In this episode of Getting Money Right we’re talking about what happens when you can’t make your minimum payments, when you start to get so upside down on your debts that you're using food money to pay credit card bills, and you realize you’re stuck in a cycle you can’t break out of. We’ll share some strategies and tools you can use to gain control of your debt.
How do you know when you’re in financial bondage?
• Your feeling financial stress - juggling bills that are due with the timing of your paycheck.
• You’re making credit card payments, often more than the minimum, but the balance is still growing.
• You’re so far upside down on your debt that you can’t even make the minimum payments.
• You don’t have the ability to pay your debts but you keep making the payments by using your income to make the payments and the credit cards to pay for things like food and gas.
• The balances grow until their maxed out and you can’t make the minimum payments and also provide for your basic needs.
How can you get out of financial bondage?
1. Recognize you’re in bondage.
Understand what you can and cannot do.
It’s not a matter of what you want to do, no one wants to be in the position of not being able to pay their monthly payments, but you have to recognize and accept it when you are in this position.
2. Stop the financial bleeding.
You can’t just ignore it, slap a band-aid on it and hope it gets better.
You actually have to stop everything and finally deal with it.
Most people in debt act too late. They continue making payments even though they don’t have the income to do so.
They make it worse by not recognizing the situation, admitting it’s a mess, and taking action to stop it.
3. Spend according to a financial plan (budget).
Provide for needs first.
Save for a rainy day - it will come.
Then tackle your debts.
4. Prevent future indebtedness
Use a budget to direct all spending decisions.
Stop using credit cards.
Use cash for hard to control areas (food, recreation, gifts, etc.)
Only borrow for appreciating items and when the payment fits into your budget without leaving another category unfunded or underfunded.
Dealing with existing debt
Do the work necessary to deal with your debt. Don’t pass your problem on to someone else. Bankruptcy is not the answer - there is no easy, fresh start.
Know how much you can pay toward your debt.
Create a budget that clearly defines your needs and shows what you can actually put toward your debt. Priority should be:
Needs first (mortgage, car payment, etc.)
Saving second (prevents taking on future debt)
Debt repayment last.
Negotiate with your creditors for a reduction in interest rate or forgiveness of balance or late fees.
When you can’t pay all the minimum payments.
Use the pro-rated debt system.
Debt snowball tool (second worksheet tab) - each debt gets a percentage of the total amount you can put toward debts.
Contact your creditors and let them know your situation.
Provide them with a letter and a one-page budget to show your current situation.
Steps to take:
Download debt payoff plan
List all your debts smallest balance to largest balance
Use pro-rata plan to set up a payment plan based on how much you can set aside each month for debts, which you can only determine if you have a good working budget.
Create a budget using the Create Your Budget spreadsheet.
Capture your income and all your expenses for 30 days in order to create a working budget.
Lower your lifestyle expenses as much as possible and increase income as much as possible to maximize margin.