Things are not good today. We’re experiencing several financial problems. Did you ever discuss how to pay off credit cards? If so, I missed it. I’ve been making payments every month. The bills keep rolling in. It appears that the balances are going up instead of going down. I’m being charged over the limit fees almost every other month and I’m not actively using these credit cards. I was considering consolidating my debt. Can you give me some ideas on the best way to attack this debt?
Signed, Female trying to get the “Debt Monkey” off of her back.
Your money problems are far more common than you can imagine. According to the Wall Street Journal, 70 percent of Americans are living paycheck to paycheck. Respondents to surveys are generally people who are subscribers or readers of the publication giving the survey. Who reads the Wall Street Journal? White-collar executive types who are well educated, understand business and finance, and earn upwards of $70,000 per year. This is not the average Joe. If 70 percent of Wall Street Journal readers are living paycheck to paycheck, imagine how financially strapped the general public is.
Below are some ideas you can use:
Admit that you’re in debt. The telltale signs for you are evident—you’re struggling to stay on top of the bills. Wouldn’t it be nice if you’d saw the warning signs before it had gotten to this point? Debt is like cancer. If detected early, you can avoid this from spilling over to other areas of your life. You can avoid the stress and agony of fighting through a mountain of debt. You can avoid the possibility of having the stuff you bought with debt amputated (sold, repossessed) from you. I’ve developed a litmus test to help early detection. If the balance on your credit cards is equal to or greater than the balance in your emergency fund, you have a pending problem. If the balance on your car note is equal to or greater than the balance in your retirement portfolio, you have a pending problem. Financial problems don’t initially show up in your ability to make minimum payments. Financial problems initially show up in your inability to accumulate and preserve savings.
Stop borrowing. You cannot borrow your way out of debt. Striving to get out of debt yet continuing to borrow money is what I call behavioral incongruous. It’s akin to striving to lose weight while continuing to eat fatty foods. It’s not going to happen. Can a debt consolidation work? Only if you correct the issues that led to debt, live on a disciplined plan and use the increased cash flow as a weapon to “eradicate debt.” Otherwise, you’re simply moving debt from one place to another. If you fail to correct the issues that created the debt, you’ll eventually run up the balances on the debt you just consolidated—creating a deeper hole to climb out of.
Establish a budget. The very mention of the word budget bring forward images of being restricted or limited. I admit there’s a sense of restriction and limitation but it has nothing to do with a budget. What restricts and limits you is your income. If you want to spend more, save more, have more, you need to earn more. A budget helps you to understand that money is finite (for the record so is credit). It forces you to tell your money where to go instead of wondering where it went. A budget is the cornerstone of sound money management.
Create some wiggle room in the budget. We’ve all heard the saying that it takes money to make money. It also takes money to get out of debt. You cannot get ahead financially if you have no margin between your income and your expenses. Wiggle room represents your key to financial freedom. The more wiggle room you have, the faster you can beat debt and the faster you can build wealth. I recommend at a minimum you free up 10 percent of your gross monthly income.
F.O.C.U.S. The key to getting out of debt at a record pace is F.O.C.U.S—Following One Course Until Successful. Make minimum payments on all debts except for the one you’re focused on paying off. The debt that you’re focused on will receive the minimum payment plus the extra money made available when you created some wiggle room. Once this debt is paid off, you take the old payment plus the extra money and add it to the minimum payment of the next debt. Too often we try to apply an extra $50 here and an extra $100 there—diluting our efforts. You’re better off applying the entire $150 to the debt you’re focused on. This will maximize your efforts to quickly beat debt and lead you on the path to wealth building.
(Mortgage and Money Coach Damon Carr is owner of ACE Financial. Sign up for Damon’s FREE Online Newsletter at www.allcreditexperts.com. Damon can be reached at 412-856-1183.)