Are you receiving persistent phone calls from debt collectors? Are you having a hard time paying off your minimum monthly payments? You’re in debt – and you’re in deep! Regardless of the reason (loss of a job, illness, overspending or just plain carelessness), with a little planning, persistence and patience, you can dig your way out of this financial hole. Here’s how:
STEP 1: Assess your Debt
To solve any financial crisis, first you need to evaluate the situation and determine the extent of the problem. How much debt is too much? It varies from person to person, but in general, if more than 20% of your take-home pay goes to finance non-housing debt or if your rent or mortgage payments exceed 30% of your monthly take-home pay, you may be overextended.
It’s also a bad sign if you can only afford the minimum monthly payments on your credit cards, or if you’re borrowing money to payoff existing debt.
STEP 2: Set-Up and Follow a Budget
Now that you’ve determined how bad your situation is, create a budget to help reduce your spending and eliminate expenses. The most important factor is to be proactive and stay dedicated to a plan. This process may require team work; especially if you have a family. Begin by preparing three lists:
- Monthly Income: Add up all the income coming into your household.
- Essential Expenses: Calculate your fixed expenses (mortgage, car loan, insurance, etc.) and other necessities like food, clothing and utilities.
- Nonessential Expenses: Assess your spending that fluctuates and isn’t necessary (eating out, entertainment, recreation, etc.). This will probably be the most difficult list to complete.
Track your expenses for one month by writing down everything that you spend. This will help you get a complete and accurate list. The more details included in your expense lists the easier it will be to spot areas to make improvements.
STEP 3: Cut Your Expenses
Obviously, fixed expenses such as your mortgage and auto loan will be hard to cut. Start with the nonessential items to see where your spending can be reduced. Perhaps you can cut food expenses by bringing lunch to work instead of eating out. You might be able to reduce transportation costs by taking public transit or carpooling. Even utility costs can be reduced by flipping off the lights and turning down the thermostat a few degrees.
STEP 4: Reduce Your Existing Debts
Once you start cutting expenses and have a balanced budget established, its time to answer those collection calls or contact your credit card company directly to speak with an agent. They’ll be more than happy to work with you to establish a repayment plan to pay down your debt. They want to eliminate your past due obligations just as much as you do! To help you, they may be willing to reduce monthly payments and possibly eliminate late fees, overdraft and finance charges. You won’t know until you ask.
If you’re able to setup new terms, it’s extremely important that you keep on track and always pay at least the minimum payment. Make sure you’re always on-time to keep your credit in good-standing. Here are some other helpful tips:
Pay off high-rate debt first: The higher your APR, the more interest you’ll end up paying. Begin with your highest-rate cards or loans and eliminate the balance ASAP.
Transfer high-rate debt to low-rate cards: Consolidating your debt to a single, low-rate credit card is a smart move (as long as you don’t create more debt!) Most credit cards offer a 0% intro APR on balance transfers – which can save you more.
* Want to transfer? See a list of 0% balance transfer credit cards
If you can’t follow a budget or figure out where to cut expenses, it may be time to call in a professional debt counselor for help. They’re trained to look for ways to reduce your debt and cut expenses in ways you may have never thought of before. Low cost services are available in many communities. Start by contacting your local chamber of commerce, credit union or bank.