Dealing with Debt
Do not ignore your debts. They do not go away. It is important to take action. Below are some suggestions or actions you may want to take to resolve them.
One of the most important aspects of resolving a debt situation is knowing where to get the money. Too many times we look at a bill and think "How can we ever pay that?" Paying ones debts is mostly a moral conviction rather than a financial one. It is important to deal with the situation immediately rather than waiting until it goes into collections.
Some suggestions on where to find money:
- Relatives & Friends - Many times parents and friends are happy to help in tight situations.
- Church – This is a good source of funds in emergencies or illnesses. Some church's even conduct fund raising activities.
- Farm Resources – Sale of livestock, sale of produce, government payment, crop check, milk checks; as well as, real estate loans are just some sources for farmers.
- Second Mortgage – Many banks are willing to help consolidate debts and wrap them into your mortgage.
- Salary Advance – Some employers may be willing to assist in this area.
- Income Tax Refund – If you are getting a refund, don't act like it is a windfall and blow it – use it to pay down bills.
- Stocks/Bonds – These have value. You can either sell them or visit with a bank regarding using them as collateral.
- Second Job – This is always a good answer for long term needs. Make certain that the second employer is withholding enough so that taxes will not be owed at the end of the year. Many times the combination of the two incomes can throw you into a higher tax bracket.
- Rental Income – If you have rental property, consider increasing the rent. Or if you have a relative/friend in need of housing, consider renting out a room to them.
- Payroll of Spouse/Child – It's important to discuss financial difficulties with immediate family members and give them an opportunity to help.
- Sale of Household Items – Take a moment and look around the home. How many items haven't been used in the last year? Consider a garage sale.
- Bonus Checks – Check with your employer to see if there are positions that will give you an opportunity to make a bonus.
- Christmas Bonus – When you receive them, use them wisely. Pay down debt.
- Military Pay Allotment – You can establish a portion of your pay be deducted and set aside for particular bills.
- Wage Assignment – Like a military allotment, you and your employer can establish an amount of your pay that will be deducted and then used for paying a particular debt.
- Pensions – While some pensions or IRA's may carry a penalty for early withdrawls, there are certain situations – like medical – where money can be drawn out early. You can also consider stopping contributions for a period of time until your debts are paid down, and then resume contributions at the next enrollment date.
- Insurance Policies- Whole life insurance policies, if you have had them for a while, have a “cash value.” This money is available at a very low interest rate. Borrowing from the cash value does not affect the policy.
- Military Pay – Like a part-time job, the National Guard maybe a consideration. These are civilians who serve their country, state and community on a part-time basis (usually one weekend each month and two weeks during the summer.)
- Signature Loan – Depending on the bank and various other factors, you may be able to get a signature loan – check with your bank.
- Savings Accounts – If you are saving money for emergencies, or a rainy day, and are struggling with debt – then it's time to look at how you are using your monies. Most savings accounts only pay 2-4% interest, whereas, credit cards charge 28%+. Never “save” money at low rates while paying out high rates of interest – you'll never get ahead that way. However, it is important to have at least two months of salary saved for emergencies. But when the emergency comes, use your savings, and then begin saving again.
- Secured Loans – If you have equity in a car, or real estate, or land, or home, or other valuables. These items can be used to secure a low interest loan.
Due to the high interest we seldom suggest obtaining money from a cash advance business. However, if it is a one time emergency situation, it maybe a consideration.
It is estimated that there are 32 million families living below the poverty level within the United States. And while you may not feel that your family would qualify for “charity,” with today's rising healthcare costs, it is important to check. Many hospitals work hard to inform individuals of assistance that is available. But few take advantage of it.
We always recommend that you visit with the hospital on what their requirements are in this area. There is nothing wrong in taking advantage of assistance that is available.
Loss of Job
Due to Unemployment Compensation, loss of job does not mean loss of income. About 125 million individuals were covered by all UC Programs in 2000, representing 97 percent of all wage and salary workers. Depending on the state, Unemployment Compensation can run from 26 to 39 weeks at 50% to 70% of the individual's average weekly pretax wage up to the State's maximum. Average length of time before receiving your first benefits check is three weeks.
Loss of job does mean that expenses have to be tightly controlled.
Likely one of your bigger expenses is health insurance. COBRA provides certain rights to “temporary continuation" of health coverage. The cost for COBRA is usually more expensive than health coverage for active employees, since COBRA participants generally pay the entire premium themselves. If health insurance is a factor, it is important to immediately check with several local insurance agents to determine if continuing on COBRA is the most cost effective way to go.
Review all expenses – house payment, insurance, food, phone, cable, etc. Determine what can be cut and cut them. By agressively taking charge of the situation you'll be better prepared for dealing with problems. Do not wait for payments to be late, contact creditors and discuss the situation. Some creditors maybe able to adjust minimum payments during this period.
Effectively Manage Your Money
One of first things to do is list all debts - also record their minimum payments and interest rates. To gain control of your debts it's important to eliminate those debts that charge the highest interest rates. Once you've established which debt charges the highest interest rate, begin chipping away at it. Check the above money sources, those that charge you lower interest, and use them to pay down the higher interest rates. If you get an unexpected bonus, use it to pay down the debt. If you get a raise, use most of the difference to pay down the debt.
On an average it takes the average family 5 years to pay down $10,000 in credit card debt by following that simple rule. Once the ball starts rolling, usually after the first year, it is amazing how quickly the debts get paid.
As you chip away at the debt, it is important to save for both unanticipated and anticipated expenses. If you know that your insurance premium will be coming due in three months, begin planning for it today. The goal is to stop using credit cards. By planning for emergencies, and then using your savings when they occur, you are effectively managing your money.