The U.S. Economy is currently in a desperate downward spiral, and although the government is frantically approving a $700 billion debt buyout and hurriedly developing contingency plans, the finances of the individual consumers like you and I usually have no such bail outs or contingencies. It's pretty simple really. The government's financial crisis is merely a large-scale reflection of the individual consumers. So what can you do to fix your own personal financial crisis?
It may be cliché, but the first step is understanding that you have a debt problem
So how much debt is too much? And isn't some debt necessary in today's economy? Well, the answer to the first question is pretty simple, according to Eric Tyson, the author of "Personal Finance for Dummies." Eric suggests that your total debt should account for no more than 20% of your annual income, and that includes car loans and credit cards alike. So if you're $10,000 in debt and don't make $40,000 a year, you're most likely headed for a personal financial crisis.
Making minimum payments can drag the debt out for years, and you'll end up paying a boatload of money
But there are other warning signs as well. For example, if you spend a significant amount of time worrying about your debts, or figuring out how your bills will be paid each month. Or the practice of "robbing Peter to pay Paul," using new credit cards to pay off old ones, or taking out new loans to cover existing financial obligations and debts.
And one final sign that you're either in the middle of a personal financial crisis, or headed for one soon: one or more of your credit cards is currently maxed out.
Here's a personal economic bail-out plan
There's no magic to it, and the truth is, nobody's going to print money just to cover your debts (that's reserved for the government!), but here's a few simple steps you can follow that will help you turn your personal economic crisis around:
First, get a look at the big picture
Make a record of ALL of your debt, no matter how insignificant, no matter how large. Do you owe $3 on an overdue library book? Put it on the list. Make sure everything is there, credit cards, mortgages, student loans, everything. Make sure you have a listing of the creditor, the amount of the monthly payment and when it's due, the interest rate and the balance owing.
Start with the most important bills, things like shelter, food, basic transportation and healthcare. If you have to make choices about which bills to pay, pay the most important ones first.
It's no fun, but call your creditors
If you've missed payments, the creditor may be able to defer these payments, or move them to the end of the loan. They may also be able to lower your monthly payment or your interest rate. The bottom line is, the creditor wants their money, and they're usually willing to help you if they know that's your intention.
Take advantage of 0% interest rates and transfer balances
Many credit cards offer 0% interest for the first 12 months, use this to your advantage and transfer high balances to these cards.
Or try this, quit the cards altogether
If you feel like you're drowning in credit card debt, get rid of them. Switching to cash or a debit card can help you keep track of spending and reduce debt.
Prioritize debt paydown steps
Start by paying off the card with the highest interest rate. If they're all about even, start by paying off the card that's the closest to its limit. And here's a quick reminder: keeping your balances at around 30% of their available limit can help build your credit score, so don't pay them off and close them!
Pay as much as you can
This step will get easier as time progresses and you reduce your debt, but pay as much as you can above the minimum every time. Making minimum payments can drag the debt out for years, and you'll end up paying a boatload of money in interest that could have been easily saved.
Check your credit reports for mistakes
It's estimated that almost 80% of credit reports have mistakes on them. Chances are, yours is one of them. Bad credit means higher interest rates, which means more debt and much longer timeframes for paying it back. You can get a free copy of your credit report at www.annualcreditreport.com
Get help if you need it
Managing debt on your own can be a pretty overwhelming task. If you need help, get some! The National Foundation of Credit Counseling (nfcc.org) is a good place to start, but there are plenty of resources available elsewhere on the Internet as well.
It's not usually the lack of funds that keeps people from saving, but a lack of discipline. Start small if you need to. Even $20 a check starts adding up over time. If your employer offers automatic deposit for your paycheck, have them deposit a small percentage into a separate savings account. Having the funds in a different account to begin with can really make a difference.
Personal economic security
While all of these steps are pretty "common sense" approaches, sticking to a personal budget and financial plan can turn your situation around more quickly than you may think. And when it comes down to it, aren't we all looking for personal financial security?