Do you feel like you are drowning in debt? The global financial crisis has placed greater financial pressure on so many people feel overwhelmed by their level of debt and financial commitments. It is also easy to let emotion takeover from good judgement, however it is more important than ever to take a deep breath and think things through before acting.
Planning is the key and the following five steps will help you on your way to becoming debt free:
Step 1 – Acknowledge the problem
Debt is not going to go away. Lenders take a dim view when you are late with your repayments and ignore their letters or phone calls. Talk to your lenders as soon as possible. This provides the greatest scope and flexibility in formulating a rescue plan. It may also be helpful to talk to a financial counsellor or a debt settlement agency such as My Debt Liberty.
Step 2 – Budget
No-one likes preparing a budget. It is a lot of work and willpower. Do it properly and you will end up with a blue print to free yourself of debt. The aim is simple; reduce your expenses to less than your income. Identify luxuries that can be cut back or eliminated. Be honest and build a contingency (say 10 percent) into your expenses to cover cost increases. There are plenty of resources available to help you prepare one. Review your budget regularly. Check your progress at the end of each pay period. Acknowledge the achievement of having money left over – reward yourself by splitting the surplus 50:50 (half off your debt or into savings, keep the other half to spoil yourself). Don’t be too hard on yourself if you exceed your budget. Just make sure you learn from it and try harder next pay period.
Step 3 – Consolidate
Credit cards and store accounts can be a trap for the unwary. Their flexibility and convenience tends to come at the price of high interest rates and charges. It is also easy to run up a debt in a short space of time. Consolidating your debts can help ease the pain and usually involves increasing your mortgage to take over these other debts at a lower rate of interest and repayments. Check with your lender for any charges that may apply. Adding to your mortgage provides the best repayment terms, however a word of warning. Doing this means that your home is at risk should you default.
Step 4 – More money
In Step 2, you trimmed back your expenses. This step looks at the other side of the equation. More income will help you to become debt free faster. Use your imagination here. It doesn’t have to be a second job. There could be scope for overtime or weekend work from your current employer. You could turn a art or craft hobby into extra cash through an exhibition or selling your work online. Writers can freelance and sites such as Helium provide income earning opportunities. Look around your home and consider a yard sale or selling online through a site such as Ebay. Pay at least half any income earned off your debt or put it away for a rainy day.
Step 5 – Humble pie
You can never eat too much of this. After the first four steps, recognize that this is a plan for the long haul and learn from your mistakes. Do not take on any additional debt unless your circumstances have significantly improved. Even then, sleep on any planned purchases and ask yourself if you really need it. If it is not essential, you can do without it. The same goes for credit cards and cell phones. You can live without them. If you must have a credit card for emergencies, keep the limit small (less than $500) and avoid temptation by leaving the card at home. Make sure you pay any balances in full by the statement due date. For cell phones, you don’t need to latest and greatest phone. Make do. Buy prepaid calls or capped plans to save money and avoid excessive bills.
Getting in over your head is easy to do and nothing to be ashamed of. It can happen to anyone at any time. Debt need not be an insurmountable problem, yet it is one that will take a lot of hard work and willpower to manage. By following the five steps above, you will be well on your way to regaining control of your finances and becoming debt free.
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