Monday, August 26, 2013

Basic Guide To Getting Out of Debt (the SNL way) and Are You Prepared For a Financial Emergency?

Whether you’re losing sleep over how you’re going to make your next house payment or dodging calls from bill collectors, being in debt is stressful. It affects every part of your life and health, but not all is lost. With the right determination and plan, you can rise above your debt and breathe easy again.

Stop borrowing and don’t buy
ANYTHING ELSE on credit. If you don’t have the cash to pay for it, don’t buy it. 80% of people who take out home equity loans to pay down debt accumulate the same amount of debt within three years1 because they didn’t solve the real problem: spending more than they earn.
1: Sudweeks, Bryan. "Develop and Use Personal Debt-Reduction Strategies." BYU Marriott School Personal Finance. September 2011. Web. 02 Jul. 2013.

Not sure if you can afford something? Or just need some comedic relief? SNL promotes a great book for those trying to make changes to their spending habits. [link to snl clip]
Step 2: CUT BACK
Reduce your expenses so you can start paying off your bills. Create a budget (see how to create a budget here), and stick to it. Cut out the extras and resist the urge to book vacations or buy things you can’t afford.  Do whatever it takes to achieve financial freedom. This couple from Utah paid off $25,000 of debt in one year by simply deciding to “give stuff up.” They stopped going to movies every week, cut way back on eating out, started clipping coupons, traded their cars in for older models, and most importantly: when they ran out what they had budgeted for the month, they stopped spending

Make a list of each outstanding debt (credit card balances, loans, unpaid bills) and its interest rate. Take what you’re saving from cutting back and apply it to your most expensive debt (the one with the highest interest rate). Some people like to pay off the smallest debt first for a sense of accomplishment. Whatever method you decide to use, the most important aspect of paying off debt is the “snowball” approach: once you’ve paid off your first debt, take the amount you were using to pay that debt off and apply it to your second debt and so forth. See an example of a “snowball” debt elimination calendar here.

Consider contacting a credit counseling agency. They may be able to consolidate debts to a lower rate or negotiate a lower balance. Be careful because not all agencies are equal—some are non-profit and some are for profit (Check this article about credit counseling strategies for a list of questions to ask before choosing an agency). The National Foundation for Credit Counseling can help you find a qualified low-cost nonprofit agency by calling 1-800-388-2227 or online here. Note that nonprofit does not mean free and regardless of whether you use an agency or not, you will still have to reduce your expenses to be able to successfully pay off your debts.

Most bankruptcies are caused by job loss, medical expenses, or marital status change (divorce, death, or separation). To substantially reduce your risk of getting into debt in the future, continue your education (to make yourself more employable) and get adequate insurance (life, health, and disability). According to the nonprofit Corporation for Enterprise Development, nearly 44% of Americans are one financial hardship (e.g. job loss or health crisis) away from complete disaster because they have less than three months' worth of savings (you might need more, depending on your circumstances).  So once you have paid off your debts, continue to keep your expenses low until you are able to build up enough of an emergency fund to protect against future economic hardships.

Getting out of debt takes determination, but it's worth it. Enjoy the smaller victories along the way and get ready to enjoy true financial freedom.
 Anyone out there had to get out of debt (or still working on it)? What worked for you?

For those of you who have never been in debt, how are you preparing for a financial emergency? How many months worth of expenses do you have in your emergency fund?



  1. This is so good. Debt is so stressful.

    As far as Step #2 goes, I think most people would be amazed at how much cutting back is available. After college I went through a period of unemployment and then partial employment and living month to month. I pretty much cut out everything except rent and food. And I survived, and it wasn't even as painful as it might sound. I do not remember feeling like I was lacking, just that I was doing what I had to do. It gives me confidence now to know that if I ever face that one big financial disaster, I am capable of living simply.

  2. That is such an awesome point, Valerie. My husband and I went through our "no frills" period for a couple years while we were both still in school getting our Masters degrees and (to a lesser extent) for a few years afterward while we paid off the student loans and saved up for a house. Like you said, even though we had little to no "fun" money, we never felt deprived. It was just our way of life at the time. Like going on a diet, it may seem hard at first, but then you get used to it. We still hung out with our friends and went on dates, we just had to be more creative.
    I think it's healthy for everyone to have a period like that when they live without the extras so, like you said, they know they can and--surprise--it's not that bad!

  3. You'd be surprised at how much you can cut. In 2008 Mike's work cut everyone's hours/ pay by 60%. We chopped everything out of the budget that wasn't absolutely necessary. We lived on 40% of our usual income for two years and made it out without going into debt. Very thankful for food storage and an emergency fund. Luckily we didn't have anyone in college at the time.

    1. That's awesome, Amber. Way to go! It's amazing to me that some people won't think twice before going into debt. So impressed by you and your family for making it work.


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