1. Reality Check
The first step to solving a problem is admitting that you even have one. Are you struggling just to make the minimum payments? How high is your debt to income ratio? All important questions in determining your financial position. I know in my darkest days of debt I lived in denial, refused to look at the mail or answer my phone when numbers I didn’t know called me. I still remember getting unknown phone calls and getting a sick feeling in the pit of my stomach. It was a horrible time but hiding my head in the sand didn’t solve anything, it actually made things worse.
So what do you need? You’re going to need some pen and paper and the latest bills or you can write this up on your computer. Either way you’re going to need to…
- List out all your debts
- Total balances of each
- Minimum payment of each
- Interest rate of each
Once you have all the information in front of you it’s important to realize all debts, in fact all expenses, are not created equally. There is a priority to expenses that we call a Hierarchy Of Financial Needs which basically means there is an order to the way you pay your bills. You need to first focus on your survival expenses like food, water, shelter, gas and electricity. Then you have the earning money expenses like your transportation to get to work – car, gas, bus, tolls, etc… Lastly you have your debts.
When it comes to your debts you want to organize them by the order in which you need to pay them off. Mathematically the smartest way to pay these off is by focusing all your resources on the highest interest rate debt and paying that down first. The exception to this rule would be if you have a some debts with really low balances, say less than $500, in which case you should pay those down first. Not only does it get these little debts out-of-the-way quickly but there is a definitive mental benefit to being able to see yourself making progress right away.
One option that is to try and contact the credit card companies and negotiate a repayment plan or a lowering of the interest rate or even of the minimum payment. A warning though it’s scary, frustrating and nerve-wracking trying to haggle and negotiate with the credit card companies. Persistence is key, if you get a “no” then call back later and talk to somebody else hopefully you will have better luck.
4. Cut Back On Spending
This one’s tough, no one likes belt-tightening but it’s essential to getting yourself on financial track. Like most of the essential things in life the solution is simple but NOT easy. Ask yourself, “Do I really need this or do I want this?” In all honesty the answers will shock you over the long haul; it’s scary to see how many want items we buy. As an entrepreneur one of the keys I know, it’s Marketing 101, people buy on wants not on needs. Marketers know this and that is why they focus on selling to your wants, advertising it is a multi-billion dollar industry and that is why it is so hard to cut out spending. Your rational logical mind tells you, “I shouldn’t spend more money” or “I really can’t afford that” but for so many of us the emotional “I want it” overpowers it all.
This is why cutting back on your spending is so difficult, you’re fighting a battle between your heart and your mind.
The solution requires being able to get your mind and heart on the same side. How to do that is going to take some soul-searching and will be unique to every person.
5. Check Out Balance Transfers
I added this as a last resort because it certainly isn’t really a first choice or recommended except in dire circumstances. First of all the goal is to get out of debt not simply move it around. A balance transfer to a lower interest rate lender can help lower the amount you will pay in debt as well as lower your minimum monthly payment. This can definitely give you a little breathing room if your budget is strapped and you routinely face more month at the end of your paycheck.
It’s important to keep in mind that when you do a balance transfer they will typically tack on a 3-4% processing fee, so make sure you factor that in when determining if the card your transferring to really is a lower interest rate.