Low-income families with high expenses generally fall into debt. Some people land in debt just by providing for the basic necessities of their families, like food, electricity and rent. Others have landed themselves in this unenviable position because of their spending habits and financial mismanagement.The first group of people have little choice. Even at the risk of rising debt, they have to continue paying for their essential needs. The second group can get out of debt if they commit themselves to a disciplined life and decide to pay back their debt.
To take control of your life you need to know your real financial situation. Keep a pen and paper handy. Note the outstanding balance from each of your credit cards. Write down the interest rates against each amount. If you have other debts, such as car loans and mortgages, add them to the list too.
Then make a list of all essential expenses like rent or mortgage payments, electricity and gas payments, loan payments, cost of traveling to work (bus, train or petrol costs), insurance payments, water bills, food expenses, school fees for children and other important bills that you have to pay.
Add up your important expenses and subtract it from your total income. The difference is the disposable income you have which can be used for discretionary expenses like going to a movie or eating out. If you end up with no (or a negative) discretionary spending amount, then you need to consult a credit counselor for help with better income management.
To understand how you are spending your money, note down every expense in a notebook. Write down all expenses, big and small. Whether you bought a pack of gum or paid your child’s school fees or bought a movie ticket, make a note of it.
If you do this regularly, you will be surprised to find that even small luxuries like the daily coffee latte and newspaper on your way to work, the deli sandwiches for breakfast, the doughnuts from the bakery, the gym subscription that you hardly use, and the twice-a-week dinner outings all add up. These are non-essential, even if they come under the category of food expenses.
Making your own coffee and sandwiches at home is cheaper and healthier without extra cream or cheese. Pack an extra sandwich to eat at lunch. Take along a couple of apples to munch on your way back home. You will find that you can easily save a hundred dollars or more just by skipping these daily rituals.
Resolve to stop indulging in luxuries you cannot afford. Use the money to pay back your debts instead. Stop using your credit cards and avoid adding more to your existing debt. Pay the minimum balances on each card every month to avoid stiff penalties.
Use a calculator to find out how many months it will take to pay back the outstanding debt on each card. Try to pay off as much as you can every month.
Start by repaying the most expensive loans first. These are usually pending payments on credit cards with the highest interest rate. Once that is done, move on to the next most expensive card and pay back the debt due on it.
If you are unable to keep up with even the minimum balance payments, call up your credit card company and calmly explain your situation. It will be not be easy, but you have no other choice. Tell them that you are determined to pay back the debt, but you need some help as you are in a very tight financial situation.
Some companies might offer to freeze the interest rate, or offer to transfer it to a zero-interest balance transfer account till you pay off the debt fully. Some might reduce the minimum payments. But don’t expect miracles every time.
Restructure Your Finances
Use these life-lines to get your debt under control. If everything fails, try a low-interest second mortgage loan. This is a dangerous line for those who are not committed to paying off their debt, as they risk losing their home.
Be careful about companies that offer debt settlement services. They are often running fradulent businesses which target vulnerable people in financial distress, and will add to your already crippling debt.
As you pay off the balances on your credit cards, cancel the ones which charge the highest interest rates. Cut them up and throw them away. All you need are one or two credit cards to cover you needs. Follow a disciplined and committed repayment plan to take permanent and lasting control over your debt.