Step 1: Discover the Size of the Problem
One of the things that people are in serious debt do is ignore it -they don't open the mail which brings the demands for final payment or shows them the 100's of dollars they are spending on credit card interest. They are in denial. You cannot fix any problem that you are in denial over. So if your debt is a a problem to you or your family you need to face it and see the size of the problem.You need to learn how to save money - not spend it!
* over due bills balances owing, payment terms, interest rates
* credit cards, store cards and similar - balances owing, minimum payments interest rates.
* car loans
* Hire Purchase payments
* house mortgage
* loans from friends and family
So this is the size of problem. Start a spreadsheet or piece of paper - for each loan take a line and note:
* the total debt
* the interest rate
* minimum payment terms and date e.g. 20th month
Step 2: Decide On your Goal
The total figure you came up with might be a little scary! Getting out of debt sounds like a good idea - but does that mean that all debt is bad? Not all debt is bad - borrowing to buying assets can be a good thing - you can out ahead financially if the asset you buy increases in value by more than the interest you pay on the loans.
Unfortunatley a lot of people are confused as to what is an asset - an asset is something that makes money. A rental property or a share portfolio are assets - they make money. A car, a widescreen TV, a gorgeous pair of Italian shoes are not assets - they not only don't make money but their value commonly drops significantly as soon as you buy them, worse some of them will cost you money to keep - such as the car. So do you want to be debt free? Consumer debt free? Once you are free of consumer debt your options to save and invest are wide open.
Step 3: Now prioritise your debts:
Top Priority Debts
Those that by not paying you are endangering your basic quality of life and your credit rating:
* your rent
* your utilities including power, telephone, water
* other utilities: broadband, pay TV,
* any bill that is stamped final demand or which has been forwarded to a debt collection agency
Lower Priority Debts
The other debts probably are in the second priority pile. These may include:
* Loans from families and friends
* credit card debt
* the mortgage on your home
The first group has to be paid and now. Contact your creditors, talk to them, agree a payment schedule and STICK TO IT.
Cancel the utilities that you don't really need: pay TV, broadband or downsize to the cheapest package. Check the fine print, you don't want to be hit with too many penalties for cancelling, but at the end of the day paying a termination fee will probably less than another 3 months of payments.
The lower priority debts. Most people seem to get into debt with credit cards, especially consumer debt. In general pay off the debts that you are paying the highest interest rate on first. However if you would like some instant gratification, take on some of the smaller outstanding amounts first so you can see clear progress.
Step 4: Analyse your Spending
You weren't born in debt! How did you get into debt - was in an unfortunate event: marriage split, loss of a job, illness. or has it just developed slowly over the months and years? If its the latter the issue is clearly that you are spending more than you earn. If your debt is the result of a one-off event then you still need to find some cash to pay of your debts and get your self back on a financially secure footing.
Buy a small notebook and carry it around for a week or 2 - write down everything you spend - everything, the paper, the milk, include anything you put on a credit or debit card too. It's OK I'm not saying do it for ever - just do it for a typical 2 week period- not when you're on holiday, not just before Christmas, just a typical 2 week period. Ideally get everyone in the household to do - or at least those that are contributing income! Now analyse your spending: you can use software or a spreadsheet or pen and paper.
Allocate your spending to some basic categories like:
* groceries
* lunch out
* takeaways
* cloths
* vehicle running expenses
* public transport
* hair dresser
* coffee out
* gym fees
Do you see a pattern - are you shocked at how much your take-away coffees are costing? Had you not realised what you were spending on lunch - whatever it is I guarantee you will find a number of items which shock you.
Step 5 Decide on an Action Plan
Reduce your regular spending
Budgeting is a bit like dieting - if you decide that from now on you are spending nothing on clothes, lunches, shoes, clothes or whatever else it is that you spend money on - it will last a week or maybe a month and then you'll have a blow out. Budgeting, just like dieting, has to be a lifestyle change, and it has to sustainable. If you live to own designer clothes then that's OK, but maybe you can limit your outfits to 3 a season rather than 5? Budgeting is the key to that age old question: how to get out of debt. If you love to go out on the town and drink and party - can you limit it to twice a month, rather than once a week? Yes you are going to have to make some changes but think about your goals and dreams not the spending reductions now!
Sell things
Can you sell stuff to pay of debt? EBay and other auction sites are wonderful places to get rid of your unwanted clothing, the glasses given as a present 5 years ago which you've never used. The toys the kids have grown out of. You not only make some cash you get to de-clutter your life as well!
Can you sell your car? It's not just the car loan that's costing you money but the insurance, taxes, registration, services and petrol! Can you reduce from a 3 car household to a 2 car household or a 2 car household to a 1 car household plus bike or scooter? You not only save money - you save the planet as well? Even if you need to keep the cars you have look at selling them paying off the loan and buying a car you can pay cash for - no more car loan ever that sounds good doesn't it?
Substitute cheaper items
Can you move to a cheaper apartment, if you rent?
Can you save at the supermarket by going to a cheaper one? Can you buy no-name brand items on the things that don't matter i.e. they all taste /act the same e.g. butter, sugar, flour, toothpaste, shampoo, toilet paper. If you like luxury foods then buy them on special, if you have the space and the cash buy items you use all the time in bulk if its cheaper. Take a calculator with you to do the sums!
Can you buy books or clothes at a second hand shop rather than new - you will probably find stuff you would never find new anyway!
Get a cheaper credit card.
Yes I am saying consider applying for another credit card! I am NOT saying use it to buy stuff on though! One of the reasons people have trouble getting out of credit card debt is the punative rates of interest charged and the low minimum payments. So increasing your payments will certainly help - but try to reduce your interest bill will help even more!
One of the reasons to protect your credit rating is that if you are still a good risk you may be able to find a new card which will allow you to transfer an outstanding balance for a low or reduced interest rate. Say you believe you can pay your card debt off in 6 months but you are currently paying 20% interest, if you can find a 0% or 5% credit transfer deal take it - and focus on reducing the debt to zero in the time frame. Whether you cut up the card or not depends on whether you can trust yourself not to get into debt again with it. Smart people don't fund their lifestyle with credit card debt - they use a credit card to reduce bank fees, earn frequent flyer points or other awards and pay it off when due - banks hate those who do that!
Extra Income
Can you go for a promotion at work? A new job? A second job? Even if for a short period of time this might be worth it - though check how much you will nett out of it after work expenses, commuting, and taxes.
Get the teenagers out working a paper-run or in a fast-food outlet - its a good way for them to learn about real-life anyway!
I said earlier that budgeting is like dieting. Its actually a lot easier than dieting - with dieting you can go for weeks without seeing any results, you give up for a weekend and all the weight comes back on! Budgeting isn't like that though - I guarantee that if you reduce your debt you will start saving. Its a snowball effect, as you reduce debt you reduce the interest you are paying which allows you more spare cash to reduce more debt.
Step 6 Putting it All Together
So now you have a list of debts A some cash from selling things Extra income coming in from you extra job Less money being spent on the necessities of life.
Now go back to you list of debts. Start with your highest priority one, how long will it take to clear it with the extra cash you have? Now once you've cleared that one, take the extra cash, plus the re-payments you were making on the initial debt (no longer needed as you cleared it ) and apply it to the next item on the list as and so on. It really does work.
Remember though no more getting into debt for consumer items otherwise you will put yourself back at the start again! Remember that getting out of debt is just a tool - the real aim is to take control of your life and fulfil your goals and dreams.
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