If you are tired of paying interest or if you feel like there is an avalanche of debt coming your way, it’s easy to feel totally overwhelmed. But putting your head in the sand is no solution and ignoring debt can make things even worse.
Many types of debt destroy your future. Maxing out your credit card on vacations and luxuries isn’t going to help your financial situation. Buying a new car every few years ensures you will never get a car loan paid in full. And not paying bills on time will destroy your credit rating.
If you willingly take on debt, you are obligated to pay it back. Romans 13:8 from several different Bible translations admonishes us “Owe nothing to anyone;” “Keep out of debt;” “Owe no man anything;” “Let love be your only debt;” “Don’t run up debts.”
Debt is a tool, and like any tool it needs to be used correctly. A hammer is a tool but you don’t use a hammer to kill a bug on a window. And you should not use debt to subsidize a lifestyle you can’t afford.
In looking at your personal debt, it helps to understand the difference between secured and unsecured debt. Secured debt is tied to a specific piece of collateral, such as your house or car. If you can’t pay the loan, the lender can seize this collateral to fulfill your debt obligation.
Unsecured debt (medical bills, past due bills on utilities, and money owed on credit cards) is solely based on your creditworthiness. A lender will approve unsecured debt, without any collateral to secure it, by reviewing your credit report and credit score.
If you are having problems making ends meet, it makes financial sense to prioritize the secured debt and pay that first. Falling behind on a credit card payment may ruin your credit score, but falling behind on your car payment may lead to your car being repossessed.
If you find yourself in a position where you have to prioritize debt payments, you will never recover without using a budget. It is the only way you can match your income against your expenses and find ways to bring them into balance.
A budget forces you to assess priorities and set limits while giving you the information you need to make smart decisions with your money. In general, you should use a budget to figure out places where you can cut back and save money. In addition to taking care of your basic needs, your budget should include a strategy for how much you can add to minimum debt payments and the order in which you want to pay off your debts.
Remember, that a budget is a tool and the success of a budget depends on how you use it. Writing down some numbers you pulled out of the sky is not a budget. Track your spending for a few months, categorize the spending and use that as your starting point for a realistic budget. Be sure to prioritize your debts and expenses, listing those that are essential to pay (like the mortgage, or the utility bill) and those that might be less important (such as department store charge cards or loans from family and friends).
A budget allows you to see if you are staying on track and making progress. Otherwise your finances are just guesswork, which is probably how you got into debt in the first place.
If you are seriously using a budget but can’t make any progress after a few months, you may need help from a credit counseling organization. If you do, check out the company’s credentials first. Not all agencies are legitimate—some charge excessive fees, fail to perform promised services, provide bad advice, don’t discuss alternative ways to deal with debt, make false promises, and sometimes even take your money and run. The federal Trade Commission website offers tips on how to choose a credit counseling agency: https://www.consumer.ftc.gov and search for: choosing-credit-counselor.
You may be considering using a home equity line of credit (HELOC) to pay off your unsecured debt. Or you may consider debt consolidation, which is a loan used to pay off all of your debts at once. For many people, a HELOC or some sort of consolidation loan may seem like an easy fix. But the HELOC may put your home at risk if you don’t pay it on time and a consolidation loan can lead to more debt.
If you don’t make fundamental changes to your lifestyle you’ll be in debt again within a few years after securing these loans. They are an easy fix to the immediate problem but debt is just a symptom. The real problem is how you manage your money.
To solve the root cause of debt, you need to resolve the reasons you ran up so much debt in the first place. Are your expenses greater than your income? Is your spending irresponsible and impulsive? Do you live beyond your means? Are you addicted to credit card spending sprees? Unless your lifestyle goes through a fundamental change, you will keep spinning in the debt cycle
To pay off debt, you only have two choices: spend less or earn more.
To spend less, think of potentially significant changes to your lifestyle. Can you manage on one car? Should you sell the house and downsize? Can you take on a roommate to help pay the mortgage? Are you willing to buy clothes at a consignment shop? What do you own that you can sell? Your biggest savings will come from lifestyle changes.
Similarly, if you want to earn more, maybe you need to change jobs. Or maybe it’s time to approach your boss with all the (well documented) reasons you deserve a raise and a promotion.
But be sure to weigh the difference between cutting expenses and making more money. For each $100 decrease in your spending you have $100 more for debt payments. For each $100 you earn, only a portion is available for debt payment because of taxes, payroll deductions and other expenses related to your job.
If you can’t seem to stay away from those little pieces of plastic that allow you to buy every whim, follow one of our strategies. Freeze your credit by putting the credit cards in a plastic bag, putting the plastic bag in a bowl, filling the bowl with water and putting the whole thing in the freezer. Or try plastic surgery by having your credit cards meet a nice sharp pair of scissors. Another trick is to cover a cookie sheet with aluminum foil, add your credit cards, then put the cookie sheet in the oven at 3500.
The bottom line is that any time you are trying to change a habit it is a long process and a lot of hard work. Making a lasting lifestyle change won’t happen overnight.
While we do NOT encourage debt, some debts, such as a mortgage, student loan or business loans are hard to avoid. These three examples can be classified as ‘acceptable’ debt as they are appreciating assets. Homes usually appreciate in value. A student loan is assuming a higher salary after graduation. A business loan may allow you to expand your business and earn more. In these cases, debt is an investment in the future.
To help you stay focused, meditate on this verse from Proverb 22:7: “The rich rule over the poor and the borrower is slave to the lender.” All the hard work you will go through to pay off your debt and change your habits is the price you pay for the freedom that comes with being debt free.
Connect with us via our podcast on Podbean for more about how to dig your way out of debt.