Here are some thoughts from Money Smart to help you as you work toward understanding debt which is the first step toward solving the problem.
Most who have a debt problem falsely believe that something will happen in the future to solve it and all will be well. A common assumption is that their income will grow faster than their spending, but that is very seldom the case. Even those that end up making more are by then usually well conditioned to just keep spending more, and they end up going deeper into debt. If you are deceiving yourself that debt is okay, that must be addressed if you are to put an end to your problems once and for all.
There is great financial power in living without debt. Consider a couple that hasn't been saving any money and has been averaging $15,000 in credit card debt at 15% interest. This amounts to $2,250 in interest paid each year. If they pay off their debt they not only get to save the $2,250, they also have the opportunity to save an additional $1,500 or so in taxes if they put the money (a total of $3,750) directly into a tax deferred account.
Investing $3,750 at an annual return of 8% will give them $54,000 in 10 years, $171,000 in 20 years and $424,000 in 30 years. That' a heck of a lot better than no savings and $15,000 in debt, isn't it? The power of no debt, especially when tied to the power of compounding, or making money on your money, is huge.
Solving the Problem
It is common to feel overwhelmed at first, but eliminating debt almost always can be accomplished. Yes it’s hard, and it might take eighteen to twenty-four months or more of really “doing without.” But it will turn out to be one of the best things you have ever done in your life. Once you start, you will find a terrific momentum developing. More free money each month attacks less debt each month and the process begins to accelerate dramatically.
Once the debt is finally gone, all of that money, including all the interest you were paying to others, is now yours. What a positive impact this money will have on your life from that moment on!
Here are the steps you need to take:
- Openly admit you have a serious problem, one that you must solve.
- Every member of the household must agree to reduce spending until your family has solved this problem for good.
- Immediately stop all borrowing! Do not borrow any more money for any reason other than for a true emergency, such as a job loss or large unexpected medical bills. If necessary, take it one day at a time. No borrowing today. Then do the same again tomorrow. Not one penny, not for any reason. The minute you stop taking on new debt you are absolutely on your way.
- Cut up every credit card and every department store charge card. No exceptions! Use only a debit Visa or MasterCard tied to your checking account for your non-cash purchases. For your cash purchases, take a pre-set amount of money from the bank every week or every two weeks.
- Make no new purchases of significance until your debt is eliminated.
- Write down every single expenditure every day for thirty days. It only takes two or three minutes a day and the results can be quite amazing. Well before the month is up, your mistakes, problems, and most importantly, the solutions, should start becoming clear.
- Buy and read Money Smart. You will learn a lot that will help you, especially when it comes to the Rules of Money, the Rules of Spending Wisely and of Investing Successfully. Once you stop breaking the rules of money and start spending wisely you will find that the results can be nothing short of amazing.
- Have a written Spending and Saving Plan that you follow and update monthly. Money Smart walks you through this process step by step with advice along the way.
- Have the money you set aside for debt reduction taken directly out of your paycheck via direct deposit and put into a separate account to be used solely for paying your bills.
- If you're still not making enough progress, go back to writing down every single expenditure, every day. Stop using your debit card. Make cash envelopes for each spending category on your spending and saving plan and start doing all your spending in cash.
- Consider taking a part time second job and having any non-working adult members in the family go to work full or at least part-time unless the cost of childcare exceeds the amount they can earn.
- Understand that you almost certainly make enough money. The only true exceptions to this are things like loss of your job, being hit with huge medical bills, or having a large family depending on you, and you are the only breadwinner. If your income is not enough to cover your lifestyle, adjust your lifestyle.
- Save at least one month's worth of emergency money before paying down your debt beyond your minimum monthly payments. Then take half of what you save by eliminating a debt account and add it to your emergency fund until you have four- to six-months’ worth of expenses saved. The rest of your free money should go toward attacking the next smallest debt, and so on.
- Absolutely tune out every advertisement for reducing or eliminating debt, including bill consolidation services and, especially, credit repair clinics––even if they say they’re nonprofit. These are almost all parasites and you will lose if you call them. There are no “secrets” for debt elimination and by the time you’ve used their services you almost certainly will be in a worse position than when you started. If you have any doubts on this advice, Google the companies in particular and the subject in general. Fees or percent of asset charges that are over $100 or so, or requirements that you have more than a certain level of debt, are red flags telling you to avoid such sources of help.
- If you need to repair your credit and feel you cannot work things out on your own, contact the National Foundation for Credit Counseling (NFCC) at www.nfcc.org. The charges involved will be very modest and fair and they will work with you regardless of the level of debt involved.
- If the size of your debt is just overwhelming, filing bankruptcy should be considered, but it is an option of last resort. You may wish to contact your local NFCC organization. They can help you to make the right decision, without a vested interest in their own gain.