As Americans struggle with a stubbornly lethargic economy, debt problems are a growing concern among more and more families.
The Federal Reserve last month highlighted some alarming consumer credit trends, among them outstanding revolving credit in excess of $800 billion at the end of December 2011.
With figures that large, the future might appear hopeless. That’s not necessarily the case, however.
Financial literacy expert Elisabeth Donati has a friend who has been struggling with his weight for years.
He knew he needed to lose at least 40 pounds but nothing worked until he heard a different perspective, Donati said.
“He talked to a thin person and he said the difference is that thin people are willing to be hungry,” she said.
The same attitude applies to personal financing, according to Donati, founder of Creative Wealth International and Camp Millionaire.
“Are you willing to not have everything you think you want right now?” she asked.
When it comes to managing debt, one of the most helpful things to do is record one’s expenses, said Carola Nicholson, a CPA and principal of Nicholson & Schwartz.
Document a monthly allocation of profit and loss on a regular basis, she said. For small business owners, don’t intermingle personal and business expenses, she added.
“Write in a ledger or invest in some software to organize your accounting,” Nicholson said. “Do it on a monthly basis so you don’t forget what you did.”
When everything is on paper it comes down to an assessment of wants versus needs, Donati said.
“You have to stop judging yourself,” she said. “It is how it is.
“I made some decisions that got me to a place I don’t want to be. I didn’t say they were good, bad, terrible or disgusting. Once you stop beating yourself up, you can recover.”
If it has gotten to a point where creditors are constantly calling, accept it, Donati said.
“What people don’t understand is it’s easy to negotiate deals when it gets to this point,” she said. “You don’t need to go to debt consolidator. If you have a decent income, people don’t realize how easy it is to get out of debt.”
Use Santa Barbara’s resources, Nicholson suggested. Take a class at SBCC or watch a tutorial at Lynda.com. Sometimes all it takes is a different perspective, she said.
“If you aren’t good with accounting, focus on what you do best,” Nicholson said. “Don’t be afraid to call accountants and ask questions and find the person you feel who’s going to have your best interest.”
The Federal Trade Commission’s process to managing finances:
» Make a list of everything you owe. You should sort out exactly what you owe and who you owe it to.
» Put your debts in order of importance. The most important debts are known as priority debts and they aren’t always the biggest ones. Priority debts are ones where serious action can be taken against you if you don’t pay what you owe. For example, you could lose your home, be disconnected from a service or even go to prison.
» Work out a personal budget. Work out a weekly or monthly budget to see what your income and expenses are, it can also show you where you can save money. A budget will help you decide what you can reasonably afford to repay your creditors, so it’s important to be realistic.
» Get advice on the different ways to deal with your debts. There are lots of options for dealing with debts. For example, arrangements you can make with your creditors or more formal ones that debt specialists can organize for you. There are sometimes extra costs involved and conditions you have to agree to.
» Talk to your creditors. Once you know what you can afford to repay, talk to your creditors about your situation and what you’re going to do about it. A debt adviser can do this for you, and some will do this for free. Be realistic about what you can afford to repay and don’t assume you’ll be able to pay back more in the future. It’s important to follow up a phone call with a letter confirming what has been agreed.
Donati’s advice is even simpler. Students at Camp Millionaire, a two-day camp for children aged 10 to 14, learn sound financial habits based on three principles:
» Pay yourself first.
» Put your money to work for you.
» If you can’t afford it in cash, you can’t afford it at all.
— Noozhawk business writer Alex Kacik can be reached at akacik@noozhawk.com. Follow Noozhawk on Twitter: @noozhawk, @NoozhawkNews and @NoozhawkBiz. Connect with Noozhawk on Facebook.