What To Do When You’re In Financial Trouble

As a bankruptcy attorney, I often think about how I can help folks with their immediate financial problems.  In my mind, the main financial problem most people face on a day to day basis is having too much debt.  If you are carrying a mortgage, car loan, credit card debt and student loan debt, you probably aren’t in a position to do much else than pay your monthly bills.  You also may be suffocating under the weight of all that debt with no light at the end of the tunnel.

It may be that you need to consider filing bankruptcy in order to restructure your debt and get your head above water.  However, you may not qualify to file or you just don’t want to.  I totally understand that.  But, before I get into the meat of this article, I feel like I should advise you about consulting a bankruptcy attorney if your unsecured debt (credit card, medical, personal loans), total more than 30% of your annual gross household income.  You can usually get a free consultation designed to help you figure out if it’s right for you.  There, I said it.  Now, let’s move on to the point of this blog post.

When it comes to dealing with your debt, there are a few rules of thumb that I tell folks to follow (remember, these are rules of thumb and every situation is different).  First, you have to have somewhere to live and housing usually takes up the most money every month.  If you can, figure out a way to lower the cost of your housing.  Sometimes renting can be cheaper than owning so, sit down and figure out the absolute cheapest way for you and your family (if you have one), to live.  Then do everything you can to make sure you pay your rent or mortgage, every month. 

Again, you have to have someplace to live so that has always been my first priority for folks who are having trouble financially.  Before you can start planning for the future, you have to get stable.  If you aren’t stable month to month, saving for retirement is the last thing on your mind.  Once you have your housing situation stabilized, you can start working on the rest of your debt situation.

The second thing you need to do is look at your numbers.  The economy is doing okay right now so most people have jobs, thankfully.  The issue is not having jobs, though.  The issue is having a job that pays well.  That is a harder goal to achieve, these days.  Wages haven’t gone up in a long time.  Even worse, employers are slowly chipping away at benefits, leaving folks on their own to sort out paying for health insurance premiums and retirement savings.

If the goal is to have enough income every month for a reasonable lifestyle AND to save for retirement, we have to take responsibility for knowing how much is coming in and how much is going out.  This means you need to have a budget.  I know, I know, that’s like the kiss of death for any successful personal finance plan.  I know it doesn’t seem like a fun thing to do, and it may not be.  While it isn’t fun, it is responsible.  If you aren’t willing to look at your numbers, you could be in serious trouble.  Don’t worry, though.  There is a way to make budgeting a little less painful. 

The key to making budgeting less painful is learning how to take emotion out of it.  That may seem a little woo woo to people but, I couldn’t be more serious about this tip.  You have to remember that you are not your money.  You’re identity is not tied to the mistakes you’ve made in the past unless you choose to make it so.  This is the most important and, in many ways, the hardest part of getting your finances under control when you are having money problems.  It’s so easy to fall down that rabbit hole of “I’m worthless,” or “I’m such a failure,” when it comes to our money problems.

That’s why my third rule of thumb for getting your debt under control is starting a gratitude practice.  Lucky for you, I’ve done plenty of free content on how to start practicing gratitude.  To learn about how a gratitude practice can benefit you, check out my blog post from 2016 (yes, I’ve been blogging for that long!), titled How to Have More Money.  You can also check out this video from my YouTube channel, too. 

Once you have your numbers down, you can begin tackling your debt.  Rule of thumb number four is making a plan that works for you to pay off your debt.  There are two popular methods that financial gurus talk about for paying down your debt.  Check out the video I did about this topic here.  The first is the snowball method, that’s when you pay off your smallest debts then roll the money you were paying on those debts into the next biggest debt until you pay that one off, and so on.  The advantage of this method is the emotional boost you get from paying off debt entirely.

The second method is the avalanche method.  That’s where you tackle the debt with the highest interest rate first.  Work to pay that debt off and once you do, start on the next debt with the highest interest rate, and so on.  The advantage to this method is mathematical.  You will end up saving yourself in interest payments over time.  The disadvantage is the debts that have the highest interest rates are typically large debts that take a while to pay off.

My suggestions is trying a combination of the two methods, if you can.  If you have debts that are less than $1000 as well as larger debts like credit cards and personal loans, try to knock out a few of the smaller debts and once you do, start focusing on the debt with the highest interest rate and knock it out.  The hard part is paying your minimal monthly payment on all of your debt while getting started on your debt tackling plan.  The first few months might be a little painful but, if you can stick it out for ninety days or so, you can really start to see how sticking to your plan will pay off in spades.

My final rule of thumb is about getting started on saving money.  I agree with the common school of thought about building an emergency fund first.  Most money gurus say $1,000 is the ideal amount to start with, then after that try to save six months worth of living expenses.  If you can save in steps like that, more power to you.  In my opinion, start with a more achievable goal, the cost of replacing a tire. 

When I was a kid, I remember driving down the road in the car with my mom and sister when it was raining.  We always had old, used cars with bald tires and on that day, we hit a slick spot on the road and hit the guard rail.  My mom was used to driving on bald tires so she wasn’t going very fast, thankfully.  The damage to the car wasn’t too bad but, she did wind up having to buy a new tire which I remember being a very big deal, financially.

If you can save $200 or $300 to start with, you can stop worrying about replacing a tire (maybe even two), or doing a minor repair on your car, an appliance or a doctor’s visit.  Once you have that small amount of money saved, you can move on to saving $1,000, then a month’s worth of expenses, then three month’s worth of expenses and so on.

The last word I’ll say about saving money is that as soon as you can, start paying yourself first.  That means as soon as you have a little breathing room in your budget, you need to start investing for your future.  Set an amount of money that you’re comfortable with and start putting it into an interest bearing account.  It’s never too early or too late to start harnessing the power of time and compounding!

So, those are my five rules of thumb for getting yourself stable if you are having money problems.  My hope is that you never have to worry about this at all but, the likelihood is that many of us will at some point in our lives.  I hope you can look to this information to save yourself some stress if that situation ever occurs for you.

The Dollar Lama

P.S.  Make sure you check out my online courses, books and resources, too!  Investing in your money management education is an investment in yourself.  That’s the best investment you’ll ever make, I guarantee it!.  Don’t forget my weekly Facebook live videos on Facebook.com/newcashview, Instagram @joyalfordbrand and on my YouTube channel NCVTV. You can catch me twice, on Mondays between 3:00 p.m. and 4:00 p.m. for my Monday Money Management Minute and Thursday evenings between 7:00 and 9:00 (Eastern Standard time), for my weekly NCVTV episode. They are packed full of useful and entertaining money management information! If you’ve missed any NCVTV episodes, you can see the latest on newcashview.com or you can check out my YouTube channel and get caught up! You can get there by clicking here. Remember, like and share the NCVTV videos on Facebook and all your social media platforms, so others can benefit from them, too!

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