Getting out of deep debt isn't easy. It's a process that takes time, diligence, and attention to detail. You can do it by yourself, or you can find a lot of people willing to do it for you... for a fee. I'm going to talk about building a successful strategy for your own debt relief, and then touch on available options for those who can't – or won't – do it by themselves. I plan to talk about some tools I've used to help with this in the past, and some simple strategies to help you achieve your financial goals without additional loans, grants, or commercial debt consolidation program.
Step 1: Figure Out Where You Stand Today
If you're married or cohabiting, that means the much-dreaded budget meeting. Grab a copy of your bank statement. Write down your income and how much you can expect each month. Then write down all your expenses, down to the last penny, that you incur each month. Even if you got into debt due to irresponsible spending, document it here so that you know the truth. If you don't know what you've spent your money on, take your best guess. You'll revise it over the weeks, months, and years it will take to get out of debt, and eventually you'll have a very accurate picture of where your money is going.
It's always better to know the truth. Even if the truth is painful to bear! If your spouse has a lot of unexplained expenses, prepare yourself for the worst.
Step 2: Learn How To Manage Your Finances
Now, I'm not LDS, but the LDS church publishes a free pamphlet called “One for the Money: Guide to Family Finances” that is really useful to get you started in your road to financial freedom. The pamphlet outlines a strategy for paying off your debts that is guaranteed to work if you follow it – no pun intended – religiously. The pamphlet is available as a downloadable PDF file, and if you're reading this, you certainly have a web browser that will do the trick! I think the only negative aspect of the pamphlet is its intense focus on religious values to motivate you to budget your money. But the positive aspect is that it outlines a successful strategy toward eliminating debt: pay the minimums on everything except for your one highest-interest loan. Once that is paid off, then apply that entire amount to your next-highest-interest loan. My wife and I have applied this strategy for the past decade, and have successfully paid off everything except for our home mortgages on two properties.
It works. Use it, if you can. I can testify to its usefulness, and our lack of significant debt besides our houses is a key to our ongoing financial success.
Step 3: Use The Right Tool For The Job
If the above pamphlet doesn't quite do the trick for you – if you'd like a system to get out of debt fast – then I recommend YNAB, or “You Need A Budget”. The basic rules of YNAB will give you a successful strategy to live within your means... and the price for the tracking software is extremely reasonable (less than $50). I've used his spreadsheet-based product before, and within a few weeks of using it you'll see exactly where your money is going and where you need to reduce spending to get your credit card usage under control. YNAB lives by the Four Rules:
Rule 1: Stop Living Paycheck to Paycheck. Live only on the income you earned LAST MONTH, with this month's income in the bank.
Rule 2: Give Every Dollar A Job. Plan exactly where each dollar will be spent. If you think you “never know”, that's part of your problem!
Rule 3: Save for a Rainy Day. Even the tightest budget can find some room to put away a few dollars to cover those unexpected – yet common – big expenses.
Rule 4: Roll with the Punches. You're never going to be perfect with your budget. Keep adjusting over time to try to meet your goals, but don't expect perfection!
I have no doubt that everybody can find a way to live within their budget. It may require adjustments to your living conditions, but making and following a budget is vitally important if you don't want to go bankrupt! You don't have to live paycheck-to-paycheck anymore once you start following some simple budgeting principles.
But what if your credit truly is out of control? What if you're so deep in debt that, after doing the budget, you have no money left to live on after paying your obligations each month?
Step 4: Credit Counseling and Preparing for Bankruptcy
There is help available, and you should really avoid ads for out-of-state debt consolidation programs. Debt consolidation can be a nightmare if done wrong! The Federal Government of the US offers a list of state-by-state approved credit counseling agencies. These organizations will often negotiate with your creditors to reduce your payments or forgive certain debts so that you have enough to live on. If you think you might need to file bankruptcy, these organizations are a required stop before you're allowed to do so. The fly-by-night Internet ad you found won't do the trick... you're going to HAVE to see one of these agencies. But realize, there are important costs:
Paying less per month means you're going to pay more – a LOT more – in interest over time.
It's going to show up in your credit report. Agencies that claim that there will be no hit on your credit report are usually relying on fraud – like a false Social Security number – to achieve their ends. Expect a HUGE hit and an inability to obtain credit from now on. If your budget is so bad that you're considering credit counseling rather than the free or low-cost alternatives above, you may not care at this point, but it's important to expect it.
There's usually a substantial fee for the services of the credit counseling service. If they offer free credit counseling, they are usually making their money on the back-end: taking a fee from your payments before handing them over to your creditors.
Beware of “balloon” offers. They'll suck you in with a very low payment, but at the end of a certain number of years – typically five to ten – you have a very large payment that you need to pay off, and a need to obtain new credit to finance it if you don't have the cash to pay it off. With the hit on your credit history outlined in #2 above, you have a good chance of being denied a reasonable loan!
Beware of “variable rate” offers. They'll offer you a very low rate at first to suck you in, but as payments expand over time often these very low-cost loans turn into an unimaginable nightmare to pay off.
You Can Do It!
Look, I think you have the skill set to do this yourself. Grab a copy of YNAB, grab that pamphlet for how to manager your money that the LDS church publishes, and figure out your strategy. You can do it! Credit Counseling – and “debt consolidation”, as bad of an idea as it is – is really your last stop before declaring bankruptcy. If you're overwhelmed by medical bills, you can make a good case for declaring bankruptcy on that basis. But avoid those two options unless you really, truly have no other choice.