The hardest thing to do when you have a serious problem is to first admit you have a problem, then to seek help to fix and overcome this problem.
In your case you may know that things aren’t right, deep down you know you have to do something about it however you keep kicking the can down the road, hoping for a miracle to come in and help fix your finances.
You keep putting off the serious chat, you try and juggle money, you miss a bill here or there, you are barely making the minimum credit card payment all the while accepting the limit increases that your bank offers. The letters and phone calls demanding repayment increase while you become more and more desperate.
You aren’t sleeping, your relationships suffer, you aren’t living the life you should be living.
ENOUGH IS ENOUGH, it’s time to fix this.
Below are all the steps to turn your financial situation around with the Ultimate Guide to Getting Out of Debt.
1. Admit that you have a serious issue and you need help
The first big step in dealing with and fixing your issue is to put your hand up and admit there is an issue. Once you’ve stopped lying to yourself and stopped making excuses, you can then start building a plan to turn your financial situation around.
So much time is wasted building or living up to a false narrative about how your situation isn’t as bad or that everything will be ok (even though you are kicking the can down the road and aren’t doing anything to fix this) or how you fake your situation around others when the quicker you take responsibility you can fix this quicker.
This also means letting your partner know about your financial situation if you have been hiding it from them.
The quicker you accept your situation and your true reality, the quicker you can assess then work on rebuilding your financial situation and repaying your debt.
Let go of your financial past
You may have been wronged, suffered from an injustice or were plain unlucky, but no matter how your financial situation deteriorated, it’s time to move on. For most, it’s time to stop playing the victim and take responsibility for where you are currently at financially and start putting plans in place to turn your financial situation around.
It’s time to stop wishing for a miracle, for someone to come in and solve all your problems. It’s up to you to get yourself out of the situation you are in and the sooner you accept this, the quicker your journey to financial reparation.
For some there may be significant trauma around your financial situation or some serious personal issues are going on behind the scenes. If this is you, please reach out to someone to chat to.
This could be a financial counselor or someone more specialized in the medical or mental health field if your problems go deeper. Don’t be scared to reach out for help, the quicker you do, the quicker you can get the right counseling or treatment and you can get back on the right path personally and financially.
By accepting your current situation and deciding to fix this, you are engaging your mind to now act towards helping find a solution rather than perpetuate the smoke and mirrors myth that your current financial situation was sustainable and repairable on its current path. rubbish that you were trying to trick everyone that was your financial situation.
Now you have a platform to build your financial success from.
2. Time to set some financial goals
Now that you’ve accepted what your financial starting point is, where do you want to end up financially? What is your definition of financial success? Is it being debt free and owning your own house with some money in the bank and some income producing investments? Financial independence? Or is it being debt free and being able to travel around the world?
The answer is going to be different for everyone and there is no wrong answer. This may also change as you travel down your financial journey. You might find that your longer term goals have changed because you have been so successful at achieving your smaller financial goals.
Now you might think it’s rather pointless to set these large far off financial goals when you are broke and in debt, however these goals will give you something to aim for. Yes these goals might be a long way off, that doesn’t mean you can’t (or won’t) achieve these. Outline your goals, put a plan in place, believe you can achieve then go out and do it.
When setting large or long term goals given the time it will usually take to achieve, it’s helpful to break these larger goals into smaller ones. For example, a large long term financial goal might be to rid yourself of all credit card and personal debt, in this example let’s use the amount of $100,000 and for the ease of calculation you’ve reached an agreement with your creditors that they will no longer charge you interest.
Now this amount may seem very daunting and you might think it will take forever to repay this amount. It doesn’t have to be this way. Let’s say you’ve gone through your finances and believe you can save over $10,000 and you are going to put this surplus towards repaying this credit card debt.
After year one your $100,000 is now at $90,000.
Next year you decide to clear your house of all unwanted items or items you don’t use and you’ve sold and given away a lot of items and raised $5,000 which you’ve put towards the debt. Including the $10,000 surplus that has gone towards the debt at the end of year two the debt is now down to $75,000.
In year three you’ve reached out to your boss as you haven’t had a pay rise in a while and your boss agrees and gives you a nice bump in pay and now you can add a further $5,000 to your repayments. At the end of year 3 your amount owed is now $60,000.
Keep this up at an annual repayment amount of $15,000 and that $60,000 is now repaid in another 4 years and you then have $15,000 to go towards building income producing assets.
Tips to set (and achieve) your financial goals:
- Think big for your long term goals and choose something that aligns with you, is going to take you out of your comfort zone and is going to be challenging to achieve.
- Set smaller goals for your journey and make sure your smaller term goals are aligned to the larger goals
- Check in on a regular (monthly) basis to make sure you are on track.
- Look to find people who have had similar success to what you are trying to achieve and look for any tips that helped them. This could include savings, budget or investment apps, investment ideas, financial education
- Mentors or accountability partners can be very helpful
- Don’t be afraid to reach out for help or coaching from a professional in your desired area (providing they are in your budget).
- Don’t be afraid to challenge and test any information that you come across (even from this website). What worked for someone doesn’t mean it will work for you so definitely test things and try things however don’t take on something blindly without giving it a once over and doing some basic research to make sure it passes your “pub test”
- Believe you can do it even though your goals will take you out of your comfort zone and what you have previously experienced.
Keep in mind when setting goals from a more impoverished financial position it can be difficult to think bigger knowing how beaten down your financial situation may have made you. It won’t always be like this and once your financial situation improves as does your knowledge and education you will find your future belief changes immensely and you find yourself pushing yourself (and succeeding) at a level you wouldn’t have thought possible.
3. Go through your expenses like a forensic auditor and put together a new budget
Aside from admitting that you have a financial problem this is probably the activity you are going to dread the most on this list. We want you to review, note down then track basically everything about your financial situation.
This means reviewing where your money went (at least the last 12 months of expenses), how much you owe (including interest rate, monthly repayments and any end dates). We also want you to estimate all assets that you have (including what you can sell to reduce debts) as well as all income that you have received over the last 12 months.
You will also want to obtain your current credit score (if you don’t already know this).
If you don’t know or have been too scared to find out, it’s time to pull the band-aid off and find out what your score is. This will also give you another guide as to how bad your financial situation is. Remember you are on a new path, one that hopefully leads to financial prosperity. Accept what happened in the past, it’s all about working toward your improved financial future.
Some countries offer free services to get a copy of your credit score.
- As with the USA, in the UK agencies such as Equifax, Experian and TransUnion offer a paid service however to access this for free you’ll likely have to engage a third party provider such as Clearscore or Credit Karma.
- In Europe it depends on whether your country has agencies that track credit scores. Visit your government website for further information.
- In Japan this is similar to Europe where there is no nationwide credit score, rather this is done on a bank to bank basis.
- In Australia you can obtain a free credit score from Experian, illion and Equifax.
Note that to get a full credit report or history in most cases you will have to pay for these (through the main players Equifax, Experian and TransUnion) and will differ in price depending on your country of residence.
Eventually you should have a detailed financial dossier of where your money went, what money you owe, what you own and how much income you earn.
Now it’s time to begin the hard work to review these and start putting together a plan.
Getting a list of your lifestyle expenses (preferably the last 12 months):
Start with going through your previous expenses (ideally this will be the last 12 months). How much of your expenses was spent on luxury items or on entertainment, expenses that could have gone towards debt repayments? Are there any patterns that you can see or any issues that need to be addressed?
A little later in this guide we will get you to go through these previous expenses and separate these into essential, non-essential and luxurious items and this will help prepare your short term lean budget.
Reviewing all your income or household income
This should not only include your personal exertion income this should also include any money earned from a 2nd job or from any cash jobs you may have performed, money from any investments such as rental income or share dividends.
Check your recent pay slip (or tax returns) to see how much you earnt in the last month or the last year and use a tax calculator to determine what your approximate net income is (if you are using your tax return this will have it listed).
Also list anyone government assistance that you may earn, this doesn’t necessarily have to be a government payment, this could also be government vouchers, etc.
As we’ve mentioned previously one of the quickest ways to turn your financial situation around and to repay debt is to boost your income. From a pay rise to a 2nd job this helps and we’ll go into more detail below about ways to boost your income.
What assets or contents do you own and what are their approximate values?
List everything, even the bonds or shares that a family member may have gifted you many years ago that you have forgotten. List all shares or investments, any retirement or pension accounts, any valuable contents (that could be sold to repay debt), basically anything that has some value that can either be sold or can earn income to go towards debt repayments. .
If your assets are linked to some of your debt, such as an investment property or margin loan with shares then assess the future potential of the underlying assets however in most cases (assuming your finances aren’t in great shape) you’d liquidate the assets and repay debt.
You may have some items that you may not realize have significant value, such as a comic book collection or sports cards that you collected as a youth. Again if looking to sell assets, assess current market conditions to determine sale suitability however unless they look to have a significant value bump in the near future they should be liquidated to repay debt levels.
If you don’t have any assets or household items to liquidate, do not worry, whilst it may take a little more longer to fix your financial situation and repay your debts, stick to the tips mentioned in this guide and start trying the income tips mentioned below to speed up your debt repayments.
Last but not least, what are your debts? And yes we mean ALL your debts!
This should include every relevant bit of information for all your debts.
Some of the information you should have regarding your debts includes:
- Who do you owe the money to?
- How much money do you owe (both individually and as a whole)?
- What is the interest rate associated with all your debts?
- What is the minimum monthly payment for each debt?
- What date is your monthly
- What date is the debt due to be fully repaid (if applicable)?
- What are the contact details of who you owe the money to?
- Is there any fee if you repay the debt earlier or repay more than the monthly repayment?
- Is the debt linked to an asset and if so is this good debt or bad debt (discussed below)?
- If so, is there any equity in the asset(s) that has a loan associated with it?
In this guide we will focus on debt that is owed in just your own name however you may have debts that are owed via a corporate entity that is linked to you. This is outside the realm of this guide and should be discussed with your accountant or qualified financial professional.
Good debt v bad debt
You may be familiar with the terms “good debt” and “bad debt”. Essentially “good debt” is debt that is tax deductible debt, used to purchase an asset where the interest payments can be tax deductible. An example would be using debt to purchase an investment property.
On the flip side, “bad debt” is debt that is used to purchase goods, items or assets that aren’t income producing and you can’t claim a tax deduction for the interest payments. An example would be using a personal loan to purchase a boat.
While “bad debt” should be extinguished sooner (this usually has the higher interest rates such as credit card debt) if there are assets linked to good debt that can be sold to reduced to eliminate your “bad debt” these assets should be seriously assessed to be sold down or sold completely and the proceeds used to reduce debt levels, particularly if your financial and debt situation is in a perilous situation.
Going forward once your financial situation is more secure there are plenty of reasons to use “good debt” to build up your investments or portfolio and we recommend you look at this later down the investment track.
Now that we’ve got all of this historical information, are there any patterns, particularly with your expenses. Are there any cash flow drains or leaks that need to be plugged? Are there any addictions within these expenses that we need to have a serious review about or to seek professional help?
If there is nothing too serious within these numbers, now we can prune these expenses and put together a lean (at least in the short term depending on how bad your finances are) budget to begin to turn your financial situation around.
Building a Lean Budget
One of the hardest things you will do is to put together a lean budget and say no to a lot of luxuries and creature comforts you enjoyed in your former life. Whilst the hard times won’t last too long these are necessary to get your finances and debts back on track.
While some might prefer to undergo a money diet, we prefer the below method to review your expenses then set a lean (at least in the short term) budget.
Firstly review your previous expenses (last 12 months ideally) and categorize or label each expense as essential, non-essential or luxury. If you are familiar with other ways to categorize expenses and you are comfortable with that way then by all means stick with that method, use what works for you however the above method is what worked for us.
Essential expenses are easy enough to identify, these would include rent/mortgage, basic food, utilities, etc.
Non-essential yet important expenses would include items such as your internet or gym membership, an expense that you can live without however it is helpful in your day to day living.
Luxurious expenses are expenses that you can live without, such as new clothes (that aren’t replacing any essential clothing) and higher ticket items such as holidays, watches jewelry, basically items that are material.
Do your best to go through your previous expenses to label them as the 3 types. As we mentioned above, there may be some holes in your expenses as unless you’ve been tracking all your expenses in the past you won’t have all the information as cash would have been used or a one off expense at a particular super market won’t have a break down as to what items were purchased nor the essential, non-essential or luxury expense breakdown
Be honest with your assessment as this will affect your potential surplus income that can be used to retire debts. The bigger your expenses, the less surplus you’ll have and the less money that can be allocated towards debt repayments (on top of your minimum monthly debt repayments).
Also be aware that while you may have the best intentions when creating a lean budget, living this budget can be a lot harder in real life. Don’t be too hard on yourself if you find yourself going over a little from what you estimated, that’s life however try and stick to a budget as lean as you can.
What we are trying to filter is all the essential (and some non-essential) expenses that will form your new lean budget in the short term. The leaner your budget the more surplus you should have and this can go towards repaying your debt quicker.
Ideally you will have access to your last 12 months of bank account and credit card statements to review your expenses. If not, do your best to estimate what portion of your expenses would have been essential, non-essential and luxury expenses.
If you have no historical expense data to go from, use a budget template (one can be found here) to estimate what your expenses will be under your new debt repayment focus.
There are other budgeting options such as the 50%, 30% and 20% option which entails that you should aim for 50% of your net income to go towards income for your lifestyle needs, 30% should go towards your lifestyle wants and 20% should be allocated towards savings.
There is nothing wrong with this above method and if you think it would work for you then go ahead and try it out. In our experience the worse your debt and financial situation the more focus needs to be on your budget and expenses (at least in the short term).
Once you’ve gotten more comfortable with your financial situation and your debt repayment program is showing signs of success, adjustments can be made to your expenses and add some non-essential expenses to your budget.
However don’t lose sight of your recent success and jeopardize this new found financial stability with unnecessary lifestyle expenses you don’t really need.
In the short term, go hard, get lean and get on top of your debts, once you’ve done this make some budget adjustments but don’t lose sight of your long term financial goals!
Now let’s review these essential and non essential expenses that will form part of your new lean budget
Let’s start with your debts.
- Reach out to companies you owe money to and look to bargain or negotiate for more favorable repayment terms
Remember the saying, if you don’t ask you don’t get. Now depending on what you owe, reach out to all debtors to see if you can achieve more favorable terms with what you owe. This could be looking to reduce the interest rate or getting an interest free period, reducing the monthly repayment amount or reducing some or all fees.
In a lot of cases you may have debtors happy to help you and offer something favorable to you however remember it works both ways and if you negotiate favorable terms and make sure you live up to your end and stick to the proposed repayment program or new proposed amounts.
Also if something financially unforeseen comes up, don’t hesitate to reach out to who you owe money to. In nearly all cases they will do what they can to help you out so be honest. Going back on your word, missing repayments and not communicating with your debtors won’t help your financial situation and will likely put you back to square one with your poor financial situation.
- Look for deals with your large regular expenses such as mortgages, education and utility amounts
When was the last time you had your mortgage, credit card or personal loan reviewed (if applicable) or put out to market? There may be cheaper, better options on the market from the last time you reviewed this.
For some this may not be a viable option due to extenuating circumstances however if your financial situation is in reasonable shape (and this is applicable to you) we recommend that you get onto reviewing these as soon as possible.
This should also be done for your utilities, your phone and internet, basically any service that has competitors with similar products you can play off each other to hopefully get a better price or offering. .
Next (if applicable) can you review any long term expenses such as mortgage, utilities (electricity/gas, phone, water, phone/internet, etc). If you have a mortgage or car loan, when was the last time this was reviewed? When was the last time you reviewed
Now there may be reasons why this isn’t possible in your situation however for most people you should be able to take these expenses to market and look for a better deal. Even if you review everything and can only achieve savings of $1,000 per annum this is better than nothing and can go towards repaying debt or investing.
Now with your essential and non essential (but important) expenses,
Of these essentials, is there a way you can get these cheaper somewhere? For example cereal might be essential however you may have previously had a high end option where a budget option may be half the price. Remember it all adds up in the end.
The above is just an example of setting a budget. There are other ways of doing this such as fixed and variable expenses or however find something that you think will work for you and try this out.
Within your essentials, ie phone, can this amount be reduced further, is there a cheaper phone plan or a cheaper energy or utility provider?
- Swapping expenses for cheaper options