How to Avoid Drowning in Debt
June 2, 2010
Most of us are pretty close to drowning in debt and we don’t even realize it.
If you think of the Atlantic Ocean as a big sea of debt, some people in our country are living on land, out of the debt; but the majority of us (myself included) are actually sinking in the sea of debt.
Cash Flow Submarines
People with positive cash flow have managed to build a little bubble, like a submarine, to protect themselves from the mortgage, auto, and credit card debt they’re surrounded by. We float from day to day, feeling relatively safe, making enough payments to keep the crushing weight of debt at bay for another month.
However, one little puncture in our fragile positive cash-flow shell can spell disaster. As the interest charges, late fees, and damaged credit start to pour in through the hole, our protective shell quickly starts to lose its strength. As we rush to plug the hole, several others open up and it’s just a matter of time before it can’t hold back what we owe and we’re drowning in a sea of debt.
How Not to Drown
Carry Less Debt
Of course, the less debt you have, the closer you are to the surface and the more likely you are to survive a swim out of debt. Setup a plan to stop accumulating debt and start pay down what you owe.
Find Additional Income Now
The worst time to try and find a way to make extra money is when you really need it because then you’re more likely to get sucked in by scams or shady deals. Instead, start looking now for different ways you can make extra money to help supplement your income in case you lose your job.
Buy Insurance
Try and get insurance to cover yourself against catastrophic expenses like car accidents, medical conditions, natural disasters.
Build an Emergency Fund
Your emergency fund is exactly what you need to plug any holes that appear. What’s really devastating is when several open up at once, ie. your furnance quits, car breaks down, and two weeks later you lose your job. You spend a bunch of money and then suddenly your household income is drastically reduced. For whatever reason, it seems like problems like these seem to crop up in groups so build up an emergency fund that can keep you going through a few months of tough times.
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Financial expert David Bach says the first thing they need to do is: “Stop leasing your lifestyle. You can’t buy things that you don’t have the cash to pay for.” David’s rescue plan put them on a hard core financial fast for a month….
Getting catastrophic insurance may not be necessary now that we will have this new healthcare plan. I hope it leads to spending less money on healthcare for us self-employed folks.
“Carry less debt” could also be phrased as “delay purchases” or “learn how to delay purchases”. We usually add debt when we buy something that we can’t really afford.
I love your first tip. If you are already drowning in debt, don’t add any more! This will only make it worse in the long run. Sometimes you just need to bite the bullet and go into frugal mode to help yourself get out of debt.
Emergency funds are also really important regardless if you’re already in debt! Start one today even if it means taking $25 a paycheck and putting it into a savings account. I wrote a post recently on sizing of emergency funds and how to figure out what size is right for you,
http://aceofwealth.com/2010/05/how-big-to-make-your-emergency-fund/
Great analogy Ben.