You’re not the first person who has fallen on tough times, and you certainly won’t be the last. Given the enormity of the problem, you’d be forgiven for resigning yourself to a life of missed opportunities and mounting debts.
It doesn’t have to be this way. With a little planning and a lot of discipline, you can improve your financial situation and begin making tangible investments in your family’s future. Start by following these seven debt-reducing, income-boosting steps.
Step 1: Don’t Play the Blame Game
Before you jump into the treacherous waters of debt reduction, take some time to prepare yourself for what’s to come. This isn’t your typical 12-step program — after all, you’re not powerless in the face of your debts. Nevertheless, the first step on your journey requires you to accept that you have a financial problem that needs to be addressed.
At the same time, it’s crucial that you don’t overreact by blaming your own questionable past decisions for your financial troubles. It’s equally important that you don’t blame others for your misfortunes. No matter how your financial situation unraveled, it’s far more important that you wash your hands of the past and focus on the future. As with any big undertaking, a positive attitude will go a long way in your fight against debt.
Step 2: Tally Up Your Budget as It Stands
It might be painful to do so, but you need to get a fair and unblinkered look at your current financial situation. This will require you to create a “snapshot” of your current household budget or lack thereof.
Even if it happened in some long-forgotten high school class, you’ve done this before. Spend an afternoon poring over your utility bills, grocery receipts, credit card statements and other expenses. Do the same with your income statements, including any special interest-bearing accounts and invoices that catalog your earnings. If you own a business, this is liable to be especially tough.
However, it’s absolutely necessary.
Once you’ve accounted for every income stream and expenditure, determine how much cash you’re bleeding on a monthly basis. If your income is significantly lower than your expenses, you’ll need to take immediate steps to slash your outlays and shore up your budget.
You’ll have to cut out frivolous entertainment expenses, name-brand clothing purchases and most restaurant meals. You may even need to go further and reduce the amount of water or energy that you use in your home. During this process, remember to hold fast. Your ability to get your debts under control depends entirely on your ability to make painful but necessary budget cuts.
Step 3: Cash Is King
There may be a simple way to ease the sting of these personal budget cuts. As soon as you decide to improve your financial situation, take it upon yourself to stop using all of the credit cards and lines of credit that you’ve accumulated over the years. Since doing so may damage your credit score, you should refrain from calling up your issuers to cancel your cards or close your accounts. Nevertheless, don’t be shy about tossing all of those insidious pieces of plastic into a dark corner of your home.
For the foreseeable future, you’ll need to concentrate on paying down your debts with the money that you earn and save. Obviously, it would be be counterproductive to accumulate more debt in the process. Resist this temptation by using cash and debit to cover your ongoing expenses. If you don’t have enough cash to pay for something, you’ll have to go without it.
Step 4: Learn to Love the Hustle
There’s no law against hard work, and no one will begrudge you for sacrificing some of your free time to make your family more comfortable. To boost your earnings in short order, look for a second job that lets you work flexible hours in the evenings or on the weekends. Even in a soft economy, retailers, restaurants and other high-turnover businesses are almost always hiring.
If you’re not willing to return to waiting tables or working the checkout line, look for more attractive consulting or freelancing opportunities. Don’t be afraid to leverage a long-dormant skill: Many stock photographers, writers and tax professionals make good money through part-time work.
Step 5: Skimp on the Right Things
If you’re serious about improving your financial situation, you’ll inevitably need to make some sacrifices. This requires a surprising amount of discipline. After all, many non-essential expenses are frustratingly seductive.
In order to afford tickets for an upcoming NBA match-up, you might craft an impossibly tight budget for your kids’ annual back-to-school shopping trip. Instead of making an extra-large payment on one of your high-interest credit cards this month, you might succumb to a can’t-miss deal on a new set of golf clubs.
While these slip-ups are understandable, they have no place in a serious debt reduction plan. It’s a matter of delayed gratification: If you improve your financial situation in the here and now, you’ll have plenty of time to enjoy life’s finer things in the future.
Step 6: Time Really Is Money
In the weeks and months after you make your decision to do something about your debts, you’ll find yourself in what millions of rabid sports fans and overworked office drones refer to as “crunch time.” This is not the time to be timid.
Permanently reducing your debts requires bold, lasting action. There are multiple ways to achieve this goal, but none of them involve half-measures. After accounting for all of your fixed household expenses and “necessity” purchases like food and clothing, you should be using the bulk of your take-home earnings to pay down your debts.
Whether you choose to use a tried-and-true method like Dave Ramsey’s “debt snowball” or simply aim to pay off your high-interest credit card debts before your lower-interest home equity loan, your debt reduction spree needs to be targeted for maximum effect.
For a variety of reasons, the first few months are likely to be the hardest. When you get down on yourself, remember that every dollar of debt that you pay down now is a dollar of debt that won’t accrue interest in the months and years to come. Mentally prepare yourself for a period of austerity and come out of the gate with your debt-fighting guns blazing. Your future self will thank you for your present sacrifice.
Step 7: Reward Yourself
It’s not totally outlandish to equate your struggle to reduce your debts and improve your financial situation with millions of Americans’ valiant attempts to lose weight and get in shape. Like eating right and getting plenty of exercise, achieving meaningful debt reduction may require you to make big changes to your lifestyle and everyday decision-making processes.
You can take a page out of the dieting book by setting key goals or milestones and rewarding yourself for reaching them. When you pay off a high-interest credit card, celebrate with a tasteful, inexpensive restaurant meal or a night out at the movies with your family. When you reach larger milestones like closing out a personal line of credit or repaying your last student loan, take a sick day and bring your kids to the local major league ballpark. Although you shouldn’t go overboard until you’ve settled all of your debts, the occasional morale-booster won’t hurt.
Depending on the state of your personal balance sheet, making lasting improvements to your financial situation is likely to take time and effort. Once you’ve prepared yourself for an extended period of austerity and personal sacrifice, use the steps that we’ve outlined above to effect meaningful change. It’s never too early to begin improving your finances and setting yourself and your family up for a brighter tomorrow.