To pay off debt you need to change your lifestyle and find ways to enjoy your life without continuing to spend money that you don’t have.

However if you make yourself miserable by cutting out every single luxury, you’ll only end up straying from your savings plan.

Instead here are some ways to enjoy life while spending less:

Split the cost of a babysitter with friends or neighbors when you want to go out.

Buy items in bulk to cut costs. Consider joining a Costco or Sam’s Club. If you don’t need massive amounts of an item but you have friends who might – have them chip in to buy bulk meals, toiletries, batteries, etc.,  which allows you to divide up the cost while each getting the amount of the item that you actually need and not letting it go to waste.

If you like to go out to the neighborhood pub or nightclub, eat BEFORE you go out rather than splurging. Find out what nights your favorite hangouts have  special deals.

Use your TV to make you fitter, not fatter, and cut expenses at the same time. Instead of the gym, work out at home using exercise tapes from the library or exercise shows on TV.

Use online coupon websites to save money.

Cheaper groceries: pasta, rice, ramen noodles, potatoes. Meat is expensive; starchier foods are filling and much cheaper.

Coffee is cheaper than lattes – about half the price! If you are addicted to coffeeshops, have a small coffee or tea and consider the latte an occasional luxury.

Buy used books rather than new.

Walk or bicycle everywhere you can to save money on gas.

Review your insurance, your phone bill, your cable TV bill, your internet bill, your cell phone bill, and any other bills that you have, to see where you could trim costs. It’s highly likely that you could save as much as a few hundred dollars a month.

Ask your credit card company to lower your interest rate if you’ve been paying on time.

Consider either quitting the gym or asking that they pause your membership for a few months to save some money. And consider doing the same with your cable bill. Cutting expenses for a few months may allow you to catch up, pay off late bills, set aside an emergency stash, and give you a little breathing room so you’re less stressed about your expenses.

When you’ve got numerous bills and you need to pay down debt, it can be challenging figuring out which bills to tackle first.

In fact, for many people it is so overwhelming that they put it off completely, making late payments – which  trash their credit – or try to please everyone by writing a bunch of checks that end up bouncing – and none of this ends up being productive.

However, if you look at the process logically, it becomes very easy to see what order you should choose to pay off your bills.

First of all, and most importantly:

You need to pay your rent/mortgage, utilities, grocery bills, and car payments. Income tax is also a priority because if you have a tax lien taken out against you, this is something that can devastate your credit rating for many years to come.

You need to set aside at least SOME money for savings – even if it’s only $50 a month.

Beyond that – you need to make a list of all the debts that you have and find out the interest rate on each debt.

Paying the minimum that you owe is a disaster. If you can afford to pay more than the minimum on all of these debts, more power to you.

However, if you can’t afford to do that, you need to pick the debt – probably a credit card debt – with the highest interest rate, and make it your goal to pay off that debt first.

So put some extra money towards that payment every month, until that debt is paid off.

If all that you can afford to pay is the minimum on the other debts, so be it.

When you need to pay down debt and you are focusing on one credit card instead of your giant mountain of bills, you will be surprised and pleased at how quickly you see the balance on that credit card shrink.
You will find yourself setting aside money to put towards that bill…paying close attention every month to how much you owe, not hiding from it…and you will be thrilled when that bill is finally paid off.

And then you will move the next high interest bill to the top of the list, and you will do this one by one until you are free of high interest bills.

Yes, this may take a couple of years to accomplish, but this way there is an end in sight and you will no longer feel so trapped and hopeless.

If you want to live debt free, you are going to have to examine what led you to get into debt in the first place – and not just in debt, but over your head in debt.

Some people get into debt because of circumstances beyond their control – an illness, or a layoff.

However, even then, there is usually something more behind it.

This isn’t meant to lay blame, or place guilt, but the reality is: everyone should have enough savings put away to cover AT LEAST six months without income. This should be done before spending money on things like cable TV, or vacations, or designer clothes, or weekly trips to the restaurant. It’s a necessity, not a luxury.

With a cushion like that, potential financial disasters like a layoff or an illness often don’t have to be a disaster.

Many people these days don’t get into debt because of job loss or health problems, however.  They get into debt because of poor planning and not prioritizing properly.

It can be very hard these days to distinguish what’s a necessity and what’s a luxury, with people taking for granted a much higher standard of living than even a generation ago.

Now people who have big screen TVs and ipods and digital camcorders and jetskis…are facing buried under mountains of bills for all of those items, which they put on charge cards, and many of these people are facing foreclosure.

Let’s be realistic – many people with piles of expensive toys are facing homelessness, because of those expensive toys, because they tried to live a lifestyle which they could not actually afford.

If you want to be debt free and financially secure, you’re going to have to make that emergency savings cushion a priority. If it takes a year, if it takes two years, to get that six months of living expenses saved up – that must come first.

And next, you must draw up a realistic budget and look at what you truly can afford. Having all that trappings of a middle class lifestyle can keep you in debt permanently and strip away your financial security.

You can’t simultaneously achieve a debt free lifestyle AND indulge in all of the extras that you’ve indulged in so far. So if bill collectors are calling and causing you stress, if you lie awake at night worrying about becoming homeless, it’s time to make paying off your debts and creating a financial cushion a top priority in your life.

Not too long ago,  those who were unable to pay off debt faced a cruel and sometimes deadly fate: debtors prison. Or indentured servitude.

Why deadly? Because up until the mid-19th century prisoners often died in debtors prison – if their families didn’t bring them food in prison, they literally could starve to death. And disease ran rampant in debotrs prisons, claiming many former businessmen who were unfortunate to face a streak of bad luck.

These days, fortunately, there is no such thing as debtors prison.

However, those who do not pay off their debts still face consequences.

First of all, if you have incurred a debt and do not make your payments on time, your creditors can report you to credit agencies, which will make your credit rating plummet.

This will make it hard for you to get credit, which will make it hard for you to buy a car, get insurance, buy a home, rent a home or get a cellular phone. And you will have to pay higher deposits for many services, like utility services.

If you continue not to pay off your debts and do not work out a payment plan, you face some serious  consequences. You could lose your home to foreclosure. Your creditors could get a judgement against you and your property could be seized by the sheriff’s office and auctioned off. Your vehicles could be repossessed.

You could even be forced into bankruptcy against your will under certain circumstances.

So don’t ignore your debts, because even though debtors prisons no longer exist, there are still serious consequences to ignoring your financial obligations.

Whether you’re in debt or comfortably well off, there is never a reason to pay more for items than necessary.

And these days, you’ll find that just about everyone is willing to negotiate.

When it comes time to renew your lease, ask your landlord for a lower rent if it makes sense – if you know that there are other similar rentals available at lower prices. Houses simply are not selling these days, which means your landlord is likely not able to sell the house when you move out, and there is a glut of vacant investor properties whose owners desperately need tenants to help them make their mortgage payments. This can put you in a position of strength; and the same goes for apartment rentals, because many people are moving into houses rather than apartments these days.

Repairs:  When you get a repair estimate call around town and get several estimates before you make a commitment. Either go with the lowest priced offer or use it as a bargaining point to get the higher estimates…lower.

credit Card Payments: If you’ve been paying on time, ask for a lower interest rate.

Retailers: Retailers are desperate to move inventory these days. It doesn’t make sense to pay full price. At the VERY least ask if they can take ten percent off the price that they are asking for.

If there is something that you want to buy and the salesperson won’t or can’t offer you a discount, ask to speak to a manager. They have the authority to offer you a discount.

And be prepared to walk away if you can’t get the price that you want. Sometimes the manager or clerk will stop you as you’re walking out of the store and give you the price you asked for; if not, then you at least avoided paying too much!

If you are in debt and concerned about paying it off, you’re probably aware that too much debt, late payments, or worse, missed payments, can negatively effect your credit score.

But what is a credit score? And how can you find out what yours is?

Fair Isaac Corporation was founded in the 1950s by an engineer named Bill Fair and a mathematician named Earl Isaac, to create a credit scoring system. They built their first credit scoring system in 1956.

As the years went on the Fair Isaac Corporation developed ever more sophisticated credit scoring systems and software to predict people’s credit-worthiness.

The more likely it is that someone will default on a loan, the higher their interest rates will be.

So now, when a lending institution is considering whether to give someone a loan, they generally go to one of three major credit reporting agencies to get that person’s credit score before deciding whether to give them a loan at all – and deciding what that interest  rate will be.

The three agencies are Equifax, Transunion, & Experian. Where does Fico come in? All of these agencies use FICO software information to determine your credit score, ranging from 300 to 850, with most Americans falling in the 600s to 700s. These days, with tightening credit standards, a credit score in the 700s is often necessary to get a mortgage loan, especially one with a good rate.

Here are the factors that FICO takes into account when calculating your credit score:

Payment history: 35 percent – Don’t pay late!
Amounts Owed: 30 Percent – Don’t borrow too much in proportion to your credit history!
Length of Credit History: Older credit cards with regular on-time payments help build good credit
New Credit: Number of recent accounts opened, number of recent credit inquiries – applying for a lot of loans at the same time hurts your credit
Types of Credit Used: credit cards, retail store accounts, installment loans, mortgage loan, etc.

You can look at your credit report for free by going to www.annualcreditreport.com and requesting it. They are obligated to provide you with one free copy of your credit report every 12 months.  They are the only site authorized by the Federal Government to provide this service. The Federal Trade Commission recommends that you link to them directly from their site http://www.ftc.gov/freereports  to make sure that you are going to the official site.  To see your credit score – not your credit report – you must purchase it, from one of the three credit reporting agencies, Equifax, Experian, or Transunion.

If you’re drowning in debt, the temptation may be just to throw up your hands, walk away from it all, and declare bankruptcy.

That is TRULY only a last resort, for numerous reasons.

One of those reasons is that it’s not that easy to start over with a clean slate any more. An onerous law called the Bankruptcy Abuse Prevention And Consumer Protection Act of 2005 makes it very, very difficult for consumers to discharge their debts.

It forces debtors into a debt repayment plan that runs for up to five years and barely allows consumers to keep a living wage during this period, in which the debtor must pay the vast majority of their disposable income towards a debt plan they have little control over.

Bankruptcy also remains on one’s credit report for up to 10 years, AND if an employer or mortgage or auto loan company asks if you have ever declared bankruptcy, of course you must answer truthfully.

So that means that in some ways, bankruptcy remains on your record forever.

And bankruptcy is not guaranteed to discharge your debts.

You still must pay income tax, you still must pay child support, you still must pay student loans, and there are many other debts that you are required to pay.

This is not to say that you should never consider bankruptcy under any circumstances. You should consult with a qualified bankruptcy attorney before you do so, though, and be completely honest about your circumstances and your prospects for earnings in the next few years.

You also should do online research before you even go speak to an attorney, so you can make the final decision yourself. You should know the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy, find out exactly how long each type of bankruptcy will remain on your credit report, and learn what kinds of debts you will continue paying. You should get a realistic view of what life will be like after you declare bankruptcy.

Chapter 7 basically means handing over all property not exempt from bankruptcy proceedings so it can be sold off to repay debts. There is no repayment plan. It stays on your credit report for 10 years and these days, with the new bankruptcy laws, many people who aren’t earning that much money find that their income still is too high to qualify.

Chapter 13 involves a repayment plan and stays on your credit report for 13 years.

So before you make a decision that will affect your life and your credit for decades to come, do your research, find out whether it is worth declaring bankruptcy, and consider trying to design your own debt payoff plan – one that YOU have control over.

Having a bad credit score can hurt you in every area of your life – not just in the ability to  take out loans.

Employers in many circumstances can run credit checks, and a bad credit score might be the deciding factor in giving the job you applied for, to an equally well-qualified candidate with a better credit score.

If you want to rent a home, or a car, or even buy a new cell phone – you guessed it – a bad credit score can hurt you.

So what kinds of things will hurt your credit score?

Maxing out your credit cards – try very, very hard not to borrow or charge more than 50 percent of the amount that you are allowed to borrow. If you go above that, it will hurt your credit score. Do not charge your cards to the limit.

Late payments – late payments are devastating to your credit. Payment history makes up about 35 percent of your credit score. To make sure that you don’t skip a payment, go on autopilot – arrange to have all of your payments withdrawn automatically form your bank account. That way you will never have to worry that the check is in the mail.

Applying for a bunch of credit cards or for any loans.

Closing down old credit card accounts. Lenders want to see a long payment history. The longer that you have had a credit card account open and have made on-time payments, the more this helps your credit score.

Having a tax lien placed against you

Declaring Bankruptcy

So what is a good credit score?

Anything above 700 is considered excellent.

600 to 690s – okay, but not ideal. These days, with tightening credit standards – may not be enough to get you approved for a house, and certainly not for the best rates.

Below 600 – you’re considered a high credit risk.

Below 550 – really, really bad.

One of the biggest mistakes that you can make when planning a budget is to only budget for the bare essentials – rent, mortgage, electricity, groceries, car payment, insurance, etc.

Why?

Because you’re not going to stick to a budget like that forever, any more than you are going to stick to a diet of cottage cheese, lettuce and grapefruit forever.

So here is what you are going to do.

First, make a list of ALL the luxuries that you regularly spend money on. Be honest with yourself; look through your credit/debit card purchases from the past few months if you need to job your memory.

Some categories might be:

Beauty salon
Restaurants
Museum visits
Cable TV
Movies
Birthday/Xmas Gifts
Vacation
Clothing purchases
Children’s Toys
Lunch with co-workers
Gym membership
Videogames

This isn’t an exercise in self-torture; I’m  not here to force you to look over all of the things that you are giving up.

Here’s what you do now: For every luxury that you love and can’t afford, list a low-cost or no cost alternative.

This actually gets quite fun once you get get going. After all, you are planning out how to do things that you love.

Some examples are:

Beauty salon – either switch to a cheaper salon, or check out local beauty school. They offer VERY low cost services, including haircuts, color, and manicures and pedicures done by their students on specific days. The students are generally operating under the supervision of a teacher. And visit the salon less often. Add a couple of weeks in between your usual visit time.

Museum Visits: Go on free nights.

Gifts: Keep a gift drawer. Scout out really good sales and buy things when they are at a very low price, even months ahead. You’ll never be scrambling at the last minute that way, which tends to lead to paying more than necessary. If money is really tight, make handwritten gift certificates for family members, redeemable for one “get out of chores free” night, one hour of one-on-one time with mom or dad doing whatever the child choses (within reason of course), etc.

Clothes: Consignment stores, thrift stores, and end-of-season sales.

Toys: Children’s consignment stores.

Movies: Matinees, or movie nights at home with the family. Make an event of it; make popcorn, buy a big box of candy (which will cost a tiny fraction of what it would cost at the movie theater.

Gym Membership: Quit the gym if you can’t afford it.  Form a walking group with people from work, and walk 20 minutes or more of your lunch hour. Take the stairs at work. Bicycle with friends on weekends. Take the dogs on long walks.

When you want to lose weight, you go on a diet.

When you need to trim fat from your budget, you need to do the same thing – go on a money diet.

The trick in stretching your budget lies in ‘trimming the fat.’ Recent surveys say the average debt per American household runs over $7,000, and we won’t see any debt relief until we are willing to make some significant adjustments on our spending habits.

First, you have to decide which expenses are your absolute priorities. You need to budget for necessities like groceries, rent or mortgage, utility bills, and making payments towards paying down credit cards. Pay extra if you can towards the credit card with the highest interest rate; if you can only afford to pay the minimum to the credit cards with the lower interest rates, do that.

You must now decide what is the “fat” in your budget. If you owe more than you can pay off every month, frankly, anything that is not a necessity is “fat”.

Gas-guzzling cars, boats, RVs and other expensive toys are “fat”.

Look to trim expenses everywhere that you can.

If you’ve been spending money on video game consoles and online games, maybe it’s time to snap out of the virtual world and, well, get real.

If you’ve been going to an expensive salon – find a cheaper hairdresser until you get your debts paid off.

When you’re on a diet you would substitute fattening food like ice cream with healthy food like yogurt.

When you’re on a money diet you need to find less expensive alternatives to all of life’s luxuries.

Buy generic groceries at the store instead of name brand groceries, and buy designer clothing at consignment stores where they’re cheaper. And do you really need to get most of your clothes dry cleaned?

Cut back on your designer or gourmet coffee habit. Buy generic brands at the grocery store.

Instead of a night at the movies, try matinee, which is cheaper. And do you really need cable TV and pay-per-view?

Go to the museum on their free nights.

Remember, developing a healthier consumer habit takes practice. Once you get in the habit though, you will find that even when you’ve paid your debt down, you are very likely to maintain healthier money habits in the future.