Dealing With Debt


In an uncertain economic climate, many people begin to examine their personal finances for ways to improve their own financial outlook. While they may not be able to control what happens at their jobs or in the economy as a whole, they can take proactive steps in their private money matters. Doing so increases feelings of safety and security as well as providing practical benefits. Reducing or eliminating personal debt is one such action. In the unfortunate event of a job loss or financial setback, it is freeing to know that burdensome debt is no longer an issue. It ensures that whatever money is available can be used for essentials rather than debt repayments. However, paying off debt can feel intimidating and overwhelming. Where does one even begin?

Too Much Debt

The first step to take is to bring household spending under control. It does no good to bail water out of the boat before the leak has been plugged. Total up the income you have have each month from all sources, then total up all monthly spending—bills, groceries, tuition, everything. Include those little incidental expenses too; you want an accurate picture of your spending habits. Look closely; does something immediately stand out as an expense that can be eliminated?

If you're spending more than you're making, you definitely have some hard decisions ahead as to how to reverse that trend. Can you take on more hours? Work an additional part-time job? Often there are ways to boost income when needed, but in most cases it's easier to cut spending. Try a cheaper cell plan, drop or reduce cable packages, take your lunch to work, and clip coupons. It all adds up.

Once the habit of reducing expenses kicks in, it can be addicting. Enjoy the rush of having more funds available, but also keep some breathing room in your spending plan. Amy Dacyczyn of The Tightwad Gazette said that “Frugality without creativity is deprivation.” You won't stick with your plan if you start feeling deprived, so be creative about working in small splurges.

How does this extra money in your budget help you pay down debt? First, having your spending under control keeps you from accumulating more debt. Plus the available funds can make extra payments possible so you can pay down those balances faster.

There are two schools of thought on the best way to pay down debt. The first is championed by experts such as Mary Hunt and Dave Ramsey. They advise listing your debts in order from smallest to largest. Continue making minimum payments on all, but put any extra money toward paying off the smallest amount first. If it's a very small debt, you might even be able to eliminate it in the first month or two. Once that debt is gone, the amount that you have been paying toward it is added to the minimum payment on the next smallest debt. Continue “snowballing” your way up to the largest debts until all have been paid off.

The advantage to this method is the emotional payoff of seeing debts disappearing. It builds momentum. However, many financial experts acknowledge this isn't the savviest way from a financial standpoint. They recommend listing debts in order of interest rate, from highest to lowest. Concentrate on paying off the highest interest first, saving yourself more money in the long run, then work your way down.

Whichever method you choose, consistency is key. See your plan through. Continue being creative as you seek ways to reward yourself while slashing expenses and lowering your debt. You will see results if you stick with it.

However, some people may be in more dire circumstances. If your budget is already bare bones yet you still can't keep up with minimum payments, you may want to look to credit counseling services or loan consolidation programs. Tread carefully here; scam artists abound. Before taking this step, contact your creditors yourself. Many will be willing to work with you to lower payments or interest rates once they are aware of your situation. If they do not and you do seek additional help, do your research. You want to make absolutely certain that the company you use is legitimate.

The best place to start might be your local financial institution. A bank or credit union may offer credit counseling or debt management services. Others may be available via phone or website. Most legitimate ones will be non-profit, so be wary of hefty up-front fees. However, even non-profit status is not a guarantee of legitimacy, so double-check with the Better Business Bureau or your state attorney general's office.

Although taking on more debt to get out of debt seems counter-intuitive, sometimes a debt consolidation loan is a viable option. Only take this route if it will reduce your interest rates, lower your payments, or somehow save you money long-term. Also be honest with yourself and ensure that you are truly committed to getting out of debt before taking this step.

If you have exhausted all other avenues and still are overwhelmed with bills you cannot pay, consider bankruptcy as a last resort. Do make sure you are truly out of options before taking this step, because it will follow you for a long time. However, some people who reach this point admit that they feel relieved. They see it as an opportunity to wipe the slate clean and start anew. If you use the time that your credit score suffers as an opportunity to change your spending and saving habits, you can make much wiser financial decisions once the bankruptcy is no longer on your record.

Once you have eradicated your debt, you want to take measures to ensure that you do not fall into that trap again. Some recommend no longer using credit cards at all and paying cash for automobiles. Other maintain that the rewards of credit cards outweigh their dangers. Use your own judgment here. If you can use the card responsibly and pay it off in full each month, feel free. However, if spending cash keeps your finances under control, do that instead. Build a savings account for emergencies so that the plastic does not tempt you when unexpected expenses arise.

Getting out of debt can feel like a long and arduous process, but in the end it is worth it. It frees up money, teaches wise spending and saving habits, and puts you in control of your financial future. In a rough economy, that all adds up to a very good thing.

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