True or False: There are only two ways to get out of debt-make more money or spend less money?
Answer: False. Both systems definitely work. If you make more money-take on a second job, get a raise, start a profitable side business for example-there's an excellent chance that you'll be able to pay down debt. If you spend less money you'll definitely have a higher percentage of your take home income to put towards reducing debt. At least that's the hope. Unfortunately, if you're sufficiently in debt you may be incurring all sorts of fees-late fees, over-credit line limit fees, automatic transfer from saving to checking fees, bounced check fees and so on. These have the potential to rapidly wipe out your ability to pay off debt by reducing expenses.
The best approach: Find a way to make more money and reduce expense. That's the best approach, right? Almost right. Don't forget to explore these options: Keep a higher percentage of your after-tax current income, negotiate debt down, and get someone (or a group of people) to give you money to bail you out. These are also time honored options, and they may be easier to pull off than you think-particularly if you do all three at the same time.
You may be able to keep a higher percentage of your income by taking advantage of paying for expenses with pre-tax dollars. As an example, many employers offer plans that allow for paying of certain medical expenses through a Flexible Spending Account (FSA). You're still paying with your money, but you are legally earning less on paper, which means that you pay less taxes, which means that you have a little extra money in your pocket each week. Not enough? Perhaps you're right.
What would happen if you started a part-time business? Suppose that business takes advantage of your strong skill sets, a business that also allowed you to legally deduct some of the expenses that you're paying as business expenses. As an example, let's say that every week you are spending money eating out. You could stop eating out. In fact, it's a great strategy for reducing expenses. Or, you could find a way to motivate restaurants to help you make money, perhaps by holding workshops and seminars in their establishments-particularly during their slow hours. How many stay-at-home moms could benefit from a plan to make an extra $200/week by holding workshops in restaurants? "Oh, I'm not a marketing person," you might say. Imagine, however, that several restaurants helped to get people in the workshops by putting up posters and inserting announcements about the workshops in their guest-check presentation folders. Now, when you dine out you have a legitimate business expense because your dining is directly related to a business venture. The money that you used to spend with after tax dollars may be an allowable business expense on a Schedule C.
Let's discuss negotiating debt down. There are companies that will help you with this, but some of them are simply out to make a buck off of you. You can do it yourself, but it's hard. To get a creditor to give you a true reduction in debt, you have to present them with a reason and a plan. You have to show people that you're able to repay the lower amount, and will do so. This can seem impossible, yet large businesses do this all of the time. They go into a lender and essentially say, "We can't make our payments. You need to work with us so we become profitable again." You can do the same thing, but you have to demonstrate that you can become profitable again. If you can show a plan, it's just possible that two things will happen, creditors will reduce your debt-after all some money is better than no money--and friends and family may bail you out of the remaining debt, but you need a plan. (By bail you out, I don't necessarily mean give you money. They may give you money or they may help you to refinance your debt at a 6% rate instead of the 35% that credit cards charge.)The good news is that you have skills that can earn you extra money, and that you are living in a country that will help you to succeed-if you play by the rules.
It is possible to establish financial freedom if you are in debt, but it takes work. To recap: (1) Find ways to reduce your current taxable income; (2) convert expenses that are paid with after-tax money into expenses that reduce your tax liabilities; (3) locate additional revenue sources; (4) reduce your current debt through negotiation; (5) When you're on the right track see, if you can also get someone (or a group of people) to bail you out. You might be surprised at what family and friends will do when you show them what you have already done for yourself.
