Digging out of Debt

Create a debt-reduction plan and see it through.

If you’re drowning in debt, it can seem impossible that you’ll ever be able to get out—but you can. It takes commitment and diligence, but you can create a debt-reduction plan and get out of debt one step at a time.

Take Inventory

It’s tempting to take the ostrich approach and stick your head in the sand, but it won’t get you anywhere. Believe it or not, not knowing is worse than knowing. Before you can solve your debt problem, you have to get a clear picture of your finances. So, take a deep breath, gather your financial records, and dig in. You may feel worse at first, but you’ll feel better in the long run. Here’s what you’ll need:

  • Expenses: If you don’t already have one, create a list of all of your monthly expenses. You can use a financial planning worksheet, software, or a simple notepad. List everything from rent to groceries to insurance to gym memberships and more. (Note: if you have been tracking your finances, this should be easy. If you haven’t been, now is a good time to start.)
  • Bills: Gather all of your bills. This includes credit card statements, loan documents, medical bills, and more.
  • Asset information: Create a list of all of your assets. This doesn’t mean you have to start selling things off, but it’s helpful to get an idea of how much equity you have. Sometimes selling or liquidating things is a debt solution and you need to know what you have.
  • Income: Create a list of all monthly household income sources and discern your average monthly income.

Once you’ve gathered all of your financial information, create a “big picture” list with three columns: what you have, what you owe, what your monthly income is.

Create a Bare Bones Debt Budget

A debt budget is different from a regular budget. A debt budget is a bare bones budget that makes getting out of debt the number one priority.

  • Start with monthly expenses: Start by creating a budget that lists all of your current monthly expenses.
  • Eliminate expenses: Review your monthly expenses and see where you can trim excess spending. Go bare bones. Get really clear about the difference between wants and needs. You want cable TV; you need a roof over your head. Remember, this isn’t forever; this is just a means to an end. Can you forego your gym membership, satellite television, and weekly restaurant visits in order to dig out of debt?
  • Add debt expenses: Every unnecessary expense you eliminate from your budget paves the way for more money to be applied to debt. Build debt payments into your monthly budget. Make them non-negotiable.

Contact Creditors

If you are drowning in debt and cannot realistically pay it down based on your current income level, contact creditors to set up payment plans. Often, creditors can reduce monthly payments to more manageable levels. You won’t know until you ask.

Reform Spending Habits

Sometimes debt is the result of unexpected emergency medical procedures or loss of employment; however, often it is the result of poor spending habits. Forgive yourself your past bad habits and make a commitment to developing new habits. One of the most common spending mistakes people make is eating out too often. It is far cheaper (and healthier) to eat at home. Get in the habit of making a grocery list and shopping for the week. Pack a lunch instead of going out to lunch.

Look for Creative Debt-Reduction Solutions

You can’t create money out of thin air…or can you? You need money, so now is the time to get creative:

  • Sell things: Do you have any big-ticket items you’re not using or could live without? Now is the time to purge the garage and list those items on Craigslist or Ebay. Every little bit helps. The bonus is that you’ll clear your clutter in the process.
  • Adjust withholdings: Analyze your monthly income statements and consider altering the number of exemptions claimed, automatic deductions, 401(k) contributions, and more.
  • Get a family loan: This is not always the best solution and depends on your family relationships. If possible, consider a low-interest or interest-free loan from a family member. You’ll pay off debt more quickly and save an arm and a leg in interest payments.
  • Increase income: You may feel completely extended already, but if you can find even 5-10 extra hours a week, consider taking on a second job. Yes, you will be exhausted and yes, you will get out of debt faster. If you’ve cut the expense of cable TV, take the time you would have spent on the couch watching television and instead spend it working at a second job.
  • Start bartering: Find creative ways to cut expenses. Can you cut your daycare bill by organizing a childcare trade with another mom? Perhaps you can find ways to share expenses and services within your community.

Create an Emergency Fund

Even while you’re trying to get out of debt, it’s important to apply money to your emergency savings account. By having 3-6 months of expenses set aside, you may be able to avoid acquiring new debt in the future should an emergency arise. Once you have managed to dig yourself out of debt, take the money that was going to debt each month and apply it to savings.

Stick with It

It takes time, patience, and diligence to dig your way out of debt, but it can be done. How do you eat an elephant? One bite at a time. How do you get out of debt? One day at a time. Stick with it.