The old comedian Eddie Lawrence used to do a bit he called the Old Philosopher where he would start out by saying something like, “What’s troubling you, friend?” From there he would go into a monologue consisting of a whole list of improbable disasters.
But here’s the deal. If what’s troubling you, friend, is an enormous amount of debt, there’s only one probable disaster — bankruptcy. And only one solution. You have to get your debts under control and eventually paid off. Here are at some tips that could help.
1. See where your money has been going
The first step in debt management is to determine how you’ve been spending your money. The simplest way to do this is to put all of your spending on your debit or credit card so that at the end of 30 days you can pull out your bank statements and receipts and review them. Next, divide your spending into logical categories such as food, housing, transportation, entertainment, clothing, etc.
2. Create a simple budget
Now that you know where your money’s going your next step should be to draw up a simple budget based on the categories you created in step #1. You will need to look for those areas where you could reduce your spending so that you would have more money to pay down your debts. Most people find that the easiest areas to make cuts are on food, eating out and clothing.
3. Get a handle on what you owe
Okay, now it’s time to face up to it. You need to know how much you owe and to who. One good way to do this is by using a spreadsheet program where you would have five columns – the name of each creditor, the amount owed, the interest rate, the minimum monthly payment (if applicable) and the payment due date. If the idea of creating a spreadsheet sends chills running up and down your spine just get out a pencil and a piece of paper and make a list. The important thing here is to get a handle on your debts.
4. Figure out a way to pay down your debts
If you have a really overwhelming amount of debt your goal at this point should not be to pay it off. That could be a really overwhelming objective. What you want to do at this point is simplify your problem. For example, if you owe on a number of credit cards you should consider transferring their balances to a new card. If they are high-interest credit cards you might be able to transfer those balances to one with a lower interest rate. Even better would be transferring those debts to a 0% interest balance transfer card – assuming you could qualify. Some of these cards offer 18 months interest-free, which would give you a year and a half to pay down your balance or even pay it off entirely.
Is your worst problem student loans? Then why not consolidate them? You could get a Direct Consolidation Loan, which would enable you to consolidate all of your student debts into just one. A Direct Consolidation Loan could have a lower interest rate than some of your current student loans as it would be based on a weighted average of all of your current interest rates and can’t exceed 8.25%. Your new payment could actually be lower than the combined payments of your existing federal loans. Plus, you would still have a number of repayment options available such as Pay As you Earn and Income-driven repayment.
5. Get a second or part-time job
If you find that there just doesn’t seem to be any good way to repay your debts based on your earnings then maybe you need to find some way to increase your income. The simplest but maybe the most painful way to do this is to get a second or part-time job. If you have good skills such as computer programming or accounting, you might be able to haul down $20 to $30 an hour. Work just 20 extra hours a week and that could be anywhere from $400 to $600 a week, which should go a long way towards paying down your debt. What could you do if you don’t have any marketable skills? Retail outfits like Best Buy, Staples and Home Depot are almost always looking for part-time help at $8 to $10 an hour. While that won’t get you out of debt as quickly as if you were able to earn $30 an hour you could still net something like $600 a month, which means that in 10 months you could retire $6000 in debts.
6. Sell your stuff
Another way to earn extra money to pay down your debt is by selling all that stuff you have sitting around that you no longer need. We sold some outdoor furniture last weekend and earned $300. If you look around carefully the odds are that you have a bunch of stuff you either no longer need or just don’t want that you could sell on Craigslist. When you run out of your own stuff to sell you could start haunting neighborhood garage and estate sales looking for stuff you could sell at a profit. Spoiler alert – before you run out and start buying stuff at yard sales spend some time on eBay to see what things actually sell for. Pick some items you think you might find at garage sales and then click the little option Completed Listings under Show Only. Do this and you’ll eliminate the possibility of buying a bunch of stuff you’ll never be able to sell at a profit.
7. Learn to love cash
There’s no point in working to pay down your debt if you continue to use your credit cards. What you need to do is learn to love cash. One good way to manage your spending is the envelope method. This is where you take out a bunch of envelopes and then label them based on your spending categories such as food, clothing, entertainment, transportation and so forth. On payday just take out enough cash to fill your envelopes with the amount of money you budgeted for each one. Make sure you also take out some cash to cover your everyday spending. This might be for lunches, sodas or coffees at work and the occasional dinner out or a movie. When you find that one of your envelopes is empty, that’s it. You can’t spend any more money in that category unless there’s money you could transfer from one of your other envelopes. For example, if you were to run out of money in your grocery envelope you might be able to transfer some from your entertainment envelope.
8. Get some counseling
If all of this seems as overwhelming as the size of your debt you might be a good candidate for consumer credit counseling. This is where you would have a counselor that would review all of your spending and your earnings and help you develop a budget that would enable you to pay down your debts. Or your counselor might suggest a debt management plan (DMP) based on what you could afford to pay on your debts. Your counselor would submit this plan to your creditors for approval. He or she might also try to get your interest rates reduced. If all or the largest majority of your creditors were to accept your debt management plan you would then stop paying them. You would send a payment a month instead to the credit counseling agency as it would be responsible for paying your creditors. This means you would have just one payment to make a month for a fixed term, which would probably be five years. But after that you would be totally debt-free.
Unfortunately, credit counseling isn’t for everyone as financial expert Suze Orman explains in the following video. However, she also reveals the kind of people that would be good candidates and shows what to expect if you were to go to one of these services.