If you’re buried in debt, your situation is not hopeless. There are three steps you can take – beginning today – to get back on track.
1. Pow-Wow
Before doing anything – and I mean anything – get your family together to sit down and discuss the situation. My suggestion is to be completely transparent about how large the debts are and what led to the problem. Continue by explaining why being in debt is not acceptable.
Specifically, explain that when you owe other people money they usually charge high interest rates. That means you give away your money rather than save it and invest it to build a better future for the family. Debt is slavery. Debt surrenders your future. Debt stinks. You may understand this, but the rest of your family may not. Get everyone to understand this key concept. If you don’t, you’re going to struggle when it’s time to tighten the belt and it will be difficult to decide on how to stop spending money.
2. Intel
You must know exactly how much you need to cut. While this may seem like a daunting task, it’s really very simple. First, calculate what you bring home. That’s usually the easy part and something few people struggle with. But when it comes to spending, you can easily and quickly determine how much you spend without using software packages and programs.
Simply pull out your bank statements. Those statements tell you the exact total amount you withdrew from your account last month. You’ll see a “Total Withdrawals” figure on the statement. That’s the number you are looking for. For a more detailed explanation, see my post on “How To Control Spending In Five Minutes A Month.”
Now, take what you earn and subtract what you spend. If the result is a negative number, you have to cut that amount. Simple. For example, if you earn $5,000 a month but spend, on average, $6,000 a month, it’s easy to see that you need to cut at least $1,000 from your monthly spending.
Of course, my preference is to build in a “fudge factor” as well as earmark funds for savings, so ideally you’d want to cut much more than $1,000 in our example above. But Rome wasn’t built in a day. You didn’t get into debt overnight, so give yourself a break and take it easy. One day at a time.
Neal’s Notes: Couples who are in debt face unique challenges. If that describes you, be prepared to take extra measures.
3. Damage Control
You know what you do if you are in a ditch and want to get out? Stop digging. The same can be said for people who are buried in debt. Stop creating more debt.
How do you do that? One way is to find credit card alternatives with lower interest rates (we’ll get to that below). But the all-important step is to take drastic action to cut spending. That’s why the first step was to get everyone on board with the need to solve the problem. And the second step was to determine how big the problem is. Now, it’s show time.
You must ask everyone to be part of the solution. Because when it comes to debt, if you aren’t part of the solution you really are a big part of the problem. Make cuts across the board so everyone gets to participate in the solution.
Many people look at their budget and can’t see any possible way to reduce spending. I understand that. But I also know it’s not really true. Think about how you lived when you got your first job and what it cost you to live. You probably spent less than half of what you spend now. Were you any less happy at that time than you are today? Probably not.
I know you might have more responsibilities now, and you can’t ask your husband and three kids to move into the dorms with you. But when push comes to shove, given the alternatives, you’ll find cuts to make.
But do yourself a favor. Don’t think of these spending changes as diminishing your life. Think of the actions you and your family take as ways to increase your financial freedom – because that’s exactly what they are.
I met a couple in their late fifties not long ago. Due to a double whammy of Jane losing her job and Bill suffering a terrible medical illness, their income dropped by over 65%. What did they do? Outside of cancelling all discretionary activities, dining out and recreation, the biggest change they made was leasing out their house. They were stuck in a large home with a large mortgage. In fact, their payments were over $4,000 a month. They were able to lease the home out for the same payment they were making. They then leased a small apartment for $1,400 a month. The kids had to change schools. Those schools were still good and safe but their lives were interrupted. No question about it.
But the family had little choice. They did what they had to do. I applaud them for taking drastic action to maintain financial stability.
Bottom line? Get commitment from everyone in your family. Once they understand the extent of the issue they’ll line up to pitch in towards the solutions you put forward.
Have you ever been faced with financial meltdowns? How far were you willing to go to get back on track?
Other resources:
Chapter 7 vs. Chapter 13 Bankruptcy
Outside resources:
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