海角大神

Digging out of debt: the first step

Turning your finances around doesn't happen all at once. It comes in stages. 

Financial meltdowns often start with a small thing 鈥� the figurative straw that breaks the camel鈥檚 back.

I鈥檝e read stories from readers about the many small things that have caused them to start reassessing their lives. They had a credit card rejected at an inopportune moment. They didn鈥檛 have enough cash to pay for the groceries in their cart. For me, it was facing a stack of bills that I didn鈥檛 have the money to pay.

For some, that figurative back-breaking straw can come with the first real sign of financial distress. For others, it takes something much more severe, and sometimes nothing will make them change their routines.

When people reach that back-breaking point, though, whatever it may be, their first instinct is usually to get their short-term finances in good shape. In other words, they want to do things so that they know they鈥檙e going to make the rent this month and that their bills are paid. Once that鈥檚 under control, medium and long-term planning can begin to take priority 鈥� how can we get out of this mess, in other words.

Today, let鈥檚 focus on that first step. What do you do when you finally reach a breaking point, realize that your finances are a disaster, and need a plan to help you get rid of some late bills and still make the rent?

The first step to take is to get those credit cards out of your wallet. If you are carrying a monthly balance on any of these cards, you need to stop using them for a bit until you get things under control.

Open up your wallet, take the cards out, and put them in a safe place so that you don鈥檛 have access to them when you鈥檙e out and about. Don鈥檛 give yourself the opportunity to add more debt load to your situation.

The second step is to assess how close you are to paying off your bills for the next month. Are you going to be able to make the minimum payment on any and all bills as they come in? Can you take care of any late bills that aren鈥檛 yet in collections?

Quite often, you鈥檒l find that you鈥檙e not able to do that with the cash you have on hand plus the cash you鈥檙e bringing in for the month.

If that鈥檚 the case, you need to sell off some stuff. Clean out your closets and find any and all items that you don鈥檛 use that might have value.

Once you have a stack of items, hit Craigslist and offer them for sale. If you don鈥檛 find any luck there, try eBay, particularly if the items are collectibles.

The purpose of this is to turn things you鈥檙e not regularly using into enough cash so that you鈥檙e not struggling to keep your head barely above water every week. Before you can take the next steps forward, you need to be sure that you鈥檙e not late on any of your bills and that you can easily take care of your bills over the next month. Often, it takes a small boost of cash to get a person up to that point, and the easiest resources for that is found in a person鈥檚 closet.

The next step you should take is to engage in cost-cutting, but don鈥檛 do it to the point of misery. Look for obvious ways in your life to spend less, but stick to the ones that feel good when you spend less.

Many people reach this situation and then respond by diving deep into hardcore frugality. They try to avoid spending anything.

Doing that is no different than going on an all-lettuce diet. Eventually, you鈥檙e going to resent it and you鈥檙e going to 鈥渟nap back,鈥� undoing all of the progress you made.

Instead, stick to cost-cutting measures you feel good about. Every time you have to make a spending decision or consider buying something, consider the path of spending less, but only choose it if it feels like the right choice. If you always choose the cheap path, particularly if it鈥檚 not something that comes naturally to you, you will eventually have a big resentment-filled backlash against it.

In other words, choose to spend less on the things that are less important to you, and don鈥檛 cut back on the things that are important.

How do you know which is which? Try cutting back on something and decide for yourself if it鈥檚 having a real negative impact on you. If it is, go back to the way things were before the next time you have to make a similar purchase. If you feel you 鈥渉ave鈥� to always do something you don鈥檛 like, frugality becomes misery 鈥� and, trust me, frugality done well is the opposite of misery. When frugality becomes misery, it becomes very easy to walk away from it 鈥� and then it becomes very easy to find yourself right back where you started.

Remember, always, that you can do this. I鈥檝e done it. Many of the readers of this site have done it. We鈥檝e been in financial situations that seemed overwhelmingly bad. We鈥檝e been depressed about it and we鈥檝e often felt completely hopeless.

It doesn鈥檛 have to be that way. You can do this. You can dig out of your financial hole. It just requires you to make some changes regarding how you use your money.