Welcome to my second blog!
Rather than droning on and on like my last post, I'm going to touch the highlights and then direct you to resources.
What to do when you're in debt
1. Debt is an addiction
2. The mechanics of paying off debt
3. Debt reduction tips
4. Summary
1. Debt is an addiction.
Once you've started racking up debt, it gets harder and harder to break the habit. And, like other highly addictive substances, you must take more and more of it to get the same effect.
As an addiction, I recommend the following:
Seek group therapy
Admitting you have a problem
Do not beat yourself up for having the problem
Realize that you will backslide, but that is not an excuse for resuming your self-destructive debt spiral
But perhaps the most important thing of all is to recognize the damage it has done and ensure you never get into this situation again.
Without further ado, here's your first reading assignment: FAQ for The Motley Fool's Credit Card and Consumer Debt board.
Get a membership (it is free) and read this FAQ. It has all of the details that you need.
Return to the top.
2. The mechanics of paying off debt
The mechanics of getting out of debt are really easy:
Debt = income - expenses
When expenses > (are larger than) income
The problem of course is that companies which offer credit also charge you interest. So if in month 1 you needed to borrow $200, in month 2 ~$205, month 3 ~$215, etc. This is called a snow ball or also the "miracle of compound interest" but only when it's you saving. When this is working against you, you could call it a debt (or death) spiral.
To stop adding more debt and begin paying-off your accumulated debt, you must make income larger than your expenses. You can do this in one of the 3 following ways:
1) increase your income
2) decrease your expenses
3) both
Every other tip/trick/technique anyone can offer you will falls into one of these categories!
1) Increasing your income -
I don't know you so I don't know your skills, industry, etc. I'm going to leave this one up to you - but be creative. Open an ebay account and sell household junk, work longer hours, get a second job, do what you have to do.
2) Decrease your expenses -
There ARE tons of ways you can do this.
Get rid of Cable
Get rid of your cell phone
If you have multiple vehicles, sell some
Clip coupons
The accepted method of reducing spending is to track EVERY PENNY you spend for a number of months. Once you know where your money goes, you can make an informed choice about where to spend it. Cut your spending, make it painful.
Return to the top.
Debt reduction tips
In the previous section I discussed the very nebulous requirement that you decrease expenses and increase your income. Those two steps are very important but below I list a bunch of small actions you can take that will also help.
A. Call your credit card company and ask for a lower rate.
If they say "no", ask to speak to the manager and ask again, politely. At the worst they will still say "no". Depending upon how much you owe, this single phone call could save you $100 dollars or more a month. Remember you lose nothing by asking!
B. Pay debts as soon as you can
If you are paid on the 15th of the month, but your credit card bill isn't due until the 1st of next month, pay the bill on the 15th!
Each day you pay early, is one day that interest is not charged to you! (BEWARE: if you pay your bill prior to its "closing date" that money will go towards your previous months balance and your credit card company could charge you a late fee for missing your payment!) Look through your statement and send the money no earlier than the closing date.
C. Pay all of your bills with cash or a debit card
This ensures you do not continue to rack up more debt when you stop paying attention and helps you with some of the steps identified in the previous section. If you use your debit card, you will always be able to track where you spent your money and how much you spent.
D. Check your bank balance daily or at least weekly
This helps ensure you do not overspend. Make sure to leave some money in reserve to cover unexpected expenses.
E. Create a spreadsheet or write down a list of ALL of your debts and their amount
Update this monthly to track your progress.
F. Make the elimination of your highest interest debt a family goal
If you've allocated $100 for groceries, try to beat that amount and apply any extra to the highest interest debt.
G. Make yourself accountable
Post your results to an anonymous site on a monthly basis. Having to do this will ensure you hold yourself to the standards we are setting
H. Join a discussion board about debt
After you get your account for the Motley Fool, I recommend participating on the board mentioned above. It really helps to share triumphs and setbacks with a community that has gone through this same difficult process. Plus many of the regulars can help answer questions.
Return to the top.
Summary
Remember it probably took you many years to get to this state, it will probably take you many years to get out of it.
Also, once you are out of debt you need to seriously consider investing for your retirement. The large percent of your income you had been using to pay-off debt could become a valuable asset for ensuring your financial independence and/or early retirement.
Return to the top.
Proceed to my next finances blog How to retire in 5 easy steps.
Rather than droning on and on like my last post, I'm going to touch the highlights and then direct you to resources.
What to do when you're in debt
1. Debt is an addiction
2. The mechanics of paying off debt
3. Debt reduction tips
4. Summary
1. Debt is an addiction.
Once you've started racking up debt, it gets harder and harder to break the habit. And, like other highly addictive substances, you must take more and more of it to get the same effect.
As an addiction, I recommend the following:
Seek group therapy
Admitting you have a problem
Do not beat yourself up for having the problem
Realize that you will backslide, but that is not an excuse for resuming your self-destructive debt spiral
But perhaps the most important thing of all is to recognize the damage it has done and ensure you never get into this situation again.
Without further ado, here's your first reading assignment: FAQ for The Motley Fool's Credit Card and Consumer Debt board.
Get a membership (it is free) and read this FAQ. It has all of the details that you need.
Return to the top.
2. The mechanics of paying off debt
The mechanics of getting out of debt are really easy:
Debt = income - expenses
When expenses > (are larger than) income
The problem of course is that companies which offer credit also charge you interest. So if in month 1 you needed to borrow $200, in month 2 ~$205, month 3 ~$215, etc. This is called a snow ball or also the "miracle of compound interest" but only when it's you saving. When this is working against you, you could call it a debt (or death) spiral.
To stop adding more debt and begin paying-off your accumulated debt, you must make income larger than your expenses. You can do this in one of the 3 following ways:
1) increase your income
2) decrease your expenses
3) both
Every other tip/trick/technique anyone can offer you will falls into one of these categories!
1) Increasing your income -
I don't know you so I don't know your skills, industry, etc. I'm going to leave this one up to you - but be creative. Open an ebay account and sell household junk, work longer hours, get a second job, do what you have to do.
2) Decrease your expenses -
There ARE tons of ways you can do this.
Get rid of Cable
Get rid of your cell phone
If you have multiple vehicles, sell some
Clip coupons
The accepted method of reducing spending is to track EVERY PENNY you spend for a number of months. Once you know where your money goes, you can make an informed choice about where to spend it. Cut your spending, make it painful.
Return to the top.
Debt reduction tips
In the previous section I discussed the very nebulous requirement that you decrease expenses and increase your income. Those two steps are very important but below I list a bunch of small actions you can take that will also help.
A. Call your credit card company and ask for a lower rate.
If they say "no", ask to speak to the manager and ask again, politely. At the worst they will still say "no". Depending upon how much you owe, this single phone call could save you $100 dollars or more a month. Remember you lose nothing by asking!
B. Pay debts as soon as you can
If you are paid on the 15th of the month, but your credit card bill isn't due until the 1st of next month, pay the bill on the 15th!
Each day you pay early, is one day that interest is not charged to you! (BEWARE: if you pay your bill prior to its "closing date" that money will go towards your previous months balance and your credit card company could charge you a late fee for missing your payment!) Look through your statement and send the money no earlier than the closing date.
C. Pay all of your bills with cash or a debit card
This ensures you do not continue to rack up more debt when you stop paying attention and helps you with some of the steps identified in the previous section. If you use your debit card, you will always be able to track where you spent your money and how much you spent.
D. Check your bank balance daily or at least weekly
This helps ensure you do not overspend. Make sure to leave some money in reserve to cover unexpected expenses.
E. Create a spreadsheet or write down a list of ALL of your debts and their amount
Update this monthly to track your progress.
F. Make the elimination of your highest interest debt a family goal
If you've allocated $100 for groceries, try to beat that amount and apply any extra to the highest interest debt.
G. Make yourself accountable
Post your results to an anonymous site on a monthly basis. Having to do this will ensure you hold yourself to the standards we are setting
H. Join a discussion board about debt
After you get your account for the Motley Fool, I recommend participating on the board mentioned above. It really helps to share triumphs and setbacks with a community that has gone through this same difficult process. Plus many of the regulars can help answer questions.
Return to the top.
Summary
Remember it probably took you many years to get to this state, it will probably take you many years to get out of it.
Also, once you are out of debt you need to seriously consider investing for your retirement. The large percent of your income you had been using to pay-off debt could become a valuable asset for ensuring your financial independence and/or early retirement.
Return to the top.
Proceed to my next finances blog How to retire in 5 easy steps.
I sent a link for this post to my congressman, Ed Perlmutter (D-C07).
ReplyDeleteI wonder if he will understand it.
Nice!
ReplyDeleteI've written several letters to my own congressman and senators lately. One of them, Evan Bayh elected to retire.
:)