Getting Out of Debt

Diagnosis the Problem

• Common Causes of Debt: – Emotional Spending: spending money to feel

good, powerful, or to show group identity. Solution: find cheap ways to meet emotional needs.

– Overspending: Buying “wants” instead of “needs”. Solution: making and sticking to a budget.

Steps for Recovery1. Increase your Income:

• Increasing your income while stabilizing expenses will help you get out of debt faster.

2. Stop using credit cards: only use cash – Allows you to better track purchases– Slowly cancel credit card accounts (keeping 1 card)

3. Snowball Method:– Cut out some expenses to and use “extra” money to pay off

debt (not eating out on the weekends, or buying music off iTunes.)

– Pay more than the minimum amount on the credit debt with the highest interest rate, or the smallest balance.

– Continue to pay minimum on other credit card debt.– Once Card 1 has been paid off, roll over the amount you paid

each month from your first card to pay off this one. (Continue until all the debt has been paid.)

Snowball in Action

Debt Amount Minimum Payment Months of Payments

Card 3 $4,000 50 80

Card 2 $2,000 25 80

Card 1 500 10 50

Roll Over Method

Debt Amount Monthly Payment Months of Payments

Card 3 $4,000 50 + 25 + 40 39

Card 2 $2,000 25 + 40 38

Card 1 500 10 + 30 13

Dealing with Creditors

• Before you miss a payment:– Call your creditors– Explain your financial situation. – Ask them to reduce your monthly payments

or the interest rate. – Tell them you plan to pay off the debt.

If you stop communicating with and paying the creditors they could get ugly.

Next Steps• Credit Counseling

– Use with caution– Many places will charge you for work you can do

yourself –such as talking to creditors or looking over your credit report.

– Use agencies approved by the National Foundation for Credit Counseling at www.nfcc.org

• Begin or keep a savings account– Begin with something small

• By saving $5 every paycheck you’re creating a habit.• Makes it easier to save in the future.