If you’re typical you probably hate being in debt. But here you are stuck in debt again. It seems like you just pulled yourself out of debt a few months ago and here you are back in debt again. How in the world did this happen and so quickly? And what could you do to solve this problem permanently so that you are never in debt again?
The first step
The first step in getting permanently out of debt is to define the source of the problem. While you may believe that the reason you’re in debt is a financial problem it’s not. It’s actually a personal problem that you just think of as a financial one. This is why you’re never able to permanently stay out of debt. In fact, treating debt as if it were a financial problem is about the same as trying to cure a cold by blowing your nose. You might be relieving a bothersome symptom but you’re not addressing the underlying cause.
A much larger problem
To put this another way, if you’re constantly falling into debt this is just a symptom of a much larger problem, which is that you’re addicted to an unsupportable lifestyle and self image and are spending more than you earn. If you are unwilling to address this root problem, the symptom will recur and you will be back in debt again.
Your personal life habits and attitudes are your debt’s real cause because this results in overspending. So, the answer is simple. You must spend less than you earn. There is just no way around this. Unfortunately, this answer is about the same as telling an overweight person that they need to eat less and exercise more. You probably already know this is what you need to do. The tough part is actually getting it done.
Slaying the monster that is debt
We understand that you want to get out of debt as quickly as possible but if you choose a superficial financial solution you just may end up as a repeat offender. For example, you could use debt consolidation, transfer all your debts to a 0% interest balance transfer card or take out a homeowner’s equity line of credit and pay off those debts. Or you could sell your house, your car or your boat. However, this does not address the root cause of your problem. You are trying to relieve the symptoms of your problem by looking only at financial issues.
What’s causing your debt?
You need to identify the ways that you spend more than you earn and then change these habits. This may mean tracking your spending for three or four weeks and then dividing it into categories so you can see exactly where your money is going. This will help you identify leaks or those areas where you’re spending too much. You need to plug all of those areas so that you will never go into debt again. This is not a very sexy solution but it will permanently solve the problem.
One day at a time
If you truly want to stay out of debt you must keep plugging those leaks until you are spending less than you earn. It may take you months or even years to do this. But that’s okay. The important thing is to not become overwhelmed. You might start by picking just one habit that produces debt and causes overspending and then correct it. When you’ve done this, pick another of those bad spending habits and go to work on it. Keep rinsing and repeating until you’ve completely stopped overspending. You will need to be persistent but if you are you will reach your goal.
Have realistic expectations
Understand that this is not a quick solution and that you need to set realistic expectations. What this is about is long-term financial management using permanent habits that will convert your debt into wealth. If you can learn to spend less than you earn, your debt issues should vanish forever. And that is a very good thing.
It’s also important that while you’re changing those overspending habits you are also working to eliminate your debts. Here are five steps that could help.
1. Evaluate your debts
Print out all of your credit reports and get all of your other financial statements so that you can see just where you stand. This can be scary but it’s critical. Take a piece of notepaper or a spreadsheet and put down your balances, interest rates and the monthly amounts due on each of your debts. Don’t forget your personal loans, credit cards, auto loans and any other debts. Be sure to also write down the annual fees you pay on those credit cards.
2. Determine what you can pay
Once you have all this information you need to determine how much you could pay on your debts. Add up all of your monthly earnings after taxes and then subtract your mortgage payment or rent from that amount. Next, subtract your other fixed monthly expenses such as payments on student loans, utilities, groceries and insurance. This will tell you what you have left to pay on your debts.
3. Create a plan
You now know your exact financial situation. So the next step is to make a plan for eliminating those debts. The way you do this is to subtract your monthly expenses and minimum debt payments from your monthly after-tax income. Use whatever money you have left over pay off the debt that has the highest interest rate and the highest balance. Continue to do this every month until you pay off the debt. Then start working on your debt that has the next highest balance/interest rate. This is the quickest way to reduce your debts. Make sure you do not charge anything on your credit cards during this time and be sure to make at least the minimum monthly payments on all your other debts. Try to also increase how much you pay on that debt with the highest interest/balance every month.
4. Contact your lenders
Step four in reducing your debt is to contact your lenders to see if you could get better terms. For example, you might be able to lower your interest rates or even get a reduced settlement on some of your debts. Most financial experts say that it’s easiest to negotiate debts that have already been charged off by the creditor or are already in collection. f you would like advice from an attorney on settling debts, watch this video …
5. Be sure to follow through
Do your best to meet your repayment goals every month. It’s not bad if the amount you put towards your target debt varies from month to month. Just try to put as much as possible consistently towards your debts. One good way to do this is to sign up for automatic payments.
Be sure to celebrate your success when you reach a major milestone. Do this and before you know it your debts will be a thing of the past.
Don’t forget to pay yourself
It’s important that while you’re paying off your debts and changing your spending habits that you don’t forget to pay yourself by putting money into savings. You need to have an emergency savings account so that when, and not if, you run into a financial emergency you will have the money to cover it. Otherwise, you’ll just be back in to debt again. If you have a tough time saving money, arrange to have automatic withdrawals from your checking account each payday with the money deposited into your savings account. The money you don’t see is money that’s harder to miss.