When money is tight and you’re having difficulty paying your bills, it’s incredibly easy to make choices that make your financial situation worse. Getting a new credit card, sticking with minimum payments or skipping payments altogether may stave off the problem in the short-term, but could cost you even more down the road.
If you feel like you’re drowning in debt, there’s still hope! Here are six steps you should take to keep your head above water and regain control of your finances.
When you’re juggling multiple debts, it’s easy to forget who you owe what to. Unfortunately, this disorganization can lead to missed payments, which leads to more interest, penalty fees and calls with collections.
Set aside some time to write down all of your debts. When we say “all,” we mean ALL — credit cards, mortgages, car loans, medical bills, everything. Write down each creditor, your monthly payment, your interest rate and your total debt. Having all of the details in one place allows you to better visualize your overall debt, discover anything you may have overlooked and see which creditors are charging you the most interest.
You can double check your debts by comparing them to what’s listed on your credit reports, which you can request at AnnualCreditReport.com. The Fair Credit Reporting Act (FCRA) requires Equifax, Experian and TransUnion to provide requesting individuals with a free credit report every 12 months. Through the current COVID-19 pandemic, everyone in the U.S. can request a free credit report from these credit reporting agencies every week — be sure to take advantage of this!
Make a Budget
While you’re still in an organizing mood, take the opportunity to get a clear vision of your day-to-day earning and spending. If you haven’t updated your monthly budget in a while, or if you’ve never created and followed a budget in the past, now’s the time to fix that! You can use our free budgeting worksheet or create your own using a spreadsheet, app or pencil and paper; any system works, as long as it’s easy to navigate, won’t get lost and can be updated as your finances change.
Once completed, your budget will provide you with a birds-eye view of where your money is coming and going. You’ll not only be able to see overarching saving and spending trends, but you’ll also be able to identify any items that are sucking your finances dry.
Decrease Your Spending
Are you spending more on rent than you can afford? Did your budget reveal long-forgotten or barely-used subscriptions? Are there any luxuries, such as entertainment, dining out or unnecessary travel, that are eating away at your paycheck? Don’t let the extras weigh you down — break free and save your hard-earned money by letting go of the non-essentials.
Struggling to identify the biggest culprits? One survey of American consumers revealed the following categories as the top ten weekly “budget killers”:
- Online shopping
- Grocery shopping
- Subscription services
- Technology products
- Buying lunch every day
- Household essentials
- Food delivery
- Gym memberships
- Entertainment (movies, concerts, etc.)
Remember that “cutting down” doesn’t always mean “cutting out permanently.” Rather than completely depriving yourself from the things you enjoy, think creatively and replace the expensive things with free or reduced-price versions. Check out these temporary swap examples:
- Replace your coffee shop visits with at-home pour-overs and Pinterest latte recipes
- Pause your gym membership and try free YouTube workouts or discounted exercise opportunities through your local parks and recreation department
- Avoid shopping for new tech, clothing and household essentials — look for gently-used and like-new items through second hand stores and sites like OfferUp, Craigslist and Facebook Marketplace
- Say no to last-minute lunch orders and try planning and prepping a week’s worth of grab-and-go meals over the weekend
- Lower your grocery bill by following a shopping list, swapping name-brands for generics and focusing on in-season produce
Increase Your Income
What if you’ve already perfected your budget and cut what you can do without, but are still having trouble staying financially afloat? Your next step is to find ways to generate more money. Here are a few of your options:
- Ask for a raise
- Brush up your resume, write cover letters, go on interviews and lock down a higher-paying job
- Work extra hours at your current job
- Pick up a second, part-time job
- Freelance or pick up a side hustle
- Sell unwanted items, like clothing, books and electronics
Don’t Take On More Credit
When you’re faced with overwhelming debt, the last thing you need is to add more to what you already owe. Stop pulling from your current lines of credit and use cash to pay for what you need. It’s also a good idea to avoid taking on any new lines of credit.
Some individuals have successfully consolidated their debts through the use of a new loan or credit card. However, in order to benefit from a consolidation loan or a credit card balance transfer, the below should be true:
- You have a high enough credit score to secure a lower interest rate than what you currently have
- You have a clear payoff plan so that you can pay off your debts before any introductory interest rate offers expire
- You aren’t in a situation where you’ll be tempted to incur more debt with your new line of credit
If you’re not careful, opening a new credit card or personal loan to manage existing debt can quickly turn into a “robbing Peter to pay Paul” situation.
Explore Debt Relief
Let’s say you’ve tried everything — you’ve analyzed your finances, reworked your budget, sworn off using credit cards and taken on more hours at work. Unfortunately, your changes still aren’t enough to make ends meet. What do you do when you’re so overwhelmed with debt that it seems you’ll never be able to get ahead?
Fortunately, there are a few debt relief options and strategies you can choose from to help you move beyond your financial burdens. Here are some signs that it may be time to look into debt relief:
- You can’t find a clear way to pay off your unsecured debts within the next few years
- If you’re able to put money towards your debt, you’re only able to make minimum payments
- Creditors are trying to reach you through phone calls and letters
- Your debt is more than half of your yearly income
- You regularly make late bill payments
- Your debt is a major source of stress