Debt is one of the most common challenges young families face, and it can be a monstrous issue that affects your happiness, security and independence. You may have significant credit card debt, student loans(you can try to refinance here: https://www.crediful.com/refinance-student-loans/), car loan payments and even a high mortgage payment. As a result, you may feel strapped for cash, or you may even be relying on credit cards to make ends meet each month. This is no way to live, and you may be wondering what you can do to get out of debt.
Create a Budget
As soon as you realize you have a debt problem, you need to review your budget. Many young families who are struggling with debt do not have a budget created. Itemize all sources of income as well as all expenses in your budget. Identify non-recurring expenses that affect your budget as well. Use free tools such as everydollar to help make the process easy and intuitive. This will tell you how much money you have available for debt reduction every month.
Many people are able to reduce debt balances slowly over time by making some budgetary adjustments. For example, you can move to a more affordable place to live for a few years, and you may drive one car instead of two. This will save money on car payments, insurance and maintenance. Dine in, and find cheap entertainment to cut back on extra spending. Only buy clothes and shoes that are needed, and avoid trying to keep up with the Joneses. Any extra money you can free up can be allocated toward debt reduction.
The Debt Snowball
Once you’ve stopped the bleeding and gotten your finances under control, it’s time to attack your debt with a vengeance. List your debts smallest balance to largest balance, pay minimum payments on everything but the little one, and attack the little one with everything you’ve got. Throw every dollar you can spare at it (keeping a reserve fund of about $1,000 for hiccups and emergencies along the way). Sell everything you can. Cut your lifestyle back to rice and beans. Temporarily (I repeat: TEMPORARILY) stop your investing until you’re out of debt except your house. Go scorched earth on that little twerp. When you’ve conquered the smallest debt, roll that payment towards the next one on the list. Every time you pay one off, you’ve freed up more of your income to throw towards the next one.
Many financial advisers teach a variation of this strategy where you list your debts not by balance, but rather by interest rate. Doing so will save you a few hundred dollars in interest over the course of the debt snowball process. The problem with this system is that it doesn’t work. Listing the debts by balance provides emotional energy that fuels your offensive. Families who attempt to pay off debts by interest rate pay off the debt far slower, if they complete the process at all. Many of the same advisers warn against pausing investments, because the ROI on the investments is outpacing the interest rate of the debt. Again, this is mathematically correct, but fails to take into account (1) the level of risk you incur by remaining in debt, and (2) the emotional focus you obtain when you stop EVERYTHING in order to attack the debt.
Seek Debt Relief
I want you to bend over backwards to avoid a bankruptcy, foreclosure, repossession or short sale. But at the end of the day, it’s possible to dig yourself so deep that you can’t dig yourself back out with the income that you have. While you have a responsibility to pay your obligations, your first obligation is to the survival of your family. If it’s between feeding your kids or paying your mortgage, there shouldn’t even be a question there. If all other avenues are closed to you, consult with a bankruptcy attorney and see about getting your debts legally forgiven. It will be a painful process that will wreck your credit and dominate your financial future for the next several years, but it is an avenue to a fresh start in life. A clean slate is a beautiful gift – make use of it by learning from your past mistakes and committing to future decisions that will yield a more abundant life this time around.
You may feel alone in your struggle with debt, but rest assured that this is a very common issue. It can take courage to take action against this problem. Taking action now can be transformative and can put you on a better path in life.