Drowning in Debt: How to Rescue Your Finances
If your finances are in trouble, you are well aware of your circumstances: creditors calling you continuously, bills arriving daily in the mail. Perhaps you are facing eviction or foreclosure, or your car has been repossessed. If you are drowning in debt, you may feel as though there is no hope. However, it is possible to get out of debt and rescue your finances. It may not be easy and it won’t happen right away, but it can be done.
Create Savings in Your Budget
The reason you got into debt in the first place is because you spent more money than you earned or otherwise obtained. That sounds simple, but understanding that fundamental fact is the key to rescuing your finances. You must get a grip on your spending. For instance, if you wear glasses, do some comparison shopping the next time you replace your frames. You may find the same frames at a lower price by shopping online or by taking advantage of rebate programs.
Contact your creditors. You may be able to negotiate lower payments or a brief forbearance period while you attempt to stabilize your finances. Creditors will often work with you if you demonstrate that you are making a good faith effort toward getting your debts under control.
No New Debt
You must also resolve not to create new debt. Do not apply for new credit cards to pay off old balances, even if your credit is still good. Do not buy a new car if you must finance the purchase. A possible exception is if you can obtain a consolidation loan to combine high interest credit card debt into a loan with lower interest rates and a single monthly payment. If you go this route, do not use the financial breathing room you gain from obtaining a consolidation loan as an incentive to create more debt.
Develop a Payoff Plan
Another important strategy in getting out of debt is to pay down your existing debt. If you have the means to do so, pay off your largest debt or the debt with the highest interest rate first. Use the money you would otherwise have devoted toward paying that debt toward paying down your next largest debt, and continue the process until all your debts are paid. If your finances are more limited, start with your smallest debt and reverse the process with larger and larger debts until all your debts are paid.
Whether you start with a top down or a bottom up approach, this strategy is known as snowballing. It allows you to pay off your debts while maintaining a steady overall level of payments. Snowballing your payments also gives you a psychological boost, as you are able to check off one debt, then another from your list.
Establish an Emergency Fund
It may seem counter intuitive to begin saving money while you are still digging yourself out of debt. However, it is essential to establish an emergency fund so that an unexpected expense does not send your finances back into a tailspin. Even if you are truly broke, save one or two dollars from each paycheck as a symbolic gesture to establish the habit of saving money. Once your finances are more flush, you can begin putting aside larger sums. In the meantime, you may collect a tidy sum even with small savings increments.
Richard Harrelson is a personal finance blogger. He is always looking at ways people can make best use of their money and shares his insights on various money blogs. Visit the Lenstore.co.uk to find out how you can save on Focus Dailies by ordering online.
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