7 Steps to Climb Out of Debt

Sometimes when people are loaded with debt, they take the ostrich approach and deny that there is a problem until they have exhausted all of their monetary resources.
Not acknowledging the problem will only make it worse and create a bigger hole to climb out of later.
Debt problems can be caused by both financial and emotional issues, and it's important both are addressed to make life-lasting changes in spending and saving habits.
This process of reducing debt begins with defining the scope of the financial indebtedness and then addressing all the possible solutions.

Step 1: Gather Information

Before forming a debt-reduction plan, you must gather all your financial information and records so you can form a solid picture of your monetary situation. While the picture might not be pretty, careful preparation can lead to more solutions for shedding the debt.
Here's what you need to gather:
• Account information on all credit cards, accounts and loans that include debtor, amount owed, date of last payment, minimum payment, interest rate charged, address and telephone number.

• Asset information on all family holdings including type of holding or property, current value, rate of return, maturity dates, cost/tax basis.
• Monthly living expenses: Categorize all expenditures and try to avoid the use of "miscellaneous" as a catchall for unmonitored spending.
• Insurance coverage including individual and employee benefits and detail the type(s) of policy, cost, coverage and rationale behind whether or not to continue coverage.

Step 2: Develop a Bare Bones Budget

Once you have a sense of all the debts, create a realistic budget to live on that eliminates all frivolous spending. Be sure to include spouses and family members when forming the budget to enhance the likelihood of cooperation and success.
Create new spending habits that include:
• Making a list of what is needed before going shopping
• Tracking monthly expenditures on a regular basis
• Reconciling the checkbook monthly
• Recording or saving receipts for all cash purchases
• Using the payroll deduction option to bolster monthly payments and savings

Step 3: Make It a Family Affair

Be sure to write down all the new spending habits and establish target dates to savings goals.
Meet with your spouse and family members regularly to evaluate progress, identify any weak areas and plan for upcoming events that may require a change to the budget.
It's also a good idea to write down all the money coming in and going out to make it easy to identify unnecessary spending. Try and cut back visits to the ATM—this source of cash is often abused and is more difficult to track than check writing. If you do not know where the money is going, you cannot plug the leaks.

Step 4: Contact Creditors

Once you have identified your debts, it is a good idea to contact creditors to set up payment plans that reduce your payments to a more manageable level.

Step 5: Look for Debt-Reduction Sources

Next, brainstorm a way to shore up any monies available to quickly reduce as much debt as possible so you aren't losing so much money to interest charges.
Here are some common sources of funds:
• Analyze net monthly income and make adjustments: Alter the number of exemptions claimed, automatic deductions, 401(k) contributions, savings bond purchases, etc...
• Review assets and re-allocate to create liquidity: When interest charges are in excess of earnings on invested monies, check to see if you qualify for tax deductions.
• Consider a temporary second job to increase income; a non-working spouse or other non-working family members could also be encouraged to seek outside employment.
• Secure a loan from a family member. The loan could be repaid at an interest rate far less than the credit card or other loan interest rates, but still higher than the family member would be earning on certificates of deposit or money market accounts.

Step 6: Develop Emergency Cash Reserves

It's important to create a rainy day fund to cover any unexpected expenditures; commit to stashing away a realistic amount of money every month and slowly increase the amount each month. The end goal is to accumulate three to six months of living expenses.
You may need to refer back to your bare-bones budget in order to set your goal.

Step 7: Plan Mid-Term and Long-Term Financial Goals

As you continue to pay down debt and begin to feel more optimistic about your finances, start detailing your long-term goals and develop plans on how to achieve them on your new financial diet.