Get Out of Debt
Do you have the willpower or desire to get out of debt. Most people are looking for quick fix, there are no quick fixes. Anything you want to accomplish takes time and discipline. First you need to look at how you got there in the first place.
It is unfortunate, state governments, national government, churches, businesses, basically everywhere you look debt has taken over our society. Is everyone in debt? No they are not. Just because most people are in debt does not make it right.
We always hear on TV, we’re spending our kids future. We get into debt for things we really don’t need. It is not the mortgage, it is not the car, it is not the college – it is the credit cards, the cell phones, the data plans, the expensive vacations, the dancing lessons your kids don’t want, eating out all the time.
Good Debt to Income Ratio
Usually when you get a mortgage, they check your debt to income ratio. Usually when you get a new car loan they check you check your debt to income ratio. These debts are considered good debts when you start out. OK, so now you have a house and a car. Most likely you have a pretty good job.
OverSpending Turns into Bad Debt to Income Ratio
Now we start adding all of the other spending after we have good enough credit for our financial foundation. Most of these new expenses we can handle it first, then it only takes one bad decision, roof leak, accident to happen and all of your discretionary income is already been spent. We were not putting away for emergencies or even savings. Now we don’t want give up anything, so we look for another loan or another credit card. Now the spending is more than the income coming in.
What are you going to do? Well you could take on another job to increase your income. Most people don’t want to take on a second job. So maybe they look for quick money, only to get further and further in debt. Remember there is no quick fix.
Steps for Getting Out of Debt
- First DO NOT acquire new debt. Loans from family and friends included. Nothing. People start looking for more money when they are in debt. That defeats the game plan. Your Target – Debt Free, No more financial stress. Get control and keep it.
- Examine every penny you are spending. Find all the items you can live without. Doesn’t matter what you have or think you need. Can you live without these things? Does your 10 year old really need a cell phone? Must eat at home. Turn up the thermostat in summer, down in winter.
- Look at your credit cards, write down all the balances, call the company and negotiate a better rate. Tell them you are going to cut them up, don’t cancel the card yet. You still have a balance but you don’t need to use them. If they won’t give you a better rate, tell them you are shopping for a new company to do business with, maybe even give them the name of the company you are going to switch to because their rate is better. Be firm and assertive, you are in control, not them. You might owe them money but you don’t owe them anything else, including your business.
- Okay now that you have negotiated a better rate it is time to DESTROY those credit cards. Do not be tempted to use them. Out of sight, out of mind. You can use your DEBIT card if you have cash to pay for something, if you don’t have cash you don’t need it.
- Now let’s look at some more areas to reduce expenses. Close the itunes account, stop any recurring monthly payments that come on your credit cards or come out of your checking account. Gym membership closed, you can exercise anywhere. Dry cleaners, lawn man, these are things you can do yourself. Discipline is what you are looking for in all areas of your life. Groceries for the meals you are now going to be eating at home. Create a meal plan and stick to it. Everyone in the family is involved in reducing expenses. Eating at home should be fun and the rewards for the family are great.
- Okay usually most people or households need an extra 300-500 a month to get everything back on track. Did you cut enough expenses to do this? Most of the time this can be done.
- If you didn’t cut enough expenses maybe you need to down size your car and get a lower payment. If your debt problem is really bad, maybe even downsize your home. We are not talking about a lifetime here, we want to get out of debt and establish a solid financial plan.
- Keep trimming expenses everywhere you can. Start paying off the debt and at the same time also start an emergency cash fund. You will read conflicting advice on this but everyone’s situation is different. How much do you need for an emergency fund? This will vary also, but a good start is $1000-$2000. This would cover car repair, busted plumbing – you know a real emergency. This is not for the nail salon, a new nintendo game, or even anniversary.
- Emergency fund needs to be liquid and semi-easy to get to. Do you have a personal banker? I recommend a local community bank. This is not money you expect to earn interest on, this is not money you want to lock up in a certificate of deposit. This is money for emergencies.
- Your Personal Banking Habits – Where do you bank, do you have to pay fees on your accounts, do they pay interest on your money or do they have qualifiers? You want to establish a checking account and a savings account. Most likely you already have a checking account, but didn’t get a savings account or you opened one with the $5 deposit. Use this for emergency fund, do not link it to your checking account for overdrafts.
- Okay we are multitasking here. You should have examined your expenses, reduced your credit card interest, started an emergency fund and now it is time to wipe out your debt and start enjoying the life you imagined.
- DO NOT USE A DEBT CONSOLIDATION COMPANY THAT CALLS YOU. You must take action on creating your own plan. They are in business 24 / 7 to get your money. They have no emotional ties to you or your family. Most likely you are young and have many years ahead of yourself. Do not be self-destructive. Take your list of debts that you owe and start with the highest balance and interest rate first. Pay on all your debts, but throw everything else at the largest balance.
- Don’t forget to keep adding to your emergency fund. Recommend $50 a week if possible. So you will have $1000 after 5 months. That is a good start.
- Once you have control of your debt. It is time to create a solid financial plan.