2-step Plan for Getting Rid of Debt

How to get rid of debt (iStockphoto)How to get rid of debt (iStockphoto)As the smoke clears from the recent recession, millions of Americans, especially Latinos, are finding themselves with impossible-to-pay credit card debt. Some of it is a result of job losses and foreclosures, but most debt comes from spending beyond means. This begs the question: How do we get out of the hole?

Having a credit card means different things to different people, but for Latinos it has become a status symbol; a visible way to measure success. According to personal finance expert and radio host Andrés Gutiérrez, they tend to max out their cards in order to live above their means, without understanding that this type of debt can lead to poverty. We sat down with Gutiérrez to ask some of the most common questions and find out how to climb out of financial hole.

"When people buy things with money they don't have, it's like opening a window into the future to pull out money into the present; in other words, credit spends the money that should be waiting for you in the future, creating a vicious spiral of debt which is very hard to get out of," warns Gutiérrez.

Avoid these financial mistakes

"The need to get credit in order to establish credit is a myth," asserts our expert. "What do you need credit for? Why not buy with cash! Your focus should not be on establishing credit but on saving money." Gutiérrez explains that the categorizing of credit worthiness based on scores was created by the very banks and credit card providers that constantly campaign for you to put your hard-earned money towards getting into debt, keep you in the same debt and continue paying higher interests because it's nearly impossible to pay off a maxed-out credit card account. When was the last time you saw a "buy with cash" commercial on TV?

A mortgage is about the only type of debt Gutiérrez advocates. "Try renting for a while, and save your money for a good down payment." You'll be able to qualify for loans with good rates; it just takes longer for banks to qualify someone with no credit score.

"It all starts with a decision," says our expert. "You didn't wander into debt; you can't wander out of it. Getting out of debt requires a decision from your heart. It requires a genuine understanding that if you owe, you're actually 'a slave to the lender'."

1. Build a small emergency fund (un colchón financiero chiquito) of about $1,000. This is what will keep you afloat when there are unexpected expenses without having to get deeper into credit debt. Our expert suggests you make a plan to save $1,000 in 30 days. Here are some suggestions on how to do it:
• Get a second job, and put away your entire earnings towards your emergency fund.
• Have a garage sale or sell individual items through online classifieds. A garage sale alone could get you about $200 toward your fund.
• Make a tight budget where you eliminate expenses from eating out, entertainment (movies, games, etc) or even cable, and live with exactly what you need. Deposit the remainder towards your fund.

2. Pay down debt by using the DEBT SNOWBALL system: "This is the most encouraging and effective way I find to get rid of all debt (except mortgage)," says Gutiérrez. It took the debt-ridden Gutiérrez's household about 18 months to become debt-free. Here's what you do:
• Make a list of all your debt, from the smallest to the largest, no matter what the percentage rate is.
• Pay the minimum on each account, but "attack" the smallest one with the highest payments possible until it's paid off.
• Repeat the process until all your credit debt is paid off!

"This works," says Gutiérrez. "Being out of debt frees all the cash you had to use for payments. Broke people make payments on debt, but the rich put the money towards investments. It's time you get to be the latter."

Financial expert Andrés Gutiérrez is the host of "The Andrés Gutiérrez Show" and creator of Paz Financiera. A successful entrepreneur and small-business owner, Andrés Gutiérrez knows what it's like to start with nothing and build lasting wealth. After hosting a San Antonio financial radio program and appearing frequently as a financial expert on the Telemundo television network, Andres joined Dave Ramsey's team in 2009 to bring the message of Financial Peace to the Spanish-speaking community.

Follow Andrés:

Twitter: @elshowdeandres
Facebook: www.facebook.com/elshowdeandres

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