Managing your money well can lead to many good things like building wealth, helping others, retiring early (FIRE), piece of mind, following your dreams, and the list goes on and on.
These things are near impossible to achieve if you have debt hanging over your head. Debt causes stress, fear, and keeps us from obtaining our goals.
If you are in debt, there is hope. There are several common sense steps that you can take immediately to begin to relieve the burden of debt. It will take hard work, sacrifice, and a change in your mindset to overcome the debt, but in the end, it will be worth it. Here are some tips to take control of your debt.
Realize you Need Help
This might be your biggest challenge. Often overcoming the mental piece of taking control of your money can be the biggest hurdle, and the actual math part the easiest. Once you accept the fact that you need help, or are willing to take steps to make the necessary changes, it is easy to move on to the next steps.
One of the best things you can do when tackling any new subject is to increase your knowledge on the topic. Start with the internet in the comfort of your own home. Look at the mainstream personal finance sites like Yahoo, USA Today, etc. , then dig into personal finance blogs. Reading the different points of views of others bloggers is similar situation may help you in yours. Or you might find tricks and tips they are using that are relevant to you.
Dust off the library card and check out some books on the topic from your local public library. Dave Ramsey’s “A Total Money Makeover” and Thomas J. Stanley’s “The Millionaire Next Door” are two good books. There are other great personal finance books that are free to use at your library too.
Check with your bank or Credit Unions website and see if they offer financial counseling. Many do free of charge to their customers. It’s a great way to get some free advice with no obligation from a professional.
Do you have a close family member or friend that you trust? Have them sit down with you and look over your budget and numbers. Having an objective third party may be the dose of honesty you need to help set a clear path from the beginning.
Define a Why
Changing your behavior and getting out of debt will not be easy. It will take hard work and sacrifice. It’s a good idea to discuss the “why” for these changes. Having a “why” a goal that you are trying to achieve will help keep you focused and motivated. Maybe you want to stop living paycheck to paycheck, build a better financial future for your family, teach your children better money habits, or reduce money stress in your life. Whatever the reason have a “why” will help keep you on track.
Build a Plan
Now that you’ve mentally and emotionally ready for the change you need to build a plan. The best way is in the form of a budget. There are many ways to get started. You can jot it down on paper, use an app or software like Personal Capital, or even Excel, but whichever way you choose you need to get your total income, debt and expenses down in some format.
A budget could take time to evolve, and you may want to track your spending for 30, 60, 90 days saving all receipts to see where your money is going. You may be surprised at some of the dollar amounts of some categories, and they could be much higher or lower than you initially estimated. This is why tracking all spending over a period is helpful.
Communicate and Agree on the Plan
It’s so important to be on the same page with your spouse, partner, children, etc. when making changes like this. These changes will affect the entire family. Compromised and communication will be the keys to success. Communication is not just a one-time thing, and it’s ongoing every day.
Don’t Take on New Debt
It’s a no-brainer. Stop accumulating any new debt, immediately! You don’t want to dig yourself further into debt; you want to begin climbing out quickly. Cutting up credit cards and only using cash is a great first step.
Find Ways to Save
For most people, the hardest part about paying down debt is finding the extra money to get it done. Unfortunately, most people live paycheck to paycheck, and extra money isn’t easy to come across. However, this just requires you to get crafty. For instance, can you take on a part-time job and use that paycheck solely to pay off debt? If not, try to make extra money in other ways. For instance, see if you can cut down on your expenses, such as switching to a new car insurance company with a lower premium or reducing your cable package.
Begin thinking of purchases and expenses in terms of wants versus needs. Your expenses should fall into one of these two buckets either want or need. Food and shelter are needs, the new 60-inch television or pair of shoes is a want.
Cutting many wants out of your expenses things like subscription services, eating out, and entertainment will help cut spending. These cuts become extra money now in your budget that can be used to pay down your debt.
When you are in a tight spot, let your creditors know. Some will be willing to work with you. You can call credit card companies and ask for a reduced interest rate. If you have a lump sum bill with someone, you can call and try to work out a realistic payment plan.
Creditors want to know they will be paid so opening a line of communication with them may not be a bad thing. Make sure you get names when you call or confirmation in writing of rate reductions. The worst you can receive is a “no, ” and you can call back at another time and speak with someone else or escalate to a supervisor or manager.
Getting out of debt isn’t something that you can magically do overnight. To help you get out of debt, you should look to lower monthly payments by reducing your interest rate. This can be done by refinancing loans, such as an auto loan or a mortgage. When you do this, you can use that extra money you saved to put towards other debt, or you can continue paying the same amount to reduce that debt more quickly.
You need to have some cash savings for when life happens, or Murphy comes to visit you. Think of those time when an appliance broke, or you got a flat tire it was super stressful. A $1000 cash saving will cover must events and reduces so much stress and avoid money fights you’ll have no idea until you have the e-fund in place.
Once you have completed your debt repayment, you will now have a surplus of income each month to do what you want with. Building wealth, by increasing emergency fund saving to cover you for when bigger life events happen. Could you survive a job loss? Build retirement saving, by investing. Save money for college, a house, a vacation, a car, etc. The possibilities are endless once you free your income up to spend on your priorities and not minimum payments.
Pick a Method to Pay off Debt
The debt snowball is the method we chose to pay off our debt. The debt snowball is a debt reduction method where one owes on more than one account and pays off the accounts starting with the smallest balances first while paying the minimum on larger debts. After the smallest balance is paid off, the payment is snowballed to the next smallest debt. This method helps build momentum. This worked best for us. Others use the Debt Avalanche method where you pay off the balance with the highest interest rates first. Any way you choose to pay off your debt is fine, as long as you are not adding any new debt along the way and adding as much additional money as possible to your repayment is the key.
The debt snowball is a debt reduction method where one owes on more than one account and pays off the accounts starting with the smallest balances first while paying the minimum on larger debts. After the smallest balance is paid off, the payment is snowballed to the next smallest debt. This method helps build momentum. This worked best for us. Others use the Debt Avalanche method where you pay off the balance with the highest interest rates first. Any way you choose to pay off your debt is fine, as long as you are not adding any new debt along the way and adding as much additional money as possible to your repayment is the key.
A debt management program. A DMP company works directly with your creditor to reduce your interest rates so that more of your monthly payment is going towards the principal and less towards interest and you can pay the debt back sooner. You make your monthly payment directly to the DMP Company and they, in turn, pay the creditor.
The DMP Company typically charges a fee for their service. Creditors like working with DMP companies because it almost guarantees repayment, and they are more willing to reduce interest rates because of this fact. Interest rates typically get reduced from 18-25% to as low 2.5-8%. All accounts will need to be closed. If you are unsuccessful with negotiating on your own calling a DMP company might be the way to go. Many offer a no obligation call to see if they would be a good fit for you.
There are two types of debt consolidation that can be used. A debt consolidation loan typically combines several unsecured debts into a single new loan at a lower interest rate. This helps organize payments into a single loan. The key to using this is that you change your behavior and don’t accumulate any new debt, only focus on paying off the debt. This is where many people fail, the use consolidation loans to get organized, but continue to overspend and rack up more debt outside their new loan, causing an even bigger problem.
The other consolidation type which you have probably heard advertised on radio and television of debt consolidation companies. These companies suggest you stop paying your creditors and pay them instead. They will build up your monthly payments in an account. They will contact your creditors on your behalf and try to negotiate a settlement, typically for less than what you own. If they are successful, they will charge you a percentage of the overall settlement, sometimes upwards of 10-15%.
The key to remember is you can afford anything; you just can’t afford everything. Good luck!
Brian is a dad, husband, and an IT professional by trade. A Personal Finance Blogger since 2013 who, with his family, has successfully paid off over $100K worth of consumer debt. I want my three children to handle money better than I ever did at a young age. I have been teaching them as much as I can for the last 10 years. My goal is to continue to champion the financial literacy message and then why I created the “How To Rock Your Money” book. To help teenagers navigate their financial futures. I hope my family’s story of paying off over $100,000 worth of debt will inspire and motivate you to take control of your money. He blogs at BrianBrandow.com