Check out “The Nefarious Hidden Costs of Debt” at The Personal MBA… it’s a great read.

Here are some productive ideas for how to use your Christmas bonus:

• Pay off debts
• Build an emergency fund
• Start a child’s college fund
• Pay down on your mortgage
• Contribute to your Roth IRA (up to the max)

Next time you get a bonus or unexpected income, have a plan for how you will use the money. You’ll avoid the “morning after” regrets and put the money to good use!

Retailers rely on impulse purchases (trust me, I own and run online stores).They use all sorts of tactics to get you to purchase today instead of waiting and really thinking about whether it’s a good decision.

One simple decision has saved me hundreds, maybe thousands of dollars…

Never spend more than $100 on a purchase without first doing these three things…

Sleep on It

If it’s something you really need, you’ll still need it tomorrow. If it’s something you really want, you’ll still want it badly in the morning. But you may wake up and realize that it sounded like a much better deal when you were standing in the store than it does now.

Talk to Your Spouse

If you’re married, discuss the purchase with your spouse. My wife and I don’t spend over $100 without first discussing the purchase with each other. If your family household income is less than $50,000 a year, reduce it to $50. If it’s more than $200,000 a year, you can increase it to $200 or more.

If you’re not married, you can talk to a friend, parent or financial advisor. Find someone who will talk to you frankly. Ask them about purchase decisions. Listen to them, they should tell you honestly whether you’re making an impulse purchase or not.

Research the Product Online

This is absolutely required. Search for the item online and compare prices. Read reviews. Look at alternatives. You may be surprised to find out that great deal you saw in a retail store isn’t such a great deal afterall.

I was just in a local office supply store today and saw a Garmin Nuvi GPS on sale. It retailed for $199 and was on sale for $175, a pretty good deal. But when I looked it up on Amazon.com’s mobile site on my iPhone they had it for sale for $150 with free shipping and no sales tax. I would have paid almost $40 more for that impulse purchase had I bought it in the store.

There are two schools of thought when it comes to paying off your debt. One says that you should start with the account with the highest interest rate, then move to the next nighest interest rate and the next until you’ve paid everything off. The other says that you should pay off the smallest balance first, moving to the next smallest, etc. Which is the best?

Which is Better?

Basic 7th grade math says that you should pay off the highest interest rate loans first, moving to the next highest interest rate loans. All things being equal, this method will pay off the balance of all loans fastest, and with the least amount of interest being paid.

But as Dave Ramsey says, if we were <em>that</em> good at math we wouldn’t have credit card debt! The truth is that most people try this method and fail. They start making payments and after a few months, feel like they’re not getting anywhere (I know I’ve been there!)

Then after a few months of not seeing much progress they start to slip a little and eventually give up and go back to their old spending habits. It’s no different from breaking any other habit or addiction… you see it with people trying to quit smoking too.

The key according to some financial advisors (including Dave Ramsey) is to pay off the lowest <strong>balance</strong> first, regardless of interest rate. It’s the reassurance of a quick win, they say, that makes you want to keep persevering. Most people have a credit card, loan or other debt that is under $1000. Paying the debt off quickly gives you the motivation to move to the next, and with that much more money per month, the next smallest is easier to payoff.

As each larger debt gets paid off, it’s easier to tackle the next larger one. After freeing up several hundred dollars in payments to smaller debts, a $5,000 loan might not look that hard to pay off.

Which Should You Choose?

Which method you choose is up to you. You may have the perseverence to pay off the highest interest rate debt first, but history and the success of the credit card industry has proven that wrong for the majority.

I will say that from personal experience, it is definitely more encouraging to pay off several small debts in a row rather than chipping away at larger ones. That said, once you’ve gotten a few smaller debts knocked out, I don’t think there is anything wrong with tackling some of the high interest debts.

Do what you are comfortable with and remember, you can always switch it up if it’s not working for you!

One thing we’ve done as a family is set monthly personal spending budgets, and we get our money in cash at the first of the month. $100 for my wife and I, and $25 each for the kids. The money can be used for anything… eating out, buying something, going to the movies, anything.

We started with a very small amount so that we could see how fast we spent. We’ll increase the amount gradually, as we learn how to control our spending and pay off our credit cards.

The first month of the experiment, I remember asking my wife on the 5th how much money she had left for the month. None! As the months have gone by (we’re on month 3 now) we’ve gotten much better at managing our “extra” cash and as a result, we’re more conscious of other purchases and their financial impact as well.

Give it a try, and I guarantee it will make you think about your spending habits more (and hopefully cause you to spend less).

1. Make a Budget
   Without assessing your current level of debt and bills, you won’t have a clear picture of where you are right now. You need to know where you are so you can take steps to get out of your current situation.
   Write down all your monthly bills and expenses, including food and gas. Write down everything.
2. Assess your Damage
   If your minimum monthly payments are more than your income, you will need to make some tough decisions.
3. Sell Big Stuff
   Sell your car to eliminate a car payment & insurance, sell your home and rent an apartment. You have to spend less than you make! Getting rid of high monthly payments can give you cash flow to eliminate your debt fast.
   
4. Get an Extra Job
   You may not be able to reduce your debts enough. Whether or not you can, it may be a good idea to get a part-time job so you can put as much money as possible on your debt.
5. Save Cash for a Rainy Day
   Before you start paying off debt, first put $500-1,000 in an emergency fund. If your car breaks down right in the middle of paying off credit cards, it would be too easy to just use a credit card and use the “it was an EMERGENCY” excuse. Put away a little cash so you can handle what life throws at you.
6. Pay Off the Smallest Debt First
   Regardless of interest rates, pay off the smallest balance first, then move to the next. Paying of the smallest debt first will also give you immediate feedback, and give you more cash to put on the next largest debt per month. This is what Dave Ramsey calls the “Debt Snowball” and it really works.
7. Change Your Lifestyle
   While you are trying to pay off debt, you shouldn’t be going out to eat, going to the movies, and spending money frivolously. Budget some money for fun, but you have to change your lifestyle… living above your means is what got you into this place in the first place.
8. Have a Yard Sale
   Go through your home and find things you’re not using. Have a set of golf clubs but haven’t played in 3 years? Video game consoles the kids never play anymore? Have a yard sale or sell your stuff on eBay, and put that money on your debt.
9. Cut Up the Cards!
   If you have credit cards, cut them up! They’re too tempting and can get you right back into debt. Before you know it Christmas will be here or your car will break down. It’s too easy to just put it on a credit cards and think “I’ll pay it off next month” but next month never comes.
10. Make a Commitment
    You have to make a conscious decision to get out of debt. As an ex-smoker, I think getting out of debt is a lot like quitting smoking. You have to really want it. You’ll go through withdrawals… you’ll see things and think “I just HAVE to have this!” Walk away. Like quitting an addition, a lot of it is habit. It’s hard, but once you change your habits it becomes much, much easier.

Most of the restaurants in the area (not fast food) cost between $10 and $12 after tip and tax for lunch. You can safely assume you can make and “brown bag” a lunch for around $2. So that’s a potential $10 per day savings by taking your lunch. 

At 50 weeks at just taking lunch 4 days a week, you could save $2,000 in a year!

That could go a long way toward paying off debt, or towards your retirement. Think about it next time the guys in the office say, “What’s for lunch?”