Yesterday we got a desperate request within a comment on our blog. It was posted by a 46-year-old woman named Veni, who feels trapped by her spiraling cycle of increasing debt. She has watched Oprah’s Debt Diet on TV and wishes someone could help her get her finances under control. We were both struck by her plea…Well, Veni, this debt diet is for you!
Step 1: Recognize that there is a problem.
Veni’s has done some soul-searching and she admits that her problems include:
-Trying to keep pace with friends who earn higher incomes.
-Losing track of small expenses
-Losing track of her checking account balances and incurring fees
-Using credit cards for everyday expenses rather than as an emergency backup
-Poor credit score
Chin up, Veni! We were in your shoes just 18 months ago. We got educated, made a plan, stuck to the plan, and now we feel great! Remember, every day you stick to the plan you will improve your finances a little. So every day from now on will be the new best day of your financial life! And we think your whole life will start feeling better once you have your finances under control.
Step 2: Stop hemorrhaging cash
This step will cut your monthly expenses so you can free up some cash for debt repayment.
First, cut your monthly fixed expenses. Call your service providers (cable, phone, internet, etc) and try to negotiate a better deal. Tell them if you’ve seen a cheaper deal with another company, they may match it. If your contract is up and they won’t budge, switch to a cheaper company or plan. Then call your credit card companies. Ask them to lower your interest rates and eliminate your annual fee.
Step 3: Find cash around the house.
If you are subscribed to magazines you don’t read, call and cancel the subscription. They’ll usually issue you a check for a portion of your annual charge. If you have the receipts for recently purchased items, return them to the store. If you don’t have receipts, start saving them (every one) so you can audit your receipts and make returns later. If there are unused items around the house, sell them on eBay. Buy a newspaper, clip all the coupons, and sell the ones you don’t want on eBay.
Step 4: Stop spending.
From now on, before you purchase anything ask yourself these questions:
1. Is it absolutely necessary for me to buy this?
2. Can I rent it or borrow it instead?
3. Is it on sale? Can I get it for less?
5. Is this worth ruining my credit for?
This means no new clothes, shoes, household items, you name it. Approved purchases include food, gas, utilities, and other minimum necessities only.
Step 5: Increase your income.
Consider working overtime (if your job allows it), asking for a raise, or getting a second job. If a formal job won’t fit in your schedule, see what you can do to earn money part-time. Can you baby-sit for neighbors, sell crafts on eBay, or do other small chores for cash? Also, check your mail for special offers that give you a cash bonus for opening checking or savings accounts. If you spare the cash for the deposit required, you can reap the bonus cash then close the account.
Step 6: Get Organized.
Create a spreadsheet or buy some budgeting software. Enter all your information then update it at least weekly. At a minimum, you need to know: The total amount of debt you owe, to whom, and at what interest rate; the total cost of your monthly fixed and variable expenses; your monthly income. Start saving every financial statement you receive. Buy a file cabinet and folders. Create a folder for each expense and sort your statements. A great book that explains very well how to do this is Smart Couples Finish Rich by David Bach. You also should know your credit score and understand why it is what it is. Get your free credit reports online, and pay the extra little amount to see your FICO score. There should be an explanation on here for why your credit score is low, such as “Too many late payments in past year.” Flip these around and they become suggestions for how to improve your credit.
Step 7: Set Realistic Goals
Some of Veni’s goals include having enough money to buy a car and a one bedroom condo within 2 years.
First, determine if these are realistic goals. It seems like a long reach to stop getting into more debt, reverse your actions, and save up enough for a down payment within two years. We’ve been following our plan for 18 months and have paid off over $6,000 of debt and improved our credit scores significantly. Still, we haven’t even begun saving up for these kind of large purchases. Maybe you’ll need to give yourself a few extra years to reach your goals. These should be your long-term goals, but set some short-term goals too. Some good short-term goals could be: Cut spending by 50%, Pay off $3,000 of debt this year, or Improve your credit score by 10 points this year.
Step 8: Get educated
As soon as you have taken these emergency measures to immediately fix your finances, begin getting educated about personal finance. This doesn’t have to be boring or expensive. You could watch Suzi Orman’s television show about personal finance, read blogs like this one, or borrow some books from the library.
Step 9: Stay Motivated
Instead of surrounding yourself with the Jones’s (and their shiny new cars and houses), surround yourself with people who respect your financial goals and help you achieve them. The personal finance blog community is full of people like this. Your real-life friends will probably be supportive if you tell them what your goals are, too. You can also use Excel to create charts showing your progress in paying off your debts and saving for your goals. These charts can help keep you motivated as you see your progress increase over time.
Well, Veni, there’s a fresh start for you! Congratulations on taking the first step and asking for help. We’re not financial experts, but these are the same steps we’ve been following for the last 18 months. We can assure you that taking these steps can only help you! We wish you well on your new financial journey. It won’t be easy or feel very good at first, but in the end you and your FICO score will be feeling HOT. We’d love for you to let us all know how things go for you, so be sure to stick around the blogging community!