other words, debt isn’t necessarily just about dollars and cents; oftentimes, things like lifestyle and values factor in as well.

That’s what makes the following 5 tips so helpful; they’re geared toward eliminating debt by altering the way you think about money and spending.

1. Change your definition of a necessity

We’ve become so accustomed to many of life’s luxuries that we have forgotten that they are just that, luxuries. And if you’re consistently spending beyond your means, it’s likely that there’s quite a bit of fat to cut. So rank order your monthly expenses based on importance and start adding up costs from top down until what you have equals your monthly after-tax paycheck. Anything below that threshold has to go. This will be your budget. Whenever you wish to buy something not included in this budget moving forward, just think: Will buying this significantly improve my life, and if so, what am I willing to give up to get it?

2. Understand that budgeting is not financial lockdown

While significant spending cuts are certainly in order early on in the budgeting process, there’s no reason why you have to feel like you’re in financial lockdown. Remembering to include some room for fun in your plans increases the likelihood that you’ll stick to your budget for long enough to pay down what you owe since it makes the whole process more tolerable. However, keep in mind that fun does not equal expensive. Get creative with your interests and explore free or low-cost entertainment and recreational options. For example, a well-planned staycation can be an adequate substitute for a pricey vacation.

3. Get a better perspective on everyday spending

If you decide to continue using credit cards after getting your spending under control and embarking down the road to debt freedom, it’s a good idea to designate one card as being for everyday spending and another for revolving debt. This method of segmenting needs is called the Island Approach to credit card use, and its benefits are twofold. First, you will be able to more clearly evaluate spending. Since you should always pay your everyday credit card’s balance in full, the presence of finance charges on your statement will clearly display that you need to cut back. Second, using different cards for different needs allows you to get the best possible terms. For example, you could transfer your current debt to a 0% balance transfer credit card and garner the lowest possible interest rate while at the same time getting the card offering the best rewards for your everyday spending. This would be impossible with a single credit card.

4. Realize that some debt > other debt

Once you have a budget in place and have ceased adding to your tab on a monthly basis, it’s time to work on paying down what you already owe. If you have multiple debts, it’s integral that you avoid treating them all like equals because doing so will cost you money. Paying down the debt with the highest interest first, on the other hand, will save you in interest. That’s not to say that you shouldn’t make payments to other amounts owed, but rather that you should put the lion’s share of your budgeted monthly debt payment toward that with the highest rate and make minimum payments toward the rest. (Keep in mind that if you have multiple balances on a single credit card, only the amount of your payment that is above the minimum will go to the balance with the highest interest rate.) Once you pay down your most expensive debt, apply this strategy to the next most costly balance, and so on, and so on. Depending on how much you owe, this strategic debt payment dispersal could save you hundreds of dollars.

5. Normalize your perception of plastic

You may feel as if you’re completely done with credit card use, and that’s perfectly understandable. Many people simply cannot help feeling that paying with plastic is like using play money, so they don’t trust themselves to do it at all. What’s not understandable is avoiding even having a credit card. Credit cards are the most efficient credit building tools around in large part because they report positive information to the major credit bureaus on a monthly basis as long as they are in good standing, even if you do not make any purchases. That’s why people who don’t trust themselves to spend reasonably with unsecured credit cards can simply open secured cards, which do not allow you to spend beyond your means. Without the omnipresent fear of falling back into a financial hole, you can work on ingraining within yourself the idea that money spent with plastic is no different than cash and should not be spent any more freely.

Ultimately, spending and payments are largely habit based. If you get in the habit of overspending, it’s hard to break. The same, however, can also be said of staying within budget and paying your bills in full every month. Hopefully, the above tips can help you get on a good financial roll.

This article comes from our friends at Card Hub, a leading marketplace for credit card deals and discounted gift cards.

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