This is a guest post from Scott Crawford. Scott is the CEO of DebtGoal.com, a do-it-yourself system for lowering your interest costs and getting out of debt. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to their debt finances.
How should I deal with my debt?
I’m often asked what is the most important step in dealing with debt and the answer I invariably give is to start by getting visibility to what’s happening with your finances. About a year ago I had a conversation with a friend who told me that she and her husband had just been to see a bankruptcy attorney and that he recommended that they declare bankruptcy. I had to fight to concentrate over the pounding of alarm bells in the back of my mind (warning: bankruptcy attorneys are marketers and sellers of a service, not providers of unbiased and free advice–of course they’re going to tell you to declare bankruptcy) but as we started to talk through their situation, I realized that it might not be as bad as they thought. It turned out to be fairly bad: they had $120K in credit card debt, another $70-80K in student debt and a mortgage, home equity loan, and some medical debt. But the good news for them was that they could afford to make minimum payments and that just by sticking to a basic debt snowball they could get out of debt (including the mortgage) in 9 years. They were encouraged and went away, vowing to stick to a plan.
Fast forward 11 months to about 2 weeks ago and I get the same call from my friend who tells me that her husband wants to go back to the bankruptcy attorney. She agrees to go to accommodate him, but in the back of her mind she’s not sure if they need to declare bankruptcy. Not surprisingly, the attorney tells them to declare bankruptcy. But my friend says that she would like to take over the finances from her husband and try to manage it for 4 months to see if they can make progress. She calls back a few days later, somewhat flabbergasted: "do you know how many credit cards we have?" she asks. Based on what I remember from the previous year, I guess twelve. "Nope," she responds, "We have sixteen."
She goes on to tell me that she can’t remember how many they had a year earlier when they started the process (I checked and it was eleven), but she’s surprised that they actually have more credit cards and more debt than a year ago when they committed to making progress.
Take an honest look at your finances
You can’t make progress if your finances are always stuck in a dark corner of the basement. You need to try to drag them out into the healthy sunshine where you can see what’s going on. Here are a few basic tips I always give people:
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Create a simple form or a spreadsheet where you write down your statement balance each month and add them up at the end. Compare to previous months to see you trajectory.
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Commit to not spending on your credit cards and then do the same tracking exercise with your card spending. Write down your total purchases for each month from each statement to make sure that you’re not slipping.
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Create a structure that allows you to succeed. If you’re on a debt snowball plan, set up separate bank account for debt payments that you fund directly from your paycheck. Then have a primary checking account that you use for all day-to-day spending which will automatically control your spending as long as you’re not charging on your accounts. As an added bonus, if you do it through a bank like Wells Fargo, you can then see the categorization of all your discretionary spending.
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Post your month-end results on the fridge and discuss with your spouse or family. Make sure you’re headed in the right direction and if you have a slip that you understand why.
At DebtGoal.com, we believe that seeing the right information about your finances is over half the battle. If you can see it you can fight it, but it’s very hard to fight an enemy you can’t see. And like a bad fungus, debt and bad financial habits don’t usually tolerate sunlight very well.
My friend is re-committing herself and her family to making positive progress. I have confidence that she will finally start to make some progress.
Related posts:
- Personal Responsibility for your finances
- Government and Finances
- Don’t fall off the wagon with your finances
- 4 Steps to Get Your Finances Under Control
- Marriage finances: joint vs. separate checking accounts
- Jenny Craig for your Debt
- $75 user participation survey for those in debt
- Money Mistake #3 – Not paying attention to interest rates
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The most important thing first is knowing that you are in debt and have to change your ways. Once you get to that point it’s all about sitting down, looking at the numbers and adjusting your spending. There are always areas to cut on spending where you can save. A little each month adds up and everything you can put to help get out of credit card debt must be done. I didn’t know individuals could declare bankruptcy like that, to be honest it doesn’t sound like a good idea.
Craig
http://www.budgetpulse.com
Yikes. I wish them the best. I hope they don’t declare bankruptcy, because it won’t actually fix their problems long-term.
Yes, they have a ton of debt. But they also have a spending and budgeting problem, and unless THAT is solved, then they could be in the same situation in just a few years.