“Dear Steve,
My wife and I currently have credit card debt of about $60,000. In addition to that we have 2 mortgages and 1 car payment with about 1 year remaining. We both have incomes, and are barely able to make the minimum payments.
We aren’t behind on any of our debts, but continue to live a lifestyle where we are putting groceries and gas on a credit card and not cutting down to the bare minimum on expenses. We are not friviolously spending money all the time, but probably spend at least 100 bucks a month on stuff we don’t need (daily purchases) and probably about 200-250 bucks a month on monthly things that we feel we need to maintain a certain lifestyle (maid/cable, etc). I am just overwhelmed with our debt number.
I have been a little more worried than my wife has been, and she manages paying the bills. Should we seek credit counseling or debt management before we start falling behind? Any ideas for good budgeting tools to help us look at how much money we waste monthly? I don’t want to file for bankrupcy, but with the amount of debt we have, and no real emergency fund right now, I know that we are just a blink away from having to consider it. We can’t even start a family because of the situation we have put ourselves in.
Scott”
Dear Scott,
It seems like I’m always suggesting bankruptcy, but here is a new one, not in your case.
First, let’s look at what is driving your concern, financial panic. It’s totally normal and natural. But before we wheel out the big legal cannon to deal with your debt, let’s take some baby steps.
Right now you are earning good money but operating in a fog. I seriously doubt you are tracking all your expenses and totally aware where the money is going. The first thing we need in your situation is clarity. And how do we get that? Tracking.
There are a couple of ways to track and budget. They range from traditional approaches like writing down when you spend any money on a pad a paper and what it was for. Or you can use more modern tools like the online service Mvelopes. The best solution is going to be the one that works for both of you. The Mvelopes approach may work better for you if you both have access to the web during the day and can quickly login and enter what you spent.
Simply tracking your cash will cut your spending by about 20%. This is because once you start tracking spending you become more aware what you are spending on and then make decisions to alter your spending habits.
Now tracking the cash can sound like a painful and boring exercise. Personally, I hate doing it but you don’t have to do it for ever if you don’t want to. Just promise me you’ll do it for at least three months.
Now the benefit of the tracking is awareness but it is also clarity. Once you know where you money is going you can then make conscious and educated decisions based on facts about what you might want to cut back or cut out.
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This approach works so much better than the traditional budget approach. A budget is a wish list on how you’d like to spend your money and tracking the cash is a measurement of where you actually spend your money.
Try this approach first and build in some immediate savings. Just open a savings account at your local bank and transfer $25 a week into ti. You should be able to easily do this once you start handling your cash with clarity.
After you track the cash for three months, if you are still in trouble, come back and we can talk about the path forward. Does this sound like a reasonable and responsible path forward to you?
Oh yes, to reduce your debt with the most motivation, use the debt snowball approach. Trust me, it works.
