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Get Out of the Credit Crunch

Do you need to start saving to pay off debt? Are you trading debt and savings back and forth because you're not sure which way to go? The good news is you might not be bad off as you think.

Generally, the focus should be on paying off debt first, followed by saving enough money to cover three to six months of expenses, and then saving for retirement. Easier said than done? Not really. Try these four steps to get on the right financial track:

STEP 1.) Stop charging immediately. All day-to-day expenses should be covered with cash. Analyze how much money is reasonable to support your daily needs, including gas, lunch, and groceries. Then, withdraw enough to cover two weeks of expenses and put the cash in envelopes labeled for each expense. Then pay cash for everything. This budget method will help you understand where and how fast your money is going. In the meantime, keeping a spending record can be a major eye-opener. For example, if you stop buying that daily $4 cup of coffee, you can save money fast.

STEP 2.) Come up with an action plan to pay off the debt. Tackle the credit card with the highest interest, zeroing it out as quickly as possible while paying the minimum on the other cards. Then, take that money and add it to what you're already paying on the next one you plan to tackle. With the payment amount growing as each card is paid off, you?ll be rolling toward that debt-free goal. 

STEP 3.) Once the cards are paid off, start saving for an emergency reserve and never allow yourself to casually say, "Just charge it." You'll need at least three months of expenses covered in a cash account. For someone self-employed, six months of cash is even better.
 
STEP 4.)
Start saving for retirement. If you don't have access to a retirement savings plan through an employer, consider a Roth IRA.  An IRA allows you to save pre-tax dollars toward retirement. Money you invest in a Roth IRA is taxed now, but you can withdraw it tax-free during your retirement.

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