Digging Out of Debt: A Basic Survival Guide
If you're one of the countless Americans who is buried in debt, you're not alone. But there are ways you can dig your way out of debt and reclaim your finances - and your life.
Being buried in debt not only has a negative effect on your bank account, it also leads to a constant feeling of stress and is detrimental to your overall well-being. It probably took you awhile to get to this point, and it will probably take you some time to get out of it - but it's well worth it, both financially and emotionally.
Work Your Way Out of the Hole
It's not instant and it's not glamorous, but working your way out of debt can be very gratifying. There are basically three steps.
- First and foremost, stop acquiring new debt. It seems obvious, but you simply must stop spending money you don't have. Stop financing things. Stop using credit. Get rid of your credit cards - if you don't, it will be too easy to use them and you'll continue to be trapped in the debt cycle. But beware: you can destroy your cards, but do not cancel them if they have a balance. Why? If you close a credit card that has a balance, your interest rate will probably raise significantly. Wait to cancel cards until they have a zero balance. And speaking of interest rates, contact your credit card companies to negotiate lower interest rates. Some companies won't budge, but there are many others that will.
- Next, you need to create an emergency fund. It may take some time, but it needs to be done - and do it as quickly as you can. Why? You need a way to cope with unexpected expenses. And since you're no longer using your credit cards (right?), you need to have some cash for emergencies. This fund is not for entertainment or new shoes or vacations. It is strictly for emergencies such as car or home repairs. It's advisable to save about $1000, and keep it someplace where you can get to it, but not easily, such as an online bank.
- Once you've established an emergency fund, it's time to tackle your debt. Go ahead - give it all you've got. Many experts suggest paying off your high interest debts first, but let's face it -we all want instant gratification. That being the case, pay off the debt with the lowest balance first. You'll pay it off faster and be more motivated to continue. Here's how it will work:
- Pay the minimum payment on all of your debts, except for the one with the lowest balance.
- Add as much extra (on top of the minimum payment) as you can each month toward the lowest balance debt.
- When that debt is paid off, use the amount you were paying toward it and apply it toward the next lowest balance (in addition to the minimum payment due).
This 'snowball' method takes time and dedication, but it doesn't take long to start seeing results. If you stick with it, it will work. And the important thing is to not put it off a day longer - start now.
Consolidate
If you have debts you'd like to pay down, but can't seem to get ahead due to high interest rates, you may want to do a little research on debt consolidation loans.
A debt consolidation loan can save you from paying high monthly bills and high interest rates while helping you take control of your existing debts. Another benefit is that instead of making payments to multiple creditors each month, you make just one payment to your lender. And of course, there's the convenience of having to deal with only one creditor instead of many.
Debt consolidation loans are not without pitfalls. One of the most common problems is that people find themselves with extra money every month, and before they know it, they're overspending and once again find themselves in a financial mess. It would be much better to apply a large part of that extra money toward your consolidation loan payment - you'll pay less interest and be that much closer to becoming debt-free.
Another issue with debt consolidation loans is that they are really short-term solutions to financial mismanagement. In order to make it work for you long-term, you have to really change your spending habits, not just now, but as a way of life.
Get Counseling
Consumer credit counseling is professional counseling that provides you with financial education and debt counseling tailored to your situation. The first step is to meet with a credit counselor, who will take stock of your debt level and work out a payment plan based on your income. Some credit counselors can negotiate lower interest rates and set up a debt management plan with your creditors. If your creditors agree to the proposed debt management plan, you begin making payments to the credit counseling agency. The credit counselor distributes payment to each of your creditors in accordance with the terms of the plan. In most instances, your credit accounts are closed to future charges as long as you are on the debt management plan.
Bankruptcy
Bankruptcy is a legal procedure that will destroy your credit rating, and it should only be used if there are no other options left. Bankruptcy eliminates the legal obligation to pay most or all of your debts, which is referred to as a 'discharge' of debts. However, it does not make all of your financial problems go away. Besides destroying your credit, you may have to give up your car, your home or part of your equity in it, your savings, or anything else of value, depending on the laws in your state. Bankruptcy also does not eliminate the obligations of child support, alimony, most student loans, liabilities from drunk driving and criminal fees.
If you do decide that filing for bankruptcy is your only option, be sure you get an attorney who specializes in such cases.
Getting out of debt is a daunting task, but it's not impossible. Take a realistic look at your options before deciding which method will work for you.
