Become a Financial Escape Artist: Get out of Debt & Start Saving

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Data from the Federal Reserve and the U.S. Census indicates that 38.1 percent of American households carry some type of credit card debt, with the average balance-carrying household owing $10,704. According to the Motley Fool, the average adult owes $11,244 in student loans, $8,163 on their car and $70,322 on their mortgage.

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If you are like the average American, getting out of debt can feel like trying to escape from quicksand. Here are some tips on how to become a financial escape artist and find your way to financial freedom.

Evaluate Your Finances

To start moving in the right direction, first you need to know where you are. Americans underestimate their credit card debt by 40 percent and their student loan debt by 25 percent, according to a Federal Reserve Bank of New York study published in Economic Policy Review.

To get a realistic sense of where your finances stand, start by checking your credit score. You can use credit sesame reviews for free credit score. You can request a free copy of your credit report once a year from each of the three major credit reporting agencies by going to Credit monitoring services such as LifeLock may also provide you with information about your credit score.

Set Financial Goals

When you know where your finances stand, you’re in a better position to decide where you want to go. Defining financial goals can help you start taking steps in the right direction. Wells Fargo recommends that to keep financial goals realistic, you should make them clear, set a specific time frame to achieve them and monitor progress.

Make your goals measurable. For instance, you might set a goal of paying off half of one of your credit cards within the next six months. You can set short-term goals such as buying a car, medium-term goals such as saving for a down payment on a house and long-term goals such as paying off a mortgage or saving for retirement.

Establish a Budget

In order to achieve your financial goals, a budget is essential. Senator Elizabeth Warren’s simple budgeting guideline, the 50/20/30 rule, is helpful as well as simple. Set aside half of your income each month for paying necessary fixed expenses such as rents and mortgages. Put another 20 percent toward repaying debt and building savings. This leaves 30 percent for discretionary spending on variable expenses such as entertainment.

Start Building Your Savings

One of your first financial goals of budgeting should be to build an emergency savings fund. Bank of America recommends that an emergency fund should be enough to cover six to twelve months of living expenses, including housing, food, transportation, health care, bills and personal expenses.

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This amount can take some time to save, so a smaller step some financial advisors recommend is to begin by building a $1,000 savings fund. To make sure some of your income is set aside for savings, you can create a separate savings account and set up your paychecks to automatically deposit a percentage of your wages this account.

Reduce Your Debt

Financial expert Dave Ramsey recommends that after you’ve built your savings account to $1,000, you should start paying off non-mortgage debts before pursuing other financial goals. Ramsey suggests paying off your smallest balance first. This small-step approach builds confidence and motivation to start working on larger debts.

Other experts recommend paying off the balance with the biggest interest rate first to avoid paying as much interest each month. Either strategy works.

After your debt is under control, work on other financial goals such as increasing your emergency savings, building your retirement savings, saving money for your children’s college fund and paying off your mortgage.

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