1. stop the bleeding
Start with the obvious: you can’t reduce debt if you keep adding more. So don’t let your debts continue to mount. One proven tactic is to literally put your credit cards on ice.
Graph of family debts organized according to age of the head of the family in 2016.
Take the cards out of your wallet or purse, put them in a glass of water, and put them in the freezer. The hassle of then removing this block of ice and thawing it can help you avoid using a credit card for an impulse purchase.
Do you do a lot of shopping online? Visit your favorite websites and delete the saved information about your credit card or other payment method. (No more one-click ordering!) Do not commit to a larger debt, such as a car payment, until you resolve your situation.
Then, analyze all your finances to see how much money goes out each month and how much comes in. To do this, sit down with a pad of paper or a blank document on your computer to add it all up.
“We’ve asked some people to print 12 months of bank statements to see where the money is going,” says David Bizé, a financial planner at First Allied Securities in Oklahoma City. The other option is to use a smartphone app like Mint to keep track of your expenses. Or use the low-tech option Opperman suggests: carry a small notebook and write down all purchases.
If your cash outflows exceed your inflows, now you see exactly how much of your expenses you need to cut — or how much additional income you need. Eating or drinking less often is an easy thing to start with. Some additional ideas:
- Stop giving money to your children. “People risk their own retirement by giving money to their adult children, covering their cell phone bills, or making their car or student loan payments,” says Opperman. “Some have adult children who live with them but do not contribute to the mortgage or other expenses. Show them that you are in debt and that you need to stick to a budget. “
- Select your expenses. Cancel the subscriptions you don’t need, whether it’s the gym you rarely go to or the 57 TV channels you never watch. Find out the costs of television, internet and telephone services, grouped and individual.
- Please buy carefully. “Pay attention,” says Karl Leonard Hicks, a planner at Leonard Financial Group in Riverside, California. “Don’t spend on things that don’t mean anything to you, or rationalize that something is necessary when you know it isn’t.” Don’t even look at the windows; “Just looking” can make you slip.
- Evaluate your insurance. Raising your auto and home insurance deductibles can dramatically lower your premiums. If you no longer need your life insurance, you may want to get the cash value of your life insurance policy or stop paying premiums on a term policy.
- Get a second job. Consider getting a short-term job to pay off debts, a part-time job whose salary is used only to pay the balances you owe.
2. Start a plan to reduce debt
Your goals to pay off debt are simple: you want to satisfy your creditors, minimize the interest you pay, and eliminate all debts, one by one.
Chart of the most common types of family debts
Keeping creditors happy is essential – once you have a loan default, trouble begins. You can lose a car to repossession or a home to foreclosure; You could also face legal consequences. Therefore, calculate the cash you will need each month to make the minimum payment of each of your debts. With that number, you can come up with a plan (using the tactics mentioned above) to have enough cash available each month to keep all your debts current.
Then focus on credit cards, as they have the highest interest rates – about 18% nationally, compared to about 5% for car loans. Experts often suggest one of two methods for reducing credit card debt when you have balances on more than one card:
- The Avalanche. Organise your credit card accounts by interest rate, from lowest to highest. Make only the minimum monthly payment on all cards except the one with the highest interest, and then pay as much as you can (in addition to the minimum) on the card with the highest rate.When you’re done paying it, repeat the process with the card that has the next highest rate, without reducing the total monthly dollars you spend to reduce debt. This strategy minimizes the interest you pay.
- The snow ball. Pay as much as you can on the card with the lowest balance and make the minimum payments on the others. When you’re done paying, repeat the process with the card with the next lowest balance — again, without reducing your total monthly payments to the cards. By attacking the smallest debt, you will decrease the time it will take you to get to that first feeling of satisfaction of reducing one of your balances to zero. “It’s a great incentive when you can start deleting accounts from your list.
3. work on the rest
If you have a car loan, take another look at your transportation needs. If your car is worth more than the loan, consider selling it and buying a used car that costs less with that profit. You will eliminate one of your monthly debt commitments and your insurance costs will also be reduced.
Medical Debt Chart as Percent of the United States Population
Do not sign a car lease, because it is a monthly payment that you cannot eliminate. “If you just go from one lease to the next,” says Opperman, “you’ll never own it.”
Lastly, consider simply getting rid of a car. With the increasing availability of apps to request hourly car rental and transportation service, this won’t necessarily be a sacrifice.
Now look at the health care debts you may have. Negotiate payment terms with vendors, informing them of the challenges you face. Clarify that you want to pay your debt, but that you need time.
Find out about hardship and charity health care offered by many hospitals. Health care debts rarely carry interest payments, but they are transferred to collection agencies fairly quickly. It’s much more difficult to get an account downgraded after it’s sent to collections, according to Mychal Eagleson, a financial planner at An Exceptional Life Financial in Indianapolis.
Next are student loans. If yours are backed by the federal government, you likely have a low interest rate. Make regular payments until you’ve paid off your higher-rate debts. Find out about loan consolidation, which can lower both your rate and your monthly payments.