Your financial situation is unique to you and your family. However, there are some general practices that are important to put into place.
Our top five resolutions for families struggling with debt:
1. Develop a Budget
Make yourself a cup of coffee, gather your bills and pay stubs, and have a seat. The first step is simply understanding where your money goes each month. Take a look at your bank statements to see what you’ve spent money on. How much was for essentials? How much for non-essentials, like eating out? Don’t judge or beat yourself up: just record.
Now, figure out what the smallest amount of money you can live on each month. This estimate will include your mortgage/rent, bills (utilities, heating, etc.), loan payments, insurance, food, transportation, etc. What, if anything, is left over after the bare essentials are paid?
If you do have some income that is not strictly spoken for, consider saving it or putting extra towards a high-interest debt. If not, see where you can cut expenses. Can you reduce your grocery bill by buying in bulk? Are you paying for two streaming services? Cut down to one. It can be hard, but see what you can do. It’s often easier to cut back than to earn more income.
2. Know Your Credit Score - and Build It Up
Your credit score is more than just a number: creditors use it to determine the health of your finances and whether or not you are a good risk. “Good” is 700 - 749 and “excellent” is anything over 750. If yours is lower, you can take steps to boost it. This will help you secure loans and lines of credit with more favorable interest rates.
Start by paying your bills on time. Also, get a copy of your credit report (you are entitled to one free report each year) and see if there are any errors. Dispute these, and keep working forward.
3. Focus on Credit Card Debt
Credit card debt can be crippling. It’s easy to rack up and very hard to pay down/off. The average American carries over $8000 in credit card debt. You may be paying the minimum, and the balance never decreases. Focus your attention here: a method like the debt avalanche or debt snowball may help. Briefly:
- Debt Avalanche: Here, you pay the minimum on each debt and put any remaining funds on the debt with the highest interest rate.
- Debt Snowball: With this method, you attack the smallest debt first. Once that one is paid off, you focus on the next - applying the minimum plus whatever you were paying on the first one. The idea is that this “snowballs” and accelerates debt repayment.
You may also consider other options, such as a low-interest balance transfer, credit counseling, debt settlement, or as a last resort, bankruptcy.
4. Start an Emergency Fund
If you had an unexpected $1000 expense (e.g. car repair, medical bill), could you pay for it from your savings? Nearly 60% of Americans could not, and 40% of us couldn’t cover a $400 unexpected expense. So what do we do? Turn to credit cards or other high-interest sources of money. This perpetuates the cycle.
As difficult as it is, put money aside from each paycheck. If you set it up as an automatic transfer from your paycheck into a savings account that you do not touch, you will be less likely to spend this money or view it as “extra.” After a time, you won’t notice it’s gone. When it comes to our paychecks, we tend to spend what we get. Give yourself less to spend and more to save.
If you do not have an emergency fund, start small. Even a few hundred dollars can help you weather an unexpected expense. But be sure to keep adding. Build as much as you can (six months’ worth of expenses is recommended).
If you get a tax refund, consider splitting it between paying off credit card debt and saving. This will give you a good head start.
5. Don’t Forget About Retirement
Planning for the future is difficult when you’re struggling with the needs of today. Putting it off, though, can put you in a precarious position. Just as with your emergency fund, start small if you have to. A good place to begin is with a work-sponsored plan. Most employers match a percentage of your contribution, so in a sense, it is free money.
Again, decide on a contribution and have it deposited directly into the investment account. That way, you won’t touch it or include it in your monthly income. As you pay debt and free up money, boost your contribution (which also means more free money from your employer).
If you are self-employed, set up an IRA or SEP (simplified employment pension) and contribute monthly, quarterly, or annually.
It sounds like a lot! Take it step by step, and do not be afraid to ask for help. Robert P Laney is an experienced bankruptcy lawyer serving Elkin NC. Now, that does not mean he will push bankruptcy as your only hope: in fact, he will work with you to explore your options, as well as discuss the pros, cons, and consequences of bankruptcy. If this is the right move for your family, Robert will be with you every step of the way.