I will admit that it is easier said than done to just stop using credit. But this really is the only way to get out of debt. The extra money that you are paying toward your debts each month isn't going to amount to a hill of beans if you are continuing to incur new debts. So, if your goal is to pay off your debt, start by promising yourself that you will not use credit. Like any other goal, it is helpful to have a plan on how you can succeed in stopping your use of credit. One of the most common mistakes that I see that causes people to use credit is that they fail to start an emergency fund. If you don't have an emergency fund it will only be a matter of time until you have to use credit. For example, if your refrigerator breaks down and you don't have any cash set aside to purchase a new one you will use credit because you need a refrigerator to live. The same thing can be said of a car repair, furnace repair, etc.
In my opinion, your emergency fund should have at least $1,000.00 in it. Many people wonder if I am kidding when I say this. They tell me that there is no way they could get $1,000.00 in a bank account. The only way to do this is to start putting money in the bank in whatever small amount you can and to just continue to do this over time. While you are building your emergency fund do not concentrate on making additional payments on your debt. Pay the minimum payments and put any extra into your emergency fund. Once you get $1,000.00 in your emergency fund go back to making larger payments on your debt whenever possible. When you have to tap your emergency fund (notice I said when and not if) go back to minimum payments until you have been able to build it back up. Having an emergency fund will help stop the cycle of paying down debt only to incur new debt.
Another key to getting out of debt is to put the idea of credit cards for an emergency out of your mind. If you have several credit cards I recommend cutting up all but one of them. As for the one you keep, do not carry it in your wallet or purse. It is just too easy to pull out the credit card and pay for something if you are carrying it on you. If you have left it at home you will need to make sure that you actually have the money to pay for something rather than just putting it on the card.
Next, it is important to set up a realistic budget and set spending limits for your variable expenses such as food, clothing, entertainment (this includes eating out), gasoline and haircuts. Once you have set your budget for these items go to the bank once a month and take out the allowed budget for these categories in cash. Use envelopes or some sort of organizer to keep the cash separated into each budget category. When you need a haircut, pay in cash from the haircut envelope, etc. But once you are out of money for the month you need to STOP SPENDING. Using cash and the envelope system is important because it makes us think about the money we are spending, but also acknowledges that you do need to spend some money. It is more effective to budget for what you will spend than to attempt to spend nothing. Attempting to spend nothing is much like fad dieting in that eventually you will fall off the wagon and go on a spending spree due to too much self-depravation.
If you follow these tactics you will have the best chance to get out of debt without bankruptcy. Once you have paid off any unsecured debt such as credit cards, medical bills, personal loans, etc., then work on adding to your emergency fund. You should really work to build your emergency fund to at least 6 months of your household expenses. At that point cancel the last credit card. Yep. It is possible to live without a credit card. I have done exactly this for years and it feels great. Anything that you might need a credit card to do can also be done with a debit card. And don't try to tell me that those points or air miles are better than not owing any money to a credit card company. As I once heard a bankruptcy judge in the Southern District of Indiana say there is a reason that they call it a "Master"card....it is because by owing money on a credit card you become a slave to your debt.
Hopefully this plan will work to help you get out of debt. But sometimes lawsuits, garnishments, long-term unemployment or medical conditions make it impossible to get out of debt using any method. If you find yourself in this situation and live in Indianapolis, Fishers, Carmel, Noblesville, Tipton, Zionsville, or anywhere else in Central Indiana I would be happy to speak with you to help you understand how bankruptcy works and whether it is a good idea for you or not. If you would like to meet with me for a free initial consultation call Halcomb Singler, LLP, at 317-575-8222.
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses
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