Four-Step Debt Evaluation Plan

May 30, 2008

One of the most comforting things to have in a crisis is a plan. Unfortunately, the last thing most people want to do is to think about their debt, so they avoid facing it. But this is exactly what you must do in order to overcome the negative feelings. You must create a plan, which establishes your dominance over the debt. A plan also shows you how far away the light is at the end of the tunnel.

Four-Step Debt Evaluation Plan

1. Make a list of every debt you owe.

2. Next to each debt, put a minimum payment amount.

3. Total up all of the minimum payments and write it down.

4. Decide how much you can pay each month and write it down.

If You Can’t Afford the Minimum Payments

You are in real financial trouble and you need to take immediate action. The longer you avoid this situation, the worse it is going to get. You need to decide right now if you are willing to make the kind of lifestyle changes that will allow you to crawl out of debt. My recommendations would include downgrading your lifestyle and getting a second job. Cutting back on lattes and bagels isn’t going to be enough. You need to take more drastic action, like a cheaper car and cheaper rent. You should probably avoid eating any place where you need to leave a tip and put off buying new clothes.

If you aren’t willing to make these types of changes, you should admit this to yourself and consider the consequences of being insolvent. Face the facts, straight up and deal with it. There is no fantasy world when it comes to bankruptcy. It’s no longer easy to discharge debt. And, you will pay for your indiscretions in many ways in the future. I recommend bankruptcy only as a last resort. I think this may be a good time to talk to professionals and I don’t mean those debt services on TV.

If You Can Barely Pay the Minimums

This may not be as bad as it seems. First and foremost, stop accumulating debt. Then, consider some of the lifestyle changes listed above. If you can increase the amount you can afford to pay by only 30-50%, you have a great shot at getting out of debt in a reasonable amount of time. Start by paying everything on time, so you can avoid late fees. If any debt is over-the-limit, pay this first to avoid the penalty. Avoiding these fees and penalties is a big key to dropping the balances.

If You Make Good Money but Can’t Get Out of Debt

There is no income level at which debt stops being a problem. Often, debt grows even faster with increases in income. Some millionaires have declared bankruptcy a number of times. There’s no shame in being in debt. But, it’s a shame if you choose to remain in debt, when you could be getting ahead and providing for a more secure future.

The problem of debt is three-fold. First, you pay a lot of money to service the debt that you could use for other purposes. Second, you greatly reduce your financial security, by increasing your required monthly expenses. Third, you reduce your ability to save and plan for your future. It’s a fiscally inefficient and insecure way to live. And, it enriches the banks at your expense.

The Bottom Line

The bottom line is that crawling out of debt is hard. I have personally struggled with debt and it doesn’t get any easier as your income goes up. It takes a dedicated, committed effort, sometimes over a long period of time. And, backsliding is inevitable, so be prepared for this. Your car will break or you will face unexpected expenses at the worst possible time.

Keep paying and don’t lose hope. Try to visualize how your new lifestyle will be, with a debt-free existence. Calculate the future date, when you will be rid of your debts and pulling ahead financially. Keep the faith and you will be rewarded.