“Stop the addiction. Start the cure.”
Chapter Overview• Debt Evaluation: figuring out the causes and severity of your financial problems.• Income And Affordability Assessment: determining your cash flow and what you can pay on your debt.• Debt Stress: a real threat to your physical and emotional well-being.Getting started with your debt plan requires taking a hard look at your finances, making honest assessments of how you got into financial distress, and selecting the best course of action to manage your debt. It can be scary and depressing. It may feel better just to look the other way.
But consider this—unmanageable debt is like a medical condition. It’s better to know. Then you can do something about it. Otherwise the problem rages on and ignoring it won’t make it go away.
To get started with your debt plan, you must do the following
• Evaluate the severity and causes of your debt problem.• Organize debt records and prioritize accounts for resolution.• Assess current and future income and determine ability to pay down debt.• Select a debt management plan.
Debt Evaluation
In evaluating your debt, you must figure out how bad your financial problems are. Factors to consider:• How much total debt do you owe?• What are your combined monthly payments on that debt?• Are monthly payments going to rise due to adjustable rates?• How long will it take you to pay off your debt at current payment levels?• Are you behind on any payments? If so, by what amount?• Do you have a reasonable chance of keeping up with payments as things stand now?
If your debt has become unmanageable, you must find out why:
• Were there specific large purchases that created financial problems?• Did expenses just “pile up” without you realizing it?• Were burdensome expenses unavoidable (e.g., medical), justifiable (e.g., tuition), or hard to defend now that you’re facing problems (e.g., luxuries)?• Have you lost income?
Be honest but even tempered in this assessment. No finger pointing. No anger. This isn’t about blame. It’s about moving forward. Identifying the causes of your debt issues and any problematic financial behavior is mandatory to solve your current dilemma and avoiding falling into the same traps later. (Remember my story—the finance major that worked for a megabank only to get into credit card debt, get out of debt, and then fall back into it again!)
Debt Organization
It’s time to tackle those unopened envelopes and unread e-mails from creditors, scraps of paper, and all other records so you can create a comprehensive chart of your debt. The initial chart should include:- Creditor name
- Your account number
- Account balance
- Payment due date
- Minimum payment amount
- Amount of any overdue payments
Once the chart is complete, you need to prioritize your debt. Factors to consider:
- Balance size
- Monthly payment amount
- Interest rate
- Time until payoff
- Age of account (how long you’ve had the account)
- Payments missed
- Any pending collection or legal actions stemming from specific accounts
Income and Affordability Assessment
Confirm your total take-home income after any withholding taxes, health plan payments or other deductions. If your income is based on commissions or tips, calculate a monthly average based on past earnings and/or seasonal expectations. Have you lost income or are expecting lower income? Adjust your figures accordingly.Next, calculate your monthly expenses (not including payments on accounts). Categories include:
• Rent/mortgage• Car payment• Utilities (can vary depending on usage, but estimate a constant monthly rate)• Insurance payments—health, auto, life, etc.• Student loans• Child support• Groceries• Gas/transportation• Clothing• Entertainment• Dining out• Charitable donations
Some of these expenses will be fixed. Some will fluctuate; determine monthly averages for these.
With income and expense figures in place, calculate what you can afford in payments on your debt—the difference between income and expenses with some margin for safety. How far away is this number from what you currently owe in monthly payments? The size of this difference will dictate the type of debt management plan you should consider. A sound plan in theory won’t work if you don’t have the funds for requisite payments.
Use Of Debt Calculator
Debt calculators can be found within financial software programs or online. They allow you to compute different financial scenarios and outcomes regarding your debt, such as:
• How long will it take to pay off debt by making minimum payments?• How long will it take to pay off debt by making a particular fixed payment each month?• How much will you have to pay per month to eliminate debt by a specified date?
Enter balances, interest rates and minimum payment amounts for each account and the calculator does the rest. The results may surprise you or even enrage you. Channel emotions into constructive behavior!
How To Budget Your Money
This book is dedicated to the premise our grandparents always talked about: living within your means. Of course, Grandma and Grandpa didn’t have the credit card culture and the ease of e-commerce to tempt them. That’s not an excuse for our generation, just a reminder that it’s easier than ever to be drowning in debt.
The techniques discussed in this book are intended to relieve you of debt burdens that you can’t handle through the standard payments assigned to the debt. If you can’t manage your debt, or if it’s preventing you from making better use of your money (savings, investments, etc.), then you need to choose a debt management method and execute it.
Living within your means is all about developing a practical budget and sticking to it. I remember a friend who once told me, “Learn to live poor”. He couldn’t have said it better! Chapter 10 goes into detail on this subject. But you can’t create a workable budget until your debt is under control. It’ll just be good intentions and empty numbers otherwise.
Debt Stress
You don’t need a degree in Finance or Psychology to know that debt stress is real. It’s an epidemic sweeping the nation, tearing apart lives, marriages and careers. In managing your debt, I want you to think about something more important than your bank balance or FICO score. Always remember the one and only thing that credit is used for: to borrow money! I want you to think about yourself and the people you love.Eliminating debt is critical to your physical and emotional health. I’ve seen too many clients in a state of collapse due to their financial woes. Think of the human costs, and the dollars-and-cents choices of a debt management program will come much more easily.
Nicotine. Alcohol. Drugs. Sugar. Salt. Fat. Debt. You get the idea. Stop the addiction. Start the cure.
