In Financial Trouble? How to Get Out Fast and Free

by Neal Frankle, CFP ®

If you’re in financial trouble , it’s easy to freak out. But you don’t have to. You really don’t. This applies even if you lost your job and can’t pay your mortgage or need IRS tax debt relief. I say this because getting all nervous about it isn’t going to help you find a solution. Instead, here’s a checklist that will get you to a solution much faster:

1. Pretend you are stupid.

You might think you know what the cause of the problem is…but you might be wrong. If so, you’ll waste valuable time and energy without solving the real problem. Go back to square one. Really examine everything…including what YOU’VE done to end up here.

Understand the cause. You might think your problem is that you need to improve you credit score but the real problem is you spend too much. On the other hand, let’s say your income is low because you didn’t finish college. You might think you spend too much, but that could also be wrong. You might be the Queen of Frugality. Maybe all you need is to focus on finding a good job that withough having a degree from college.

Before you do anything, you have to be clear on what got you into the mess you’re in.

 

financial trouble

 

I like to ask people how long they’ve carried debt. If the answer is “for a long long time” I know the problem is overspending. They live beyond their means. If they suddenly got into trouble, it may have been caused by some medical emergency, sudden loss of a job or other unforeseen catastrophe. Believe it or not, these problems are easier to fix because they aren’t caused by a deep-seated personality trait. But when someone is a chronic over-spender, it’s often in their blood. When that’s the case, it’s a tougher nut to crack.

2. It’s all in the family.

The next step is to have everyone in the family admit there is a problem and identify what the problem is. Without a concerted effort by everyone in the family, you’re headed for trouble with a capital “T.”

This is especially the case when the adults are at odds. Believe it or not, if you aren’t on the same page with your spouse when it comes to this, it makes the most sense to spend more money and see a marriage and family therapist before going any further. If you don’t, you’ll be spinning your wheels and your family will remain in emotional turmoil. I’m not joking. Use your credit card if you have to (you’ll never hear me say that again), but get to a good therapist and get agreement on the issue. It’s a lot cheaper than divorce.

3. Devise a plan.

Now that you have agreement, you can take real action. Forget about your debt for a moment. Are you spending more than you bring in on average? If that’s the case, immediate action is required. Figure out what the shortfall is and do whatever it takes to cut your spending. Your spending should be no greater than 80% of your income no matter what. Get out the big scissors and make cuts across the board.

On top of the spending issue, you might need to get out of debt. If so, there are a number of steps you can take. Calculate how much money you can apply towards that debt and then estimate how long it will take to pay it off. You need to know how long it’s going to take to get out of debt and be OK with that. This way you won’t become impatient and make mistakes.

Can you find more areas to cut in your budget? Can you find alternatives to refinance that debt and find lower-cost credit card alternatives? Can you find more work? What can you do to speed up the process of clearing up your debt? I know you can come up with a lot of ideas.

4. Execute the plan.

Having realized the nature of the problem and (if you have debt) how long it will take you to resolve it, what are the action steps you are going to take and when are you going to take those steps? Write down each step and the date you’ll implement those steps. You’re going to look for a new job…when? You’re going to cancel the magazine subscription? When are you going to make those calls? You’re going to look for credit card alternatives? When?

5. Set up a budget.

No matter what your financial situation is, you have to track spending. I have written about the importance of this step many times before. Rather than forcing me to repeat myself you can either read my review of You Need A Budget or you can just trust me. You have got to have a method by which you track your spending. You need to set up budgeted amounts and track how your actual spending tracks with those budgets. And your entire family has to be part of this process. You must discuss the budget weekly or monthly.

If you don’t do this, you’re like a ship that leaves New York headed for England – but without any navigation equipment. Do you want to be on that ship? Of course not. Get a system in place to track your budget.

(By the way…did you notice that setting up a budget was step #5? If you want extra points, can you tell me why it wasn’t the first step?)

6. Commit to another human being.

This step helps reinforce all the previous steps. There is something magical about committing to another human being that pushes us to go further than we thought possible. In some ways, it’s a bit sad that it’s more important to show up for others than for ourselves, but that’s just the way it works. Take advantage of this phenomenon by calling someone you know, trust and respect. Tell her about your plan and when you’re going to implement. Call her every month and tell her how it’s going. Call weekly or daily if that works better for you.

7. Also…

Once you get out of trouble, remember: there is more to do. Make sure you create your financial plan. Among other things, it will tell you how much life insurance you need and make sure you get the right kind of insurance. The point is…be proactive. Once you’re out of the hole, start building your financial future.

Have you ever been in financial trouble? What did you do to get out of it? Are there other steps we need to be aware of?

 

photo credit by Flikr, Timielee5359

 

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