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Articles - Money Management
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Back to Money Management view printable version 
Debt Considerations
Sometimes major adjustments to a person's lifestyle are required to reverse the consequences of debt. Merely shutting the lights off when no one is home or installing water-saving showerheads will not negate the burden of excessive long-term debts.
Consider a family of four that has a mortgage payment of $1,200/month, two car payments of $500/month, and only brings home $2,500/month. In this example, the family has only $300/month left over to pay for all other expenses. Assuming the average family would spend about 15% (assumption adapted from 2000 Consumer Expenditure Survey) of their net income on food alone, the monthly food bill for this family would be $375. Excluding all other expenses and no change in shopping/eating habits the family would spend $75 more than they earn each month. Shopping with coupons may allow them to save $75/month, but all the other regular monthly expenses would still cause the family to spend more than they make each month.
In these situations, where required payments on debts are so high that reducing discretionary expenses will still not allow debt obligations to be met, major changes in lifestyle may be required to avoid foreclosures, evictions, repossessions, and even bankruptcy. Individuals in this circumstance should consider:
Increasing Income
- Obtain a second job to: make ends meet, pay off debt(s), pay down principal and renegotiate monthly payments.
- Upgrade employment to meet financial obligations.
- Consider having other family members work part/full-time to contribute to debt repayment.
- Ask/volunteer for overtime.
- Rent out a room/basement to provide extra revenue.
Modifying Transportation Debt
- Selling one car and sharing the other may be necessary (no second car payment; may reduce insurance, gas, and maintenance expenses).
- Public Transportation vs. Personal Transportation.
- Selling an expensive car and using a more economical one (Lexus vs. Taurus).
Modifying Housing Debt
- Selling a home with equity may allow the individual to pay off all/some of the debts.
- Living with parents/family member (in the short term) can eliminate/reduce housing expense (typically this expenditure is > 30% of one's income) so that it can be applied to paying off debts.
- Decreasing mortgage payments by moving to a smaller home or less expensive neighborhood.
- Explore a home equity loan.
- Explore mortgage workouts with lender and/or attorney.
Using Assets to Repay Debts
- Selling recreational items such as boats/personal watercraft/motorcycles/RVs/campers/etc. (or even having someone take over the payments) may eliminate the monthly payment, erase the debt, and decrease expenses on gas, oil, insurance, etc.
- Selling items such as expensive jewelry, guns, antiques, etc. to pay off or pay down debts.
- Cashing out 401(k)/retirement benefits (should only be done in extreme circumstances after consultation with a CFP/CPA/Attorney).
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