Get Out of Financial Trouble

Financial trouble can strike suddenly and can come from a variety of sources. Perhaps you lose your job, suddenly find yourself in credit card debt, or lose it all on an investment gone wrong. In any case, the most important thing you can do is stop and think to identify the problem and plan a way out of it. By doing so, you can immediately get started on the path towards regaining your financial security.

Steps

Planning a Way Out

1. Determine the source of your troubles. This may be obvious if you've lost a job or lost money from one particular mistake, but for some people the fact that they've been living beyond their means and overspending may be harder to see. If you have suddenly found yourself unable to pay your debts, look at your debt sources and your expenses and identify how you got into this mess.
   • Make a list of your biggest financial problems. Remember that you do not need to fix everything at once. Instead, try to prioritize the items on your list, such as paying off a major source of debt or finding a job. The rest of your financial woes will be easier to solve once the major ones are out of the way.
   • After you have identified and prioritized your financial problems, try setting a goal date for solving each one. For example, you might give yourself until the end of the month to find a job or make it your goal to pay off your largest source of debt within two years.
   • If you are married or in a long-term relationship, then make sure that you involve your spouse or partner in this process as well.
2. Develop a list of solutions. Now that you have prioritized your financial problems and set goal dates for each one, you should also map out a plan for solving these problems. Identify concrete steps that you can take to move closer to your goals and write them down.
   • For example, if your goal is to pay off a large credit card debt within two years, then you will need to calculate how much to pay each month and be consistent with those payments. You will also need to avoid using the credit card if the account is still open.
   • If your goal is to find a job, then you might list solutions such as search job postings daily, submit 10 applications per week, or call after a week if you have not heard back.
3. Review your debts. One of the first things you can do to try to get out of debt is to contact your debtors and make certain that you really owe the amount demanded. If you think that you owe less, you can contact your creditor first and try to resolve the issue. If this doesn't work, you may have to take legal action to get out of the debt.
   • However, if the issue is simply that you can't pay your debt, you can try to set up a new payment schedule with your creditors. Odds are they prefer giving you more time to repay your debt to potentially receiving nothing when you file for bankruptcy. So, call them, explain your situation, and negotiate a new repayment schedule.
4. Make a budget. A budget will help you track your spending and income, allowing you to see exactly where your money is coming in and going out. By identifying your monthly flows of cash this accurately, you can more easily identify areas to reduce expenses and opportunities to pay off debts more quickly. After examining your current spending, create a new budget plan to guide your spending for each month, allotting only a certain amount of money for certain categories of expenses, like entertainment, and sticking to it.
   • Examine your spending. Odds are, there are some areas in which you are overspending. Take a hard look at your expenses (food, living expenses, car, entertainment, etc.) and try to find areas where you are spending more money than you need to be. Maybe you buy lunch every day when you could be packing a lunch instead, or perhaps you buy books instead of renting them for free from the library. Make a plan to reduce your expenses as much as possible to reduce your financial burden.
   • For instructions on how to create a budget spreadsheet, see how to make a personal budget on Excel.
5. Get your family on board. If you and your spouse, or others people in your household, don't agree on the best solutions to your family’s financial problems, then it will be more difficult to make a change. Constantly fighting about where to adjust spending just wastes time and can result in wasted efforts to get out of financial trouble. Talk to your family before embarking on any sort of financial plan and make sure everyone is on the same page.

Executing Your Plan

1. Stick to your budget. Once you've created a monthly budget for your expenses, make sure you stick to it as closely as possible. This is much easier if you track your spending closely, especially by checking your bank account regularly through your bank's website. Make edits as necessary if you find that you've set a budget category too high or too low.
2. Continue reducing expenses where you can. After a few weeks or months of careful budgeting, go back and review your expenses again. Look for areas where you can cut expenses even further. For example, think about how you can get free or very cheap entertainment, like going to the park, and eliminate more expensive options, like the movie theater. In addition, think about taking steps to reduce your bills for things like cable and your cell phone by eliminating features or services that you don't use.
   • For more information, read how to live on practically nothing.
3. Let someone else help keep you accountable. Having someone else help keep you accountable for your savings and spending goals can make it easier to stay on track when things get tough. Doing so taps into a part of human psychology that makes you more accountable to someone else than to yourself.
   • Start by finding a person, like a family member or close friend.
   • Let this person know about your financial goals, what steps you're taking to get out of financial trouble, and your timeline for doing so.
   • Call this person regularly (weekly or monthly) to talk about how your plans are going.
4. Save your money on payday. This comes down to a simple idea: pay your debts first. The first thing you should do when you get paid is put aside as much money as possible to pay down your debts. If at all possible, have this set up automatically with your bank, using automatic online bill payments on the same day you are paid. Just make sure your money gets into your account before your bills are paid; you don't want to end up hit by overdraft fees.
5. Get back on your feet if you mess up. Everyone will go slightly over budget at some point. Even if you go way over budget on something in a given month, realize that this is only a temporary setback. If you go over budget for a special event or for other reasons, then commit to saving more the following week or month to make up for what you lost.
6. Consider more extreme options, if necessary. If you've implemented good spending and saving habits, but are still deep in the hole with no end in sight, you may want to consider taking further action. For professional help, you can turn to a debt counselor and start on a debt management program.
   • If you really see no other way out, you can file for bankruptcy. Just know that doing so will destroy your credit score and require months of legal proceedings.

Staying Out of Financial Trouble

1. Continue your money-saving habits when your debts are paid. After you've made it over the hill and feel more financially secure again, avoid future problems by sticking to your previous budget. After all, you've managed to live on this budget for months or even years, so why change it now? Your left over money from living frugally can now be invested in your retirement or in a college fund for your kids.
2. Think logically about each purchase you make. Before making any purchase, especially a large one like a car or boat, research the product and try to find the best price on it. You should also consider how much you really need the product and if you can pay for it now (rather than finance it). This will help you cut down on impulse buys and unnecessary interest payments. You should also avoid purchasing anything just because it seems like a good deal or it is on sale.
3. Maintain a good credit score. The basis of financial health is a good credit score. A particularly high credit score can help you do anything from get better interest rates on your home or car to get a better credit card with higher limits or more perks. In addition, a high credit score will allow you to take out a personal loan at a low rate if you run into financial trouble again and need money quickly.
4. Create an emergency fund. Start an emergency fund in a savings account or similar type of account so that you can have quick access to money if you run into financial difficulty again. Many financial professionals advise that you save an equivalent of six months of your after-tax wages in this account. However, an amount of $3,000, or in some cases as little as $500, can be enormously helpful in dealing with unexpected expenses and avoiding financial disaster.

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Sources and Citations

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