William Shakespeare had some wise advice regarding debt: “Neither a borrower nor a lender be; For loan oft loses both itself and friend”. Apparently most people in America aren’t listening to him, because by 2008, total household debt totaled $13.8 trillion.
And in 2009, unfortunately, we’re seeing the end results of that debt-fueled lifestyle as foreclosures and repossessions sweep through the land.
This isn’t to say that all debt is bad; for many people, borrowing money is the only way to buy a house, which comes with significant tax advantages and can be a good long-term investment.
However, many people today are finding that they have borrowed too much money to pay for luxury items and now they are trapped in a nightmarish situation where they’re dodging creditor’s calls, their debt is rising every month as they get socked with late fees, their credit is ruined, and they see no way out.
Here is the good news: you CAN get out of debt. Here’s the bad news: you have to make immediate, significant changes to your lifestyle to do so. You can’t keep doing exactly what you’ve been doing and expect things to get better.
The first thing that you need to do is gather up all of your bills and make a list of living expenses.
The cable TV bill doesn’t count as a living expense. Restaurant outings don’t count as a living expense. We’re talking grocery bills, electricity, heating bill, fuel costs to drive to work, clothing, etc. If you are in debt and want to pay it off you are going to have to cut back on all luxury expenses until you are out of debt – or odds are you will never get out of debt.
Think about this – if your credit card company is hitting you with fees every month…and charging you 28 percent interest because of your lousy credit…every single luxury purchase that you make costs you 28 percent more than its actual price – because you could have used that money to pay down your debt. And if you are being charged 28 percent interest, every dollar that you owe is really $1.28.
Next, you have to write down every single debt that you owe. Yes, it’s going to be painful, but again, it has to be done. Now write down the amount of money that you take in every month.
Let’s say you take in $2000 a month. You have pared down your living expenses to the bare minimum and made the commitment to give up luxury spending until you have paid down your debt to the point where you take in enough money every month to pay your expenses, put money in savings, and make payments towards your debt.
So let’s say your bare minimum living expenses are $1000, and you have $1500 in payments that you need to make to your debtors every month. You can’t manufacture an extra $500 a month. Yes, you can start selling things on eBay or go get a part time job, and if you are in debt you certainly should consider how to raise extra cash, but you need to budget for the amount that you currently earn.
You now need to call up all of your debtors and renegotiate. These days, debtors recognize that getting some money every month is better than getting nothing, and they are much more open to negotiation. So you need to figure out exactly how much you can afford to give each debtor every month, and get them to agree to it.
When you call, be polite, explain your situation and why you are behind in your payments, and tell them how much you can afford to pay.
You will be surprised at how receptive most lending institutions are.
And you will feel a huge weight off your shoulders as you begin the journey to paying off your debts and becoming debt free.
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