10 Steps to DIY Debt Management

I read an Liz Pulliam’s article on Why Credit Counseling Often Fails this week.  It’s sad that so many people pay debt management companies to write their budget and reach a settlement with their debt collectors and then end up in default.

One thing that struck me was that debt collectors are now starting to accept a budget with a savings plan built in.  One of the biggest reasons why debt management or credit counseling fails is when the person has an emergency of some kind and goes into default on their monthly budget.  I see this as a huge step in the right direction.

But if you take it one step further, you are usually paying most debt management or credit counselors a fee.  If the money that was going to pay them were put into a savings account, this possibly could have been avoided.  If you have the resolve and patience to negotiate with your creditors, you can save money and get your debt under control.

These ten steps to DIY Debt Management give a clear plan on negotiating your own settlement and creating your own budget.  These include a plan to build an emergency fund while paying off your debts.

Take Stock

The first thing that you need to do is figure out what money you have coming in and where that money is going.  At one point in time, I had plenty of money coming in but when it came time to pay the bills, there was never quite enough.  My money was leaking out all over the place.  My biggest problem was not big purchases, it was the little under twenty dollar purchase that were draining my income away without me even realizing it.  It’s easy to stop the big leaks because you tend to think about them and realize that you are spending the money.  However, it is also far easier to justify in your mind those little ones, after all, it’s only ten dollars or twenty dollars.  The problem is that those small purchases add up quickly.  Have you ever wondered what happened to that one hundred dollar bill once you broke it?  Try writing down every penny that you spend for a week.

Find the Leaks

Take a look at what you have written down and put an L by every purchase that you could have easily avoided.  These might be things like impulse purchases, snacks and sodas, toys to reward your children for being good..  Ah, now I have hit on something difficult.  Do you tell your kids when they go with you to the store that you will buy them something if they are good?  I know that I used to bribe mine quite often.   It was usually not a big bribe but it adds up and the kids would break, lose or be bored with the bribe in less than a day.  Make a list of the leaky items and set it aside.

Make a Plan

Make a spending plan or budget.  Make sure that the number one thing on that list is you.  If you are going to have a chance at sticking to a budget, you have got to make an emergency fund/savings account a priority.  You cannot stick to a budget if every time something comes up, you have to fall off the budget wagon and blow your budget.  My biggest mistake in budgeting was not allowing money for entertainment, gifts, Christmas, and emergencies.  I thought that until I paid off my bills, I could go without these things.  Guess what?  It doesn’t work!  It’s like going on a diet and saying that you weren’t going to eat.  Reduce your leaks but don’t try to cut them out entirely.

Write It Down

Write it down in a format that you will be able to send to your creditors. You will use this plan to negotiate a reasonable payment and interest with them.  The plan you will send to them should not be too detailed.  They don’t want to know how many sodas you will be buying during the week so keep your budget or plan categories general.  You will need to include the debt payments as well as household expenses such as electric, telephone and cable.

Leave Room For Flexibility

There are some expenses that are ‘hard expenses’ such as utilities, insurance and rent or mortgage payments.  You have to have a place to live, most of us also require electricity, food and a car to drive to work. These should be listed right under your payment to yourself.  Next would be your miscellaneous expenses, I consider this my flex fund and I gave myself more than I thought I would spend.  If you don’t allow yourself money for these types of things, your plan will fail.  It’s almost guaranteed to fail because unless you are a monk, you are going to have to buy a gift or go to a movie or just get out of the house. This is your leaky fund and all of the items that were listed as leaks are going to come out of this fund.  You will need to make a commitment to spend only the budgeted amount on them.  After your  expenses, you will list your desired debt payments.  I have included a simplified example.

Income             2200

Savings:              200

Mortgage           400

Utilities             100

Insurance              55

Car Payment       255

Misc Expenses   150 (Entertainment, gifts, vacation, leaks, etc)

Groceries             400

Gasoline              100

Medical                 50

Debt 1                 150

Debt 2                 140

Debt 3                 100

Debt 4                 100

Total                      0

Make a Commitment

This is the most important and the most difficult part of DIY debt settlement.  When you are paying someone to manage your debts, you make a commitment to them and some people find it’s easier to keep it when you have someone standing over your shoulder.  If you are going the DIY route, you will need to make a commitment to yourself, your spouse, your parents, or your kids.  If you are married, living with someone then they need to be a part of the plan and make their own commitment.   Make it for a specific period of time or a specific goal.  You are going to need to make a commitment to your creditors anyway for a period of time but my suggestion to you is to make a commitment to yourself to stick to this budget for a month before you call your creditors.  When you start calling them, you will want to be able to pay the agreed upon amount right away.

Give your plan a month’s trial and then sit down and tweak it.  Are you still leaking?  Are they legitimate leaks or did gasoline cost you more than you expected?  Were your medical costs higher than you expected?   If you allotted a reasonable amount for your misc and medical expenses and you came in under it for the month, I would not lower them.  Put the money into savings, because Christmas is coming and no matter what religion you are, there are going to be certain months when expenses are higher than normal.

Call Your Creditors

I have found that it is usually best to call your creditors and tell them that you are unable to make your current payments and that you want to work out a plan that will enable you to do this.  Offer to send them your budget.   In today’s economy, most of them will work with you.  It might take a few phone calls to get someone who will negotiate but keep trying.  Write down every call you make, who you talked to and what the outcome of the call was.

If you don’t get anywhere, write them a letter and include your budget along with your plan to pay them off.  Wait two weeks and call again.  Ask to speak to someone with the authority to negotiate a settlement and budget plan.  There is certainly someone there who can do it.  Remember when you are negotiating with them that most debt management plans fail so their job is to get as much money as fast as they can.  Your job is to negotiate a plan that allows you to pay them back successfully and live at the same time.  Essentially, you both have the same goal: getting your debts paid off.

Revise, Revise, Revise

Every month is going to be a little bit different.  Some months you are going to have more expenses than others.  You may get a raise or your electric bill may go up.  A budget is not written in stone.  If your electric bill goes up, you are going to have to find the money in your budget to pay it.  This means that you have to do one of two things, reduce an expense somewhere else or increase your income.  The easiest place to reduce is your misc expenses.  These are things that are not usually a necessity and you can live without them for a month or so.  This is the second reason that I told you not to skimp on these expenses.  For a short term fix for a budget deficit, you can use the money alloted here to pay the extra expense.  If it is going to be a long term deficit such as your car insurance going up every month, you are going to have to revise your whole budget.  You have been tracking your expenses for at least two months now so you should have a pretty good idea as to where you can reduce.

Do not reduce your debt payments if at all possible.  You have made a commitment to these creditors and you need to honor it.  If you default on your agreement, they will usually revert back to the original terms.  If it is absolutely necessary to reduce those payments, then call the creditors BEFORE your payments are due.  Tell them the circumstances and renegotiate the payments.  Again, since your goal is to pay off your debts, this should be a last resort.

Free Money

There ain’t no such thing as free money!  Don’t fall into this trap when you get a tax return, gift of money, bonus, etc.  This has undone me many times.  Don’t splurge just because the money wasn’t in your budget.  This will undermine you in so many different ways.  It’s like an alcoholic falling off the wagon, once you get in the mindset to spend money freely it is hard to stop with just the extra money.  Focus  on your goals.  Your priority when you set out was to pay off your debts.  Don’t lose focus on that goal.  Pick one debt and send a larger payment to get it that much closer to being paid off or pay off a smaller debt with it and pat yourself on the back.

It is hard to stay focused on paying off your debts.    I have ready many articles that state that budgeting is easy but I am not going to lie to you about it.  It may be easy for some but for me, it was very difficult.  It took almost 50 years for me to figure out that most of the stress in my life came from my debts and my struggle to pay them.  I would get started and do great for a month and then just lose focus on what I was doing.  Then I would feel guilty and just shut it all out. The reason that I started this website was to help me focus on paying off my debts.

Congratulate Yourself

You will notice that I did not say reward yourself.  Too often we associate rewards with spending money.  We get a new job, we celebrate by going out to dinner.  We buy new clothes, we splurge.  That was the old us.   So instead of spending money and undermining all your efforts, take a moment every day to congratulate yourself for your successes.  They may be small successes at first, such as saving five dollars by packing your lunch or combining trips to town but they are still successes.  Feel good about it!

When you get your first savings account statement, take a good look at it.  It will come to be the measure of your success.  Watch it grow.  Nurture it.  If you are putting ten percent of your income into savings, then you will see it grow quickly.  My emergency fund is the biggest reason that I can stick to my budget and it is my biggest reward for doing so.  It gives me security.  It keeps me from feeling so much pressure that I go out and spend just to relieve it.

Draw two jars and put them on the refrigerator or hang them on the wall by your desk.   Put your savings goal at the top of one of them and the total amount of your debts on the other.  Fill the jar every month by the amount you have saved or paid.  Make it visual so you can see the results easily.  Congratulate yourself for every small step.

Your creditors are not going to congratulate you.  Your bank probably won’t congratulate you for saving money.  You are the one who is going to have to find ways to stay motivated to do it.    If you want to share your successes or your struggles, feel free to leave a comment.  No one understands how difficult it can be better than me and quite a few of the people who read these articles.  I am always happy to celebrate a success or share in a struggle.

Take Heart

It gets easier.  The first few months are the hardest.  If you can stick to your plan for a couple of months, you will find that the whole process gets easier each month after that.   You will find the things that motivate you to continue whether it’s watching your emergency fund grow or watching your debts shrink.  You will find that there is less stress in your life and that you have more time and energy to enjoy living it.

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Tags: budget, debt reduction, debt settlement, emergency fund