Tips To Manage Your Debt

“Live within your means”, “Spend less than you earn”, “Pay yourself first”, “Neither a borrower nor a lender be . . .” We’ve all heard this financial advice and if you are 18 years old with no bills and no responsibilities and you’re trying to figure out how to make it in this world – these are super principles to live by.

But, come on, you didn’t search for “Tips To Manage Your Debt” because you were trying to figure out how best to spend your first paycheck, now did you? If you’re reading this article, you probably already have debt – lots of it – and you’re wondering what you’re going to do about it.

Time For a Debt Plan

What you need is a plan to stop the madness that hits you every time you open the mailbox and see a new stack of bills arriving. This article is written with your situation in mind – and you’ll find many other helpful ideas throughout this website too. Rest assured, you’re not the only person to ever be in your situation. It may have been reckless spending and foolish choices that got you here, or it could have been something completely out of your control.

Either way, it doesn’t feel good, but dwelling on the past is NOT helpful. You are where you’re at today. The past is done. Today is the only day you can do anything to improve your situation. You can’t undo the past. So don’t try. Decide to start today to make things better, and then use some of the following ideas to do that.

Step 1: Assess Where You’re At

Have you been able to juggle the bills successfully up to this point without ruining your credit? Are you using cash advances and balance transfers to keep making the minimum payments on time – not getting behind on your car or house payment? If so, congratulations! That is a real skill and you should be proud of yourself. Of course, these are not solutions to your problem, but these things buy you time to create a solution.

Or, have you slipped into the nightmare stage of never-ending collection of phone calls and the threatening notices from lawyers? If you’re at this stage, you need professional help. Debt management counseling and repayment plans, maybe even bankruptcy, are options.

Once you’ve gotten to the point where your credit is ruined, your interest rates are 32% on your credit cards, most of your accounts are in collection, and you’re so far behind on your house payment that you can’t catch up – that’s when a professional is needed to help you stop the bleeding.

Step 2: Assess Your Resources

Do you have unused credit available? You’re not going to spend yourself out of a hole, but you may be able to redistribute your credit in such a way as to manage your cash flow – this will buy you some more time. Do you have equity in your home you can access? Refinancing, even at a higher interest rate, can allow you to pay off many of your shorter-term accounts and get your cash flow situation under control.

Do you have assets you can sell or retirement money you can get at – even if you have to pay a penalty? Many 401K plans have loan provisions that let you avoid the tax penalties. And I’m aware that the big financial gurus all advise against tapping your retirement accounts, but they have money and are paying their bills. If tapping your 401K lets you avoid financial ruin – it is well worth it. (See Universal Default articles)

Step 3: Kill Off Your Obligations

No, I’m not talking about the ex-spouse here. In order to gain control over your finances, you need to kill off – meaning completely eliminate – your debt obligations, one at a time. The more monthly payments you have going out each month, the more chances there is that you will miss payments, ruin your credit, and have your house of cards (credit cards and house) come crumbling down.

Consolidating your debt, using your home’s equity or another means of debt consolidation, is one way to do this. If your mortgage payment suddenly goes up $400 a month, but you’re able to kill off several accounts that you were making monthly payments of $800 a month – this is worth it. Even if the monthly payment savings isn’t all that much – just having fewer payments will help you. Remember too, credit card interest isn’t tax deductible – mortgage interest is.

Or maybe you have a $500 a month car payment with, say, $3,000 left before it is paid off. Rather than waiting for 6 months, at $500 a month, to pay it off, consider using one of them convenience checks from your credit card and paying off the bill. Again, even if you have a teaser 2.9% interest rate on the car and the interest on the credit card is much higher – this will still free up cash flow. That $500 car payment is dead. Your credit card payment maybe went up $100 a month when you shifted the money over – so you have $400 less monthly obligation. $400 to apply towards something else.

And don’t pay a little extra towards each bill each month. Your goal is to kill accounts. Pay the absolute minimum on each bill each month, and then focus your attention towards one of these bills until you kill it. Then focus on the next one. Which bill should you focus on? Check out our simple “S.P.F. Formula” to help you decide. Or just pick the smallest account you have and kill it off.

You’ll get a huge sense of accomplishment and a burst of hope each time you kill an account – it’ll help you build momentum. Oh, and DON’T CLOSE THE ACCOUNT WHEN YOU PAY IT OFF! This is extremely important because it can ruin your credit if you do. Just pay the account off – cut up the card if you want to – just don’t call the company and close the account.