Getting Out of Debt
We made some poor money decisions the first few years of our marriage and now we have $12,000 in consumer debt. We realize that our excessive spending was wrong and we're determined to change our ways. How can we reduce our debt?
The following suggestions should help you pay off your debt. Choose the ones that work best for you and your spouse, then start erasing your debt today.
- Do you have any assets that can be sold? Even small things sold through a garage sale can help you pay off smaller debts. But the sale of bigger items such as cars, boats, investments and perhaps even homes should also be considered.
- Consider using savings accounts. Using a low-yielding savings account to reduce high-cost debt such as credit card debt or an installment loan is a guaranteed high-yield investment. But don't tap into the emergency fund that you have set aside to protect you and your family against unexpected bills.
- Try to double up on payments. By doubling up on credit payments and cutting expenses in other areas, it's possible to pay off debt much more quickly. There are also benefits to paying home mortgages on a bimonthly schedule, or even making just one extra payment per year. Either approach has a dramatic impact on the number of payments needed to pay off the mortgage.
- Keep constant the total amount of payments you're making each month. Pay off your smallest debt first. When that is gone, apply that payment to your next-smallest debt. For example, if you have several credit card and installment payments totaling $500 per month, instead of reducing the amount paid each month as the debts are eliminated, continue to spend a total of $500 a month on repayments.
- Review your living expense summary and decide where you can cut expenses. You might cut down on entertainment, clothing, food or your home-maintenance budget. In almost every family, as much as 40 percent of the budget could be used to repay debt, but it requires a change in lifestyle. Then, apply that amount to paying off specific debts.
- Review your income-tax withholdings. If you receive an income-tax refund, consider reducing your withholdings to the amount of your projected tax liability. Then apply the increase in your take-home pay to your debt repayment. Determine your tax liability for next year by looking at last year's income tax return to see how much you paid. Then calculate the effect of any pay raises, the birth of a child, having an older child leave home, and so on. After you have determined what you're likely to owe, fill out a new W-4 form. But don't reduce your income tax withholding below your projected tax liability. If you do, you're borrowing from the government to pay someone else. The day of reckoning is merely postponed to April 15.
- Don't decrease your charitable giving. Giving should be the first priority use of money, because it is recognition of God's ownership of everything. And in most cases, avoid debt-consolidation loans. Such loans don't solve the basic problem of overspending.
- Be careful about seeking a second full-time income. If your family can cover expenses with one income, you shouldn't seek a second income merely to increase revenues. When you consider the additional expenses of tithing, taxes, childcare, transportation and so on, the economic benefit of a full-time homemaker getting a job is often almost nonexistent. There are exceptions, however. A family may face unexpected medical bills or desire to send their children to a private school. In such cases, a second family income may be the means of providing the extra money Another possible exception is if a wife takes a part-time or temporary job to help pay off debt.