Ah, the life of the newly single. Freedom isn't quite so much fun when you realize that you now get to shoulder the burden of life all on your own, which means your new home may be downsized to smaller than your first college dorm room! Some free birds are even getting an unexpected going away gift of phantom taxable income and real debt that is ballooning with 28% interest each month. Turns out that short sell on your home costs more than you were led on to believe, once the collection agencies get a hold of it. Ouch.
However, there is a way to turn this all around. You can get out of debt, even with astronomically high interest rates. And it's more fun than you think - though it will require making dramatic changes. (Cutting out café lattes doesn't really thin out your waste line when interest on your debt is heftier than your car payment.) Below are six quick tips that will change your life forever, so that you really can become that smart new you who makes great life choices and winds up rich, thin, healthy and happy, with luscious soul-mate arm candy.
1. Open up a 401K, IRA, etc. now and put 10% of your income on auto-deposit into that plan. You might think you have to pay down debt first and then start building up your assets, but the opposite is the case. In order to get out of debt, you must develop the habit of earning and saving and increasing your asset/debt ratio. This helps to negotiate better terms for your debt and pay it off sooner, at a much lower price. Also, your retirement plans cannot be attached by your creditors - even if you declare bankruptcy. And unlike insurance plans and annuities, the retirement money is yours to keep, even if you have to change the amount you are depositing each month. Additionally, unlike insurance plans and annuities, you can invest in any fund or publicly traded company you desire, or you can keep it all safe in an FDIC-insured money market, if that is what you need to feel safe for now, while you educate yourself on investing. (Annuities and insurance plans are not FDIC-insured, and are really investing in one company - the insurance company.)
2. Health Savings Accounts. Are you paying astronomically high monthly premiums for your health insurance? If you're healthy, opting for a higher deductible health insurance plan, combined with a health savings account (to cover the deductible and co-pay costs in the event of a catastrophe) might be a better choice. Health savings accounts work like retirement accounts. The money you save each year by being healthy and not needing medical care becomes yours to keep. The HSA is tax-deductible. The money can be invested in stocks, bonds and money markets. And the gains/interest you earn from the investments in the HSA are not taxed. To learn more about HSAs, visit IRS.gov.
3. Earn More Income. Believe it or not, points one and two are two great ways to earn more income. Instead of spending/wasting that dough, you are 1) saving it, and 2) it has a chance to grow when you invest it using sound investing strategies. Also, is it time to ask for that raise, or to put the feelers out for a better job/position? Do you need to downsize by leasing out your oversized home for extra income, and buying something more suitable and efficient? Get creative. With more assets and more income, you can negotiate better terms and/or pay off your debt altogether.
4. The Thrive Budget. Have you been on the struggling to survive budget? The trying to squeeze life into the dregs left over after all my bills are paid budget? If so, you're probably bankrupt in fun, in addition to being in debt. The right answer is to get your basic needs expenses down to 50% of your income. Yes. You'll need to get creative. And yes, you'll need to make big changes. You cannot cut out café lattes and expect to get out of debt. It hasn't worked up until now, has it? (See point 7 for extreme debt reduction stimulus.)
5. Put Your Debt on a Payment Plan. If your debt is out of control and escalating with the outlandish 28% interest rates that credit card companies are charging, then call the credit card company and set up a payment plan that works for your current budget. Tell them you'll call again in six months to discuss a new plan. If you have done steps 1-4, then you are already on a course that will get you out of debt, though it will take some time to correct a lifestyle that was previously out of control. The only way out of debt is to increase your income, increase your protected assets (retirement) and put in a budget that is consistent with thriving and within the parameters of what you are earning.
6. Reduce Expenses. How you can get creative about reducing your expenses? Single moms have been using CoAbode.org to find one another. By teaming up, they can get a bigger home in a better neighborhood, carpool, share home expenses, including child care and generally get twice as much value for their time and money. The beauty about this is that when you get the big-ticket items (like housing, car, insurance) under control, you are naturally creating more money for fun, for family and for charity - all the things that make life worth living. Depriving yourself to the brink of breakdown and then overspending in a retail therapy session only makes the problem worse - as you now know!
Join me on my BlogTalkRadio.com show to discuss this further and get real answers to your questions on just how to start thriving when your interest payments are burying you alive! The Get Out of Debt Show is scheduled for Tuesday, November 9, 2010 at 6:00 p.m. PT. Call-in Number: (347) 215-7305. If you miss the show, it is available for playback on demand 24/7 and you can also download it as a FREE pod cast.
Natalie Pace is the author of You Vs. Wall Street and host of the Pace and Prosperity radio show on http://www.BlogTalkRadio.com/NataliePace. She is a repeat guest on Fox News, CNBC, and ABC-TV and has contributed to Forbes.com, Sohu.com and HuffingtonPost.com. As a philanthropist, she has helped to raise more than two million for Los Angeles public schools and financial literacy. Follow her on http://www.facebook.com/pages/NWPace and on http://www.YouTube.com/NataliePaceDOTCOM. For more information please visit, http://www.nataliepace.com.