According to a recent survey of 191 CDFA (Certified Divorce Financial Analyst®) professionals from across North America, the three leading causes of divorce are basic incompatibility, infidelity and money issues such as debts, which in 22% of the cases was cited as the as the primary reason for the divorce.
A couple’s finances can become very thorny issues. One person may try to hide his or her debts from the other, blame each other for their dual debts or have an attitude of “this is mine”, “this is yours,” all of which can keep couples from working together to find solutions. The biggest money problem in most marriages is debt. Whether the debt was there when the couple married or was accrued during the marriage, couples that want to preserve their marriage must learn how to work together to handle it and here are six tips that can help accomplish this.
Have you or your spouse not been honest and upfront about your debts? If so, it’s time for the guilty party to admit his or her debts and talk about them openly and honestly. CFP professional, Steve Repack has said that, “Sunlight is the best disinfectant so one of the best first steps is to share with each other how much you owe and the interest rate on each of the debts”. And if the debt was accumulated by just one of you and you want to stay married you will need to commit to work together to pay it off.
Prioritize your debts
The second thing you need to do is pay for your necessities – shelter, food and clothing. This may mean giving up on some of the things you enjoy most like new wardrobes, dining out or a mini mansion. Next, you need to make at least the minimum payment on any secured debt or any loan that is secured by a tangible asset such as your house or your car. Failing to pay these bills on time could cost you that asset, which in the case of your automobile or house can lead to major life problems.
Make a plan
There are several different plans or strategies for paying off debt. You’ll need to choose the one you feel will work best for you. The two most popular are the avalanche method and the snowball method. The avalanche method means paying off first the debt that has the highest interest rate while making the minimum payments on your other debts. If you focus all your efforts on paying off the debt with the highest interest rate you will get it paid off fairly quickly and end up saving the most money. When you’ve paid it off you then move onto the debt with the next highest interest rate and so forth.
The snowball method, which was created by the financial expert Dave Ramsey, is about the opposite of the avalanche plan in that you order your debts with the one with the lowest balance at the top down to the one with the highest balance. You then focus all of your energy on paying off that smallest debt and work down from there. Of course, you will want to continue making the minimum payments on all of your debts. Dave calls this the snowball method because as you pay off a debt you’ll create momentum to start paying off the next one like a snowball gains momentum as it rolls downhill.
Negotiate if necessary
It’s important that you pay off your debts on your own. However, there may be cases where you need to negotiate with your creditors to try to get some of your debts reduced. Most creditors won’t negotiate unless you have a temporary financial hardship of some kind such as a job loss, a death in the family or you were required to take a serious cut in pay. If you do have a financial hardship you could contact your creditors to see if they would be willing to reduce your debts. Unfortunately, in most cases the answer to this will be “no”. However, you may be able to negotiate a reduction in your interest rates, which would at least yield lower monthly payments. Or you might be able to negotiate a timeout of several months during which you would not be required to make any payments – which would give you time to possibly get caught up on them.
If you find the idea of negotiating with your creditors a bit scary, here’s a video with Roger Dawsn on the Secrets of Negotiating.
Develop a new mindset
Why did you get into trouble with debt? Are you or your spouse used to spending money on items that aren’t in your budget such as a costly vacation, eating out several times a week, splurging on the latest electronic device or other non-essentials? If this is the case the two of you must work together to develop a new mindset and develop new spending habits which must become permanent. As one financial expert has noted, “If you pay off debt only to charge up the credit cards or sign up for a new car loan in a few weeks or months later, you’ll have ultimately gained nothing”.
Make a plan for future spending
The final step for the two of you is to make a plan for your future spending to make sure you won’t be racking up unnecessary debt. To make sure that neither one of you ends up feeling trapped financially figure out an amount of money each of you can spend without having to consult the other. The two of you should also learn to make all of your purchases with a debit card or by paying cash rather than using credit cards. When you have to use a debit card or have to take money out of your wallet you should find it easier to determine whether what you’re buying is a want or need.
CFP Repack also says that when you are creating a plan for your future spending it’s important to set aside a little money in your budget so that you can still have some fun. That way if you’re operating on a very tight budget you’ll know that there is some extra money built in to splurge a bit from time to time – whether it’s a trip to the beach or an overnight stay at your favorite hotel.