Living with Debt and Its Solution

Written by A Guest Speaker on May 21st, 2008

Living with Debt & Its Solution
By Erik Wyche

Having been down the road of debt, which ended up in me filing for bankruptcy, I can provide some insights into preventing you from reaching such circumstances. The first hurdle to overcome is being able to acknowledge the problem. If you are in debt, you’re not alone. The average family owes upwards of $9,900 just on credit cards. If your monthly expenses, including debt, exceed 65 percent of your income, you should be very aware of what’s going on and take a hard look at your finances. The best advice I can give is to not ignore the problem. The bills are not going away so you must face the problem and solve it.

An issue I had was thinking about the daunting task of digging myself out of this hole. To me it seemed like a process that was going to take years to fix. Advice that I give now is that you might not be able to become debt free in 30 days but stop spending for 30 days. Stay away from the plasma TV that is being offered interest free for 12 months and do not even bother going to the mall.

In those 30 days you should be looking to see if you could get your mortgage at a more favorable rate. This will lower your monthly payment to free up some cash to tackle other debts. Credit cards should be consolidated if possible or at least transferred to another card of yours with the lower interest rate. One mistake people make though is that they close the accounts with $0 balances. You should keep these accounts open. Closing them can actually hurt your FICO score. On the flip side, do not go out and open a bunch of accounts either, as this will also hurt your FICO score. If all your credit cards currently have high interest rates just pick up the phone and give them a call to see if you can get lowered. You will be amazed at how cooperative they can be.

Once you have freed up some cash do not fall into the trap that now you can go and spend. This is not a shift-debt strategy but a zero debt strategy.

Once you get some breathing room, something I could not get accomplished, you need to figure out a long-term plan. This means you need to come up with a budget. The word most Americans do not comprehend that entirely well. How well do you know what you spend? Most cannot answer that question with any certainty. Grab a piece of paper and write down what income you do bring in and expenses. This will give you a brutally honest picture of you finances.

Once you have a budget stick with it. Pay down you debt and be disciplined. Make sure you understand the order in which the debts should be paid. All secured loans should be top priority. You have put collateral up and if you do not want it taken from you these debts must be paid first. Do not skip credit cards but they should come after secured loans. Credit cards also have an order in which they should be paid. The cards with the highest interest rate are first to go. Remember, stick to your budget.

A key to making your budget work is having enough money. Here are some tips for holding onto you cash:

Brown-bag it to work
If you have a 30-year fixed-rate mortgage, making a payment every three weeks instead of every month can drastically reduce the length of your loan.
Learn to love leftovers
Save on postage by paying your bills online
Bundle you media services
Wash your own car
If you are going to be out the room for more than 5 minutes, turn off the lights
Use your debit card for purchases instead of your credit card.
Go grocery shopping with a list and stick to it.
Shop out of season when prices are lower
Bike or walk instead of driving when possible
Buy an artificial Christmas tree
Stop smoking

Of course there are many more ways to save money but this will give you an idea of what you need to do.

Finally, never give up. You don’t want to fall back into the mess you were in. There are always going to be ups and downs in the economy, but if you follow the simple money management rules you will succeed. I know I have learned my lesson the hard way but I now follow these rules and I am able to keep my head above water. You can to.