Consumers in America are carrying a large amount of debt; in fact, consumer debt is at an all-time high. Debt levels have been rising consistently over the last 10 years. Now that the economy is roaring back and the Federal Reserve seems content to keep interest rates low, there is nothing on the horizon to slow down this upward trend. This year saw household debt rise to unprecedented levels, one not seen since the Great Recession when the economy teetered on the edge of collapse.
While the circumstances are different now, this rising debt is a bit of a concern. In 2008, the delinquencies rate on loans and credit cards was very high, but that is not the case now. However, Americans have not seen income growth keep up with the cost of living in over a decade. This has most likely contributed to the growth of credit card debt among consumers in the U.S. When families are lacking enough income to weather the rising cost of food and housing, they become susceptible to using credit cards to bridge the gaps and deal with unexpected emergency expenditures. In addition, with banks and other lenders dramatically easing their lending requirements, it has become very easy to get credit cards, and therefore compile more debt.
With the rising cost of living, the American family has felt the lack of income growth significantly. Even when both partners are earning a paycheck, it can be difficult to make the money stretch to the end of the month. If they’re parents, it is even more difficult. Childcare is a huge expense for working families. Add in the rising cost of basic expenses such as housing, utilities, food, and fuel and you can easily see how difficult it can be for families to stay afloat financially. Moreover, if one parent loses his or her job, the effects can deal a devastating financial blow to a family’s finances.
When families have to rely on credit cards to get by every month, they are already in trouble. Without something changing significantly, this scenario is likely to end in financial disaster. There are a few ways to reverse this trend: increase income, decrease expenses, or do both. If you’re accumulating more debt every month, there are ways to turn things around. Let’s look at 10 simple steps you can use to stop the bleeding and work toward becoming free from debt.
1. Create a realistic budget
Do you know how to formulate a monthly budget for your family spending? If you don’t, you’re not alone. Most Americans never learned how to formulate a budget, as this is not a skill taught in standard schooling. Many consumers feel as if they have a handle on where their money goes. The truth is that they probably don’t. Past the big expenditures such as mortgage, rent, and auto loan payments, it all becomes a blur for most consumers.
Building a budget forces you to look into the minutia of your spending. Doing so will uncover savings opportunities. Sometimes, just being aware of how and where you’re spending your money will help you make better financial decisions. Many resources exist online to help families learn how to make a budget and follow it each month. It’ll take a bit of work on your part, but it’ll be well worth the time it takes you to sift through your bank account statements and credit card expenditures. You’ll realize that there are numerous ways to curb your spending and get on the path to paying off your debt.
2. Stop wasteful spending
When you do review your expenditures, you’ll be surprised at some of the things you find. Most consumers find lots of unnecessary spending that they can eliminate to help free up more money in the budget. When you are looking, try to find things you may have forgotten about, such as recurring charges for subscriptions or services you’re no longer using. Look for cash draining out of your bank account regularly for things such as expensive coffee every morning, take-out foods, and lunches out at work. These are all things that are easy to cut down on or eliminate. Additionally, take a close look at your service accounts, such as phone, cable, and electricity. Look for ways to reduce these bills. Perhaps eliminate your landline, reduce your cable package, or adjust your thermostat to get some quick wins. Every little bit helps.
3. Earn more money
Adding income is a very effective way to change the financial dynamic in your family immediately. Start by considering getting a second job or asking for more hours at work. Alternatively, if you’re entrepreneurial minded, perhaps look into starting a side business. Having more money coming through the door provides a way to stop the bleeding and get you off relying on credit cards to make ends meet. In addition, it will help you make some headway in paying off your debt, especially if you pay more the minimums on your credit cards. Paying minimums will cause you to pay an exorbitant amount of interest, and it’ll add years to your payoff period.
Be sure to have a plan on how you’re going to utilize that extra cash in advance, and don’t increase your spending to match the increased income. If you don’t, you’ll just find yourself working harder and not getting anywhere.
4. Create a fund for emergencies
One of the biggest factors in accumulating large amounts of credit card debt is being unable to handle a large, unexpected expense such as a broken furnace or other major household appliance. Sometimes, unexpected expenses come in the form of an emergency car repair or a big medical bill. If the family has no emergency fund to fall back on, it’ll need to rely on a credit card or other financing to handle the expense. These large expenses can exponentially increase a consumer’s debt burden and, without a savings account to fall back on, the consumer is powerless to stop it.
Most financial experts recommend that families build an emergency fund at least $1,000. However, you can see how quickly that could be gone with one major emergency. Make $1,000 your first goal, but don’t stop there. Keep saving as much as you can and build your emergency fund into a safety net that can get you through a real crisis.
If you’re looking to build your emergency fund quickly, consider selling things that you no longer want or have use for, and then use that money to start your fund. Host a garage sale or utilize online re-seller sites such as eBay or Poshmark to monetize your unwanted items.
5. Close down your credit cards
If you’re truly going to change your spending habits and stop relying on credit cards to get by, at some point, you’re going to have to get rid of your credit cards altogether. If you’ve made the necessary changes in your spending by carefully budgeting your money, and you’ve managed to save up your emergency fund, then it might be time to start closing them down. Sometimes, consumers will see a temporary negative effect on their credit score but, in the end, it won’t matter, and closing the accounts is what should happen to ensure you don’t continue to accumulate debt.
If you feel that you aren’t ready to fly solo with no credit cards, perhaps consider keeping one account open for emergencies. However, be careful. Don’t carry it with you; rather, put it away in a safe place. You don’t want to be tempted to use it when you shouldn’t.
6. Pay more on your balances each month
To make any meaningful progress on paying down your credit card balances, you need to pay more than the minimum payments. Paying only minimum payments is a scheme, created by credit card companies, to get the maximum amount of interest out of customers and make sure that the money yields a nice return on investment. When paying only minimums, consumers will pay enormous amounts of interest and will pay forever to pay off even a modest balance.
7. Watch your spending on food and entertainment
Food and entertainment expenditures can take up a lot of a family’s budget if not carefully monitored. In addition, if managed well, they can represent an opportunity for a large amount of savings.
There are many ways families can reduce their food and entertainment budget and still enjoy great family time. By planning meals at home and shopping accordingly, families can cut back on dining-out dollars, which can wreak havoc on a family’s budget. It’s so much more economical to dine at home than it is to eat out at restaurants. In addition, meal planning keeps consumers from overspending on food at the grocery store and wasting money on unnecessary items such as junk food and other impulse buys.
One of the best ways to save money on food expenditures is to pack lunches for the entire family. Not only are homemade lunches generally more healthful, they’re also much more cost effective. If you do choose to dine out, make sure it’s the exception and not the rule. You can save money dining out by choosing restaurants that cater to families and offer good value. Many times, you can find restaurants that have specials where children dine for free or at deeply discounted prices.
When considering your entertainment options, don’t overlook community events that are fun and engaging but also very economical. Festivals, street fairs, and movies in the park offer families a lot of bang for their buck. In addition, they create a chance for families to spend more quality time together.
8. Buy used/sell used
Don’t get caught up in buying everything new. Sometimes, the better deal is to shop around and find the item slightly used. If you can find what you want in a consignment shop, on an online auction site, or from a friend who is looking to sell, you’ll save an incredible amount of money.
Consider this especially when you’re looking to buy big-ticket items such as furniture or appliances.
Additionally, consider selling items of value that you’re no longer using. Take the extra cash and pay down your credit card balances.
9. Use your tax refund to pay down debt
Since tax season is around the corner, this is a good option for those getting a refund back from the Federal Government. Rather than just spend your refund on frivolous items, put it directly toward paying down your debt.
10. Most importantly, get a plan together
Solving your debt problem will most likely take a varied approach. The best thing you can do for yourself is take all these ideas and incorporate them into your plan to reduce your debt.
If you’re not current on your payments, your situation is much direr. Do everything you can in order to catch up. This will give you a lot more options and will guard your credit from severe damage.
Even if you feel that your situation is hopeless, don’t file for bankruptcy! There are many options still available to you. For instance, you can check out working with a debt settlement company such as National Debt Relief. Debt relief companies work with consumers to help them communicate with their creditors, set up a plan, and get their debt settled. Don’t wait, though. If your problem is serious, time is not on your side.