Being in debt is a scary place to land. Knowing where to begin chipping it away can easily become overwhelming.
But take a breath: You're far from alone. According to the 2018 Consumer Financial Literacy Survey, 29% of Americans lack any emergency savings whatsoever. But with awareness, discipline and persistence, you can tackle debt—one step at a time.
Admitting there's a problem is the first step to finding a solution, notes Shari K. Hooper, Certified Senior Advisor (CSA), Senior Financial Advisor, ARGI.
"Have awareness of your situation and start taking action," said Hooper, adding that an accountability partner or financial advisor could be the key. "There's a debt-to-income ratio that's very easy to review by taking your total expenses each month and dividing it by your gross monthly income. The lower the percent, the better position you're in."
Once you know your debt-to-income ratio, online tools or resources can help you begin to save for the future.
Laura R. Wright, CPA, Tax and Advisory Manager, Rehmann, says getting out of debt will be hard work, but the rewards are well worth the sacrifices. "Living debt-free or—at the very least—living with your debt at a minimum, will afford you a lifestyle of freedom and opportunities."
Wright offers these recommended first steps for confronting debt:
- Make a list of all your debts, by balance and by interest rate. If manageable, focus first on getting the debt with the highest interest rate to the smallest balance.
- Determine your budget and commit to living within it. You'll likely need to cut out all unnecessary expenditures and allocate all available funds—other than essential livings expenses—to your debt. Google and your local library have resources for creating a budget that works for you.
Checking your credit report is vital to ensure employers, insurance companies and lenders—all of whom can access your credit report—are seeing an accurate and positive picture.
"You must obtain your free report through the government website annualcreditreport.com," said Wright. "If you find errors in any of the reports, you'll find information on the agency's website on how to dispute any inaccurate information, along with an available number to call."
Hooper and Wright recommend having an emergency fund, to keep you from sliding further into debt as unexpected expenses inevitably arise.
"One of the biggest reasons people stay in debt is due to the fact that they're always trying to pay down the debt without leaving room for an emergency fund to build," said Hooper. "Whenever a small financial emergency arises, it's added to the much larger load of already existing debt."
Start by saving each month while making your monthly payments, even if it's simply $25. A common goal for this fund, Hooper said, would be three months' worth of your total expenses, or six months' worth if you're a single-income home.
It's important to not count things like bonuses at work as guaranteed income, as there's no way of knowing what that bonus amount will be—or if you'll get one at all, Hooper advised.
As you begin to see the light at the end of the tunnel, don't forget to make use of your company retirement plan and salary.
"Defer a small amount initially and increase as your debts are reduced. This is an important key to staying out of debt," Hooper said.
"When you can see the opposite of debt and have a growing asset, it becomes harder to spend on luxuries."
Consider adhering to the 70/10/10/10 savings plan for applying your income deliberately:
- 70 percent for general living expenses
- 10 percent invested philanthropically
- 10 percent saved for retirement
- 10 percent for personal development
Sending your child off to college?
Help them avoid these top credit card mistakes made by college students, identified by Credit Karma.
- Pretending credit doesn't exist. Establishing good credit young will come in handy later.
- Missing payments. Set recurring alerts for bills or set up automatic payments.
- Running up credit card debt. Just because you can, doesn't mean you should.
- Not setting a budget. Encourage students to learn to live below their means.
- Not understanding how annual percentage rate works. Know your balance, payment date, purchase and penalty APR, and the date your introductory APR ends.
Written by Sarah Suydam, Staff Writer for West Michigan Woman.
This article originally appeared in West Michigan Woman.
