Debt can invade your life in many different ways. It can sneak up on you: the result of spending $20 more than you can afford every day (which becomes more than $20,000 of debt in 3 years). It can appear all at once, after an emergency medical expense or a job loss. And it can surprise you in a terribly painful way, when you learn about a family member’s hidden, debt-fueled addiction.
If your expenses are more than your income, then you have an issue. Even if we find ways of getting your debt to cost less, you still need to fix the underlying issue. If you continue to spend more each month than you earn, your debt will continue to grow. So, you need to figure out how to:
- Increase your recurring, regular monthly earnings and / or
- Decrease your monthly expenses
Determining Where You Can Cut Expenses
Look through your list of everything else. Are there some obvious, painless things that you can cut? If at first you think now, try this exercise:
Fast forward to retirement. You are now 65 years old, and you have to choose a place to live. There are two options. You can buy the nice home on the beach in Florida, that is just seconds to the beach. Or, you can buy a studio apartment in a bad neighborhood with a view of the parking garage. How you spend everything else will determine where you live when you retire.
The more you save now, the more you have later. So, you just need to decide. You may not be willing to give up that daily $5 latte habit. Which turns into $1,825 a year and $54,750 over the course of 30 years before you want to retire. Just know that by having that daily $5 coffee fix, you are giving up a nicer place to live in retirement. Everything is a trade-off.
For some people, there just isn’t enough money, period. When you look through your “everything else” bucket of expenses, there aren’t many expenses, if any, that you can cut. If you cut expenses it means you don’t eat or you don’t travel to work. If that is the case, you have to find a way to increase your earnings or cut your fixed expenses. You should spend a decent amount of time looking to cut your fixed expenses.
How to Reduce Fixed Expenses
Can you refinance your mortgage? Take a look at PenFed, a credit union with very low interest rates, to see their current interest rates [click here]. As the time of this writing, a 30-year fixed mortgage at 0 points is 3.600%.
It may be worth refinancing to reduce your monthly paying if your interest rate is a 4.600% or higher. In general, if your interest rate is a full 1% higher, it may make sense to refinance. If it is 2% higher, it almost definitely makes sense to refinance.
Warning: If you cannot afford your monthly mortgage payment, and you cannot increase your income, you may need to think about selling your home and finding a cheaper place to live. No one likes to admit defeat, but the longer you stay in a place you can’t afford, the more likely defeat becomes. Take a real long, hard look at the home and its maintenance costs. There should be no shame in moving to a cheaper location. Or, you move to a place with a lower cost of living where you can earn more. I have moved in order to make more money. Some people would rather stay put and cut their expenses. But you have to make a choice.
If you signed up for a lease that is just too expensive, there is good news. You have more flexibility than a homeowner. Find out what is required to break your lease, and start looking for something that you can afford. As a general rule, you should never be spending more than 30% of your take-home pay on rent. Ideally, you can spend even less. I don’t care what real estate agents or banks say you can afford. They are not thinking about your best interests; instead, they are thinking about their best interests. If your rent (or mortgage, for that matter) costs more than 30% of your net, take-home pay, you will likely find life difficult.
It is very difficult to get out of an automobile you can’t afford. Why? Because a car depreciates (usually by at least 30%) the minute you leave the car lot. If you financed the entire car, you can end up getting stuck in a car loan, and refinancing options are limited.
If you are upside down on your car (owe more than the car is worth), the only way out is to come up with the money to pay down the loan. Once your loan amount is just a bit below the possible sales price, you can sell and find a cheaper option. But, until then you can be stuck. That is a big warning: a high-pressure on a car lot can be a tremendous burden for years if you make the wrong decision.
If you have good credit and your loan balance is less than you car’s value, you can look to refinance. Credit unions have great deals in this space. If you don’t belong to a credit union, consider https://www.penfed.org/– one of our favorites. They are easy to deal with, and they have incredibly low interest rates and none of the junk fees.
shop around and see if you can get cheaper car insurance. There are a lot of sites out there. We like TheZebra – it can help you compare across lots of different companies.
Too many people pay far too much money for insurance. If you are in a whole life insurance policy, you are almost certainly paying too much. The purpose of life insurance is to make sure that people who depend upon you can maintain their lifestyle if you die. Life insurance should not be a way to save for retirement, and it should not be a way to give your children an inheritance. That means term life insurance is almost always the best option.
Just as it sounds, term life insurance will only cover you for a specified period of time, whereas whole life covers you for your whole life (the name does make sense). So, in term life insurance, the insurance company may never pay a claim. In whole life, they definitely will pay a claim. As a result, term life insurance is much cheaper. You can speak with your local insurance agent to find a good term life policy.
Not convinced? Here’s an example:
Meet Bob. He is 35 years old and has a wife and two children. His wife left her job to be with the kids. So, there are three people who depend upon Bob. He wants to make sure that if he dies, his wife can stay in the house and take care of the kids. He makes $100,000. So, he buys a $1,000,000 30-year term life insurance policy (10x his income). If he dies before he is 65, his family will receive $1,000,000. At 65, the policy expires and he can get that policy for less than $100 per month. When Bob is 65, his kids are on their own and his retirement savings is available for retirement. By buying a term life policy instead of whole life, Bob is saving hundreds every month.
How to Eliminate Needless Expenses
It is so easy to sign up for something and forget about it. The first month (or year) is free, and then the bill starts. It gets charged to your credit card, and you don’t even mention it. Just cancel all of those recurring charges. You will be amazed at how quickly they add up.
If you don’t even know what you are paying, there is a really good tool called Prosper Daily (formerly BillGuard). Just visit https://www.prosper.com/daily/ and it will look at your expenses to find recurring transactions. They can also help you cancel those transactions. It is worth taking a look.
People end up spending silly money on checking accounts, when they should be free. If you are spending monthly fees, overdraft fees or ATM fees, you should consider switching banks. At MagnifyMoney, we make it easy to find a checking account that is actually free. You can compare bank accounts by clicking here.
Address the Core Issue
We had to spend a lot of time on the topic of spending money and budgeting. You just can’t spend more money than you make, because your debt will continue to increase. Any type of debt consolidation plan will not solve the core, underlying problem. I have seen far too many people move their debt from a high interest rate to a low interest rate, and think the problem has been solved. But, because their core-spending problem was not solved, they ended up in even more debt. Deal with your spending first, and then you can deal with your debt.