How to Start Paying Off Debt
“Neither a borrower nor a lender be; for loan oft loses both itself and friend.”
That’s a famous quote from William Shakespeare’s Hamlet and is some great advice, even in today’s world (actually, especially in today’s world). But apparently most individuals aren’t heeding that advice because in 2008 our total personal and household debt toppled 13.8 trillion – yes, that’s with a “T.”
And it’s not looking any better for 2009 as our debt-fueled lifestyle continues to catch up with us. One only need look at the overwhelming number of foreclosures, repossessions, and personal bankruptcies to see that we haven’t bottomed out yet.
All this turmoil will undoubtedly cause many people to shy away from debt, yet borrowing is still a critical part of our financial system. Without debt, most people would never be able to buy a house and all the tax advantages that go with it – not to mention, investment advantages.
The real crisis we are facing today is that many people have overextended themselves. They have borrowed excessive amounts of money for luxury items and are now feeling the real effects of “out of control debt” – and that can be scary. As a result, they are trapped in a nightmarish situation where they are avoiding collection agencies, paying punishing late fees, and have completely ruined their credit rating.
If you find yourself in this exact situation, there is good news and bad news. The good news is that the situation isn’t hopeless – you can escape the shackles of debt. The bad news is that you’ve got to start now and it’s going to mean immediate and significant changes to your lifestyle. Things will not improve if you keep doing the same things that got you into this mess in the first place.
You should immediately gather up all your bills and start itemizing your basic living expenses. Basic living expenses don’t include things like cable TV and restaurant meals. Think more in terms of grocery bills, clothing, heating, electricity, and gas for the car to get to work. The bottom line is that if you are in debt, you must eliminate (or drastically cut down on) luxury expenses until you are out of debt – otherwise, you’ll continue your downward spiral to financial ruin.
Look at it this way: Most credit card companies charge around 28 percent interest; that means for every dollar you don’t use to pay down your debt, you are paying $1.28 to purchase your luxury items. For every dollar that that is still on your credit card, you owe $1.28.
Your next step should be to write down every single debt you owe. Although this isn’t going to be easy, it is a critical step in getting a handle on things. Once you’ve done this, write down your total monthly income.
Now, simply subtract your basic living expenses from your income and funnel the remainder into a savings account. Take this money and increase your payment towards your debt – as much as possible.
In some cases, your basic monthly living expenses plus your debt may be greater than your income. While you can start selling personal items or get a part time job, you might also want to consider calling up your debtors in an effort to renegotiate. In today’s financial climate, a debtor recognizes that being able at recover some of the balance is better than ending up with nothing - and are, therefore, much more open to negotiation. Before you contact them, you should know exactly what you will be able to pay and get them to accept that amount.
Be courteous and friendly and tell them exactly why you have fallen behind in your payments and the amount you can pay each month. While they may not be thrilled at the prospect, most will be receptive to the proposal. By taking this simple step, you will be taking a huge weight off your shoulders as you start making real changes in your situation by paying off your debts and eventually becoming debt free.
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