The average credit card debt of an American household is $15,799.
The average student loan debt among graduating seniors is $23,186.
The average amount financed for a new vehicle is $26,673.
It seems the average American household is in a huge amount of debt trouble. If you are trying to pay off debt, chances are you won’t be able to save much for emergencies or retirement. This is putting your future in jeopardy and you need to have a plan to deal with all of these debts. Ignoring the debts and just paying minimal payment won’t be enough.
The first step is to figure out your income and expenses. Use Personal Capital or a simple spreadsheet to keep track of all your income and expenses for 3 months and see where the problems are. If you are like the average American household and owe more than $10,000 then you will need to cut some expenses somewhere and/or earn more income.
The first step to reducing expenses is to create a monthly budget that will work with your income. If you earn $5,000/month then your expense needs to be less than $5,000/month. You might need to reduce luxury spending for a few years until the debt is paid off, but it will be worth it.
If you have existing debt, it will be difficult to reduce the debt with just minimum payments. In this case, you might need to earn more income. In this economic environment, it could be difficult to get a raise at your current position. You can try to apply for a job with higher pay. The unemployment rate is high, but many companies are still looking to hire well-qualified employees. The best time to get a new job is when you already have a job.
Another option is to get a part time job like delivering pizzas or another flexible time positions. This is difficult, but if you want to pay off the debt, extra income will be very helpful. We have been working on this website and recently got our first check from Google. You can do it too!
What if you have a student loan, a new car loan, and some credit card debt? If we use the average debt numbers above, then you may owe more than $65,000. This is a huge amount of debt and it will be difficult to pay off by reducing expenses or even getting a 2nd job. In this case, you probably need some help and debt consolidation maybe the way to go.
Here are some debt consolidation options:
- mortgage refinancing. If you have over 20% equity in your home, mortgage refinancing is a great option right now. You can refinance your home with a cash out option, and then use the extra money to pay off the debt. The interest rate is at a near historic low and you will save a lot of money by consolidating all the debt into a lower rate. You still need to do your homework and make sure you can make the new payment every month. If the payment is too much to handle, then this is not a good option because you can lose your home by not paying the mortgage loan.
- debt consolidation loan. If you have excellent credit, then an unsecured debt consolidation loan from your bank might be an option. These loans are more difficult to obtain with the current credit crunch, but you can try talking to your bank/credit union to see if they can help you.
- debt settlement. Another option is to get professional debt counselor help. You can sign up at a debt settlement company and they can work with you to settle the debt. This aggressive tactic will hurt your credit. You stop paying your debt and save the money in your bank account instead. The debt settlement company will negotiate a lump-sum payment with your debtor.
- peer to peer lending. You can sign up on a peer to peer website such as Prosper or Lending Club to borrow money to pay off your debt. The interest rate is usually quite high though so you have to crunch the numbers to make sure it will work.
All in all, paying off debt is difficult, but you need to do it. A crushing debt will prevent you from saving for retirement and you will have a lot of problems later. The longer you put off paying debt, the bigger problem it will become. You have to face the problem head on and work on paying the debt off aggressively ASAP.