So you’re up to your neck in a massive pile of debt. There are many circumstances that could have led you here, but responsible financial planning is the one that will get you out. Most debt situations can be corrected with careful planning and intense effort over a period of one to three years. You’ll need to include everyone in your household and be honest about the need for focused debt reduction efforts. You can do it if you follow these steps to achieve pay off all outstanding debt without filing for bankruptcy protection:
1. Save $500 – Figure out how to save $500 in an emergency fund that will be accessed in the event of an unexpected expense during the debt pay off project. Eliminate every discretionary expense possible and accumulate enough funds to meet the $500 goal.
2. Organize debts – Make a chart of every outstanding debt in order from smallest to largest without any concern for interest rates. Immediate feedback will be realized when smaller debts are paid off early in the process.
3. Stop all credit card use – Cut up the credit cards and spend cash even at the grocery store. Take absolute control of the monthly expenditures by starting a budget. Write checks to pay bills and allocate cash for all other budget categories.
4. Trim the budget – Make some difficult decisions and eliminate any expense that is not directly related to supporting the family. Consider disconnecting the cable television service until the debts are repaid. Reduce the land line phone bill by removing unnecessary features. Determine if more than one cell phone is necessary.
5. Do not go shopping – Avoid shopping for anything except for groceries. When shopping for groceries, buy items on sale and learn to cook from what is present in the kitchen. Reduce or eliminate eating at restaurants until all the debt is repaid.
6. Pay the minimum on all but the smallest – Every debt must be maintained in good standing to eliminate unnecessary fees. Pay the minimum payment amounts on all debts with the exception of the smallest on the list. Apply as much money as feasible within the budget to the smallest bill. Be realistic when setting this amount to prevent shortfalls in other budget areas.
7. Reward yourself – When a debt is paid off completely, reward the family. Order pizza or purchase a new game for family game night. Use non-monetary rewards so everyone learns the value of time together over spending money.
8. Apply funds to next debt – Take the amount that was used to pay off the first debt and add it to the minimum payment that has been paid on the next debt on the list. This method will accelerate the amounts paid on the larger debts. The accumulation effect will cause faster progress in the later months of the process. Every time a debt is paid off all of the money is rolled into paying off the next debt.
9. Delay unnecessary purchases – Throughout this process, the expense level must be reduced within the household. Spending cannot continue as usual if real progress is to be made on the debt repayment plan.
10. Celebrate success! – When all of the debts have been repaid, immediately start a savings plan that will prevent the situation from repeating itself. Attempt to save half of the amount that has been applied to the debts of the previous months and years. Decide together on a reward for the family’s achievement.
Financial spending habits must change to prevent a recurrence of the indebtedness. Live according to a family budget and ensure that all bills can be paid within the month they are incurred. Evaluate the period of the debt repayment plan and determine what works for the family. Keep the best activities of the financial discipline learned throughout this period as good financial habits.