Debt Management Strategy : You Need One!

I was at a networking meeting on Chicago's Northside a few weeks ago when I met a woman named Martha who had recently lost her job. Like many of the people I meet, she was a victim of the current economic climate. Not even the brightest, most qualified people are immune to budget cuts when companies are desperate and on the brink of collapse. But unlike many, Martha did seem immune from the stress I see people in my office experiencing on a daily basis.

That's because Martha is debt free. Her house is paid for; she has no credit card debt, no student loan payments for children, and no car payments. She has a retirement fund she can rely on, and she has some money saved for unexpected circumstances. She was simply trying to decide what to do with the next phase of her life. At worst her situation is inconvenient.

I couldn’t help thinking how in control and powerful she seemed, and it was in that moment that I realized Martha embodied exactly what I strive to develop in the people I advise. She was able to meet challenging times with confidence, and she had power to choose her future, instead of being compelled forward by circumstances; the power to build wealth, instead of always paying debt.

When I did bankruptcy work (long before the laws changed and bankruptcy became exponentially more difficult to get out of), I used to joke that I had a magic wand in my credenza. I was going to wave it over them and make their debts go away. In today's reality, though, there are no magic wands. I guarantee Martha can attest to this. It’s not magic, it’s hard work. It's discipline. Most importantly, it's a strategy.

So what do you need to do? Everyone has a unique situation, but there are a few basic steps that, for the most part, should be incorporated into anyone's debt reduction plan. After all, the foundation of financial confidence is a clear idea of where you are, where you're going, and how you're going to get there. You will never get out of debt unless you have a strategy. After all, your lenders have one!

Strategy Tips

First of all, you need to start operating on a cash basis. If you cannot afford it, you cannot have it. Need to buy something on the internet? Pay for a hotel or rental car? Use your debit/charge card. Imagine yourself without credit and change your way of looking at it.

Next? Look at your charge cards. What are the interest rates? Can any of them be negotiated down with your lenders? Are you in so deep that the negotiation of your balances won’t affect your credit rating – it’s awful anyway? If you are only paying the minimums on your credit cards you need to understand that your credit card companies reduce your minimum payment as your card gets paid down so that they keep you on the hook as long as possible.

Pull your credit. Make sure the information being published about you is correct. If not, look for strategies to correct the information.

Look at your mortgage. Are you at the beginning, middle or end of your mortgage? If you are at the beginning or middle, you should seriously consider using a method of mortgage acceleration to reduce the amount of interest and the length of time you will be paying your mortgage.

Look at your loans. The same methods used for mortgage acceleration may well work in reducing interest and length of payment for student loans and car loans.

Of course everyone's approach is going to be tailored to their personal situation, but the first step towards financial freedom is to have a plan. Martha was able to embrace the challenge of unexpectedly losing her job because she had been disciplined in employing an effective strategy. If you want to be able to meet challenging times with confidence, want to choose your future, instead of being compelled forward by circumstances, and want to build wealth instead of always paying debt, you absolutely need a strategy. You owe it to yourself to always know where you are, where you're going, and how you're going to get there.

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© Copyright Erica Crohn Minchella, 2009