Too much debt and not enough savings is a tough situation that many people are finding themselves in these days. A large percentage of those people are single parents who rely on credit cards to help make ends meet and keep their kids from doing without. The only way out of this situation is to make some hard choices and sacrifices that will allow you and your children to live within your means, freeing up money that you can apply to debt and savings.
Trim the Fat
The first step to eliminating debt and building savings is daunting, especially for a single parent, but it’s also necessary. Start by tracking all of your expenses for a month -- not only your bill payments, but also all of your spending on groceries, entertainment, personal and household expenses, schooling and daycare costs. At the end of the month, examine your expenses to see where you can trim the fat. Determine which expenses you can cut out entirely, as well as any you can substitute for a cheaper option -- such as trading cable TV for a cheaper online streaming subscription, or involving your kids in the free entertainment options at the local library. You might even be able to lower your bill payments by negotiating lower interest rates with your credit card companies or downgrading your mobile phone package.
Build a Budget
Once you’ve determined where you can cut expenses and free up extra money, create a monthly budget. List all of your bills and expenses, and allocate the amounts needed to cover each item. You can use the free online service Mint.com to keep track of your budget and set up alerts and reminders to help you stay on track. It might take a few months of practice and adjustment to come up with a budget that works to keep your family comfortable while leaving you extra money each month that you can apply to debt and savings.
Save an Emergency Fund
Put extra money that has been freed up by your budget into an emergency savings fund. This is money that you will use in place of credit cards should a costly emergency arise, to avoid going deeper into debt. Personal finance guru Dave Ramsey recommends saving a minimum of $1,000 before starting to pay off your debts -- although you should continue making the minimum payments on your debts while you save up the emergency fund.
Start a Debt Snowball
With your emergency fund built up to a level that makes you and your family feel secure, it’s time to shift the priority to eliminating your debts. Dave Ramsey recommends starting a “debt snowball” in which you first add the amount you’ve been putting into savings to the minimum payment of your smallest debt. Once that debt is paid off, add that entire monthly payment amount to the minimum payment of your next smallest debt, and so on, until all of the debts are paid. Some financial experts argue that you should first pay off the debts with the highest interest rate, which will save the most money on interest. On the other hand, Dave Ramsey argues that paying off debts in order from smallest to largest will give you the psychological boost that you need to stay motivated and keep going until you’re debt-free. Of course, it’s up to you whether you apply all of your extra money to paying off debt, or continue to direct some of it to your savings account each month. However, the sooner your debts are paid off, the sooner you’ll have more money to devote to your children’s future.
- DaveRamsey.com: Get Out of Debt with the Debt Snowball Plan
- DaveRamsey.com: The Truth About Budgeting
- Oprah.com: Suze's Best Advice on Getting Out of Debt
- Oprah.com: Cutting Spending to Create an Emergency Stash
- PBS.org: Tavis Smiley -- Single Parent in Debt -- What To Do?
- Lewis Alexander: Single Parents Debt -- Single Parent Mum or Dad with Debts
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