Worldwide Success

In the previous article entitled “Debt – A Personal Finance Crisis Emerges”, we discussed how debt is impacting the personal financial health of many people, from young adults to senior citizens, and all ages in between.  In this article we will explore ways to deal with debt and offer suggestions on how to eliminate or at least reduce your debt load.

Recognize the Problem

Sometimes people get in debt for factors beyond their control.  The loss of a main source of income, health issues, business failures, are all common problems that may force someone into debt.  Sometimes you get in debt in order to invest in yourself, as is the case with college students.  But just as common are behavioral issues where people simply spend beyond their means without control.  Whether they were allured by easily accessible credit cards, or enticing home equity loans, people are ultimately responsible for spending more than they earn.

If you are in debt due to your inability to control your spending, the first step to recovery is recognizing that you have a problem.  Once you take responsibility for getting your life back on track, you will be ready to take on the challenging but rewarding steps necessary to recover.

Eliminate the Guilt

The next step towards recovering from the behavior that may have led to a high debt load is to eliminate the guilt.  Whether you went into debt by your own fault or not, you must rid yourself of any guilty feelings and re-channel this negative energy into positive actions that will get you out of this situation.  Mistakes made in the past should stay in the past.  Everybody makes mistakes, so just recognize it for what it is and move on.  Make a definite commitment to get out of debt by starting anew and forgiving yourself for mistakes of the past.

Measure Your Spending

The only effective way to reduce or eliminate debt is to spend less than what you make.  There is no way around this simple fact.  Therefore, the first piece of knowledge you need to collect is how much money you spend and what you spend it on.  There is a hard way and an easy way to do this.  The hard way is to collect receipts for everything you spend money on and add the expenses by category manually.  The easy way is to use a personal finance software package like Quicken to automatically capture your spending and have it categorized for you.  For more information on how to use Quicken to help you measure your spending refer to the article “Using Personal Finance Software for Your Success”.

Reduce Your Expenses

Here is where your will power and commitment will be tested.  Once you understand where you are spending your money you need to prioritize your spending and selectively find areas to cut until your total spending is less than your total income.  This is the hardest part, but also the most critical.  In the next article I will give you 10 simple ideas on how to reduce expenses and save money.  But you are ultimately responsible for finding opportunities to reduce your spending in your own budget.

Cut Your Credit Cards and Thrown Them Away

I mean it!  Get rid of all your plastic, except one.  You may need one credit card, but only one, for essential purchases.  Choose a credit card with no fees, low interest, and that gives you something back, preferably cash.  But if you are the type of person that cannot control your impulses to use credit cards on a whim, get rid of them all.  Use a debit card instead.  This will force you to only spend money that you have.

Increase Your Income

Reducing your expenses is a bottoms-up approach.  Another way to handle the income-spending equation is a top-down approach, meaning, increasing your income.  The article “How To Increase Your Income” lists several ideas that you may want to consider.

Attack the Worst Offenders First

Once you get your spending under control, and start saving money, apply your savings towards reducing debt.  This should be your utmost priority.  Look for the debts with the highest interest rates and penalty fees and pay those off first.  Only pay the minimum required on the lower interest rate debts until you are able to pay them off also.

Consolidate and Refinance

One option you may want to consider is consolidating your debt and refinancing.  This will require a careful analysis of your credit situation, and should be done under the guidance of a professional.  If you have a decent credit score, in many cases you can reduce you interest rate expenses significantly by consolidating your debt.

Make Small Progress

Any small reduction that you make towards reducing your debt is a step in the right direction.  Don’t set overly aggressive goals that you know you won’t be able to keep up as this will only discourage you.  Set realistic goals and work towards making small progress every month.  Consistent progress is the name of the game here.

Stay With The Plan

Reducing or eliminating your debt requires focus, discipline and persistence.  If your debt situation is critical, seek a qualified financial advisor and put together a plan to reduce your debt load.  If you think you can set a plan by yourself, do it now.  Don’t wait another day, as the longer you delay dealing with the problem the worse the situation will get.  Once you come up with a plan, stick to it.  It won’t always be easy, but seeing your debt decrease will give you satisfaction and keep you motivated.  The key is to keep track of how well you are progressing and reward yourself along the way for reaching milestones.

For Recent College Graduates

If you graduated recently from college and you have accumulated a significant amount of debt, think of your debt as a leveraged investment in yourself.  Investors borrow money all the time to invest in stocks, real estate and other investment vehicles.  A college education is one of the best investments you can make.  So even though you may feel troubled by all the debt you have accumulated, be cognizant that you made a good investment.  Chances are that you will make a lot more money than you would have otherwise if you had not gone to college, enough not only to pay off the loan, but also obtain a much higher standard of living.

I recently ran into an interesting organization called United Graduate Debt Program that is trying to help college graduates eliminate their debt.  I don’t have any personal experience dealing with this organization but the idea is intriguing.  You may want to check it out.

Be sure to also review the next article in which I will share some simple ideas on how to reduce your spending and save money.

Good luck with your debt reduction plan!

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