We like most people acquired more debt and recurring bills than we would have liked before the economic bubble burst. Our plan had been to run up some debt, then sell our house to pay it off the way we had done once before. Unfortunately with the economic downturn our home value dropped to less than we owed, our credit card companies decided to double our interest rates and minimum payment percentages, and everything from gas to groceries were substantially more expensive nearly overnight. At first it was pretty scary and we had a hard time covering the upswing in cash going out the door. We cut non essential bills right away, stopped going out and buying new things, but were still losing ground. Our next step was to call our credit companies and negotiate payment plans to reduce our monthly bills, followed by cancelling our home phone, reducing our cable/internet costs and reducing spending on food by switching grocery stores. There are a lot of resources that tell you what to do when you are in this situation that are more comprehensive, but this worked for us and we are substantially better off today than we were as little as a year ago, and we did not increase our debt with new loans, refinance, file bankruptcy or default on our mortgage or any other payments due. During this time we did everything we could to supplement our income also, but there simply weren't many options.
This is what we did to get out of the hole:
1. If you call your credit card company and ask for a payment plan they will set one up for you. Not one of them said no, and most allowed for a 5 year plan with no interest. The payment plan sets up automated payments from your bank account with a lower amount than your normal payment and yet pays more principle than if you just paid your minimum amount. We reduced our monthly bills by about 20% just by this first step, and since have paid off more debt than we did over 2-3 years of regular payments.
2. We started planning our meals, and were more careful about where we bought groceries. This simple process saved us between $200-300 a month that we could use to pay down debt. We also started packing lunches for work rather than buying them.
3. We turned off the home phone ($50) which we never used anyway, changed internet providers($15), changed cable/satellite ($40) and raised the A/C temp by a degree or two. Total savings was around $150 a month.
4. We did still go out some, but looked for deals. $1 slice night at our favorite pizza place replaced the night on the town at a $20 a plate restaurant. $5 movies are still one of our favorite outings for our family of 4. Netflix also is an outstanding deal for us since we love movies. We replaced buying 2 DVDs a month @ $40 with a $18 a month account that gives us 2 blu-rays at a time and unlimited instant movie downloads.
5. We used cash windfalls, extra money & checks, like tax returns or year end bonuses to pay off debt instead of spending them.
6. We also put money in savings. Not as much as we used to pay debt, but we felt to reduce the risk of recurrence this was necessary. This was pretty easy with a program that our bank has available that moves money into savings every time you use your check card or pay bills online (so we saved a lot) and allows for regular movements of money into savings also on a monthly basis.
7. We went on vacation to visit a relatives house instead of to an expensive hotel and theme park. Of course this relatives house is like a B&B so it wasn't much of a sacrifice but it did save us a bundle.
All these changes, discipline to pay down our debt and a few temporarily drastic changes to our spending really turned things around for us, and have really opened our minds to how being a little more careful about how we spend actually increases our options instead of reduce them. A lot of these changes became habits and even though we are in a different place today we still follow them.
