In most instances debt tends to creep up gradually. An adult entering the work world obtains a credit card or two, just for emergencies and perhaps for gas. And when the bills come in, they decide to make only the minimum payments because there are other things to do with the paycheck. After all, life is to be enjoyed, and leisure activities cost money. After several months, another offer for a new credit card comes in and the teaser interest rate is appealing, so now the individual can purchase that apartment furniture and the new television.
Two years and several credit cards later, the debt is mounting and the payments are becoming more burdensome. Now there is no money left for fun after paying the bills, still the minimum payments, and the consumer is looking at years of paying off debt on things that have a “shelf life” that is ticking away.
If an emergency should occur – a major car repair or a medical/dental expense – it will have to be charged because there is no cash reserve. Eventually, the credit cards are at their high limit, and a payment or two has been late or missed. The credit score is now affected negatively, so any major purchase will come with a higher interest rate. Had this individual learned and practiced the basics of personal finance and using a budget, this could have been avoided.
Managing and Preventing Debt
- Add up the total household monthly net income. This is the figure you will be working with as you prioritize and plan for debt payoff.
- Make a list of every expenditure for an entire month. This includes even the tiniest purchase. You have to see where your money goes.
- Divide expenditures into columns of “absolute necessities,” “not necessary but important,” “unnecessary,” and “non-monthly.” (The non-monthly are those bills that you pay every 2, 3, or 4 months – a water bill or a car insurance bill perhaps)
- Add up the “necessary” column. Divide the “non-monthly” by the number of months you have in between payments and add that figure into the “necessary” column.
- Subtract the total from the “necessary” column from you total net monthly income. The result will be what you have for the remaining two columns.
- Now it is time to make some decisions. What can you do without? You need to eliminate as many expenses as possible, so how about giving up the nail salon for a while? How about getting a haircut every 6-8 weeks instead of every 4? How about no more morning lattes or restaurant lunches? If you look carefully, you will see a number of things that you can cut out for the short-term, so that additional money can go toward paying off debt faster.
- Pick a credit card to attack, usually the one with the smallest balance. Cut it up, and vow to take all extra money you have “found” and apply it to that payment. Any “windfall” money that comes in, such as a tax refund, should be applied first to this credit card bill.
- Once the first credit card is paid, attack the second, and so on.
Getting yourself out of debt will take a few years, but if you stick to using a budget, in the long run, you will have plenty of extra money to put into savings and to enjoy some leisurely activities. Commit to the philosophy that nothing will be purchased until the cash has been saved for it, and that there will always be some savings for emergencies. As your income increases, you will see your savings grow, and you will be able to afford vacations, nice dinners, etc. And, more important, your credit will be great!