The reality of consumer debt

The unfortunate reality about debt is that getting into debt is such an easy thing to do. Recognizing and/or admitting that you may be in over your head isn't quite such an easy task, though.

Today's level of consumerism is quite high and many consumers have grown up in a world with a spend-it-until-you-don't-have-it philosophy. Some people today accept debt as though it were a given, a fact of life that they cannot possibly escape. While it is true that some aspects of debt are unavoidable, many aspects are not only avoidable but are totally unnecessary.

No longer do all consumers look into their wallet for a 20-dollar bill to splurge for lunches, videos, and electronic games. Instead, many simply pull out the credit or debit card and swipe the plastic.

Advances in technology have undoubtedly made it possible for people to monitor their credit card usage online. But, in order for these advances to be useful, consumers must actually take the time and make the effort before the bill arrives. Finding the time and effort in today's fast-paced society can prove to be difficult for many.

That said, how can you recognize the signs that not only are you in over your head, but also, you may be about to go under?

Making changes for financial survival

Coming up for air might not be so easy in a financial climate that has consumers scrambling for the gas station with the lowest prices and the corner store with the lowest price for their milk. So, maybe consumers are becoming aware that they should look for ways to save, but are they even going about it in the right way?

Looking for ways to save money just so that it can be spent elswhere is unlikely to make a real difference to a financial situation unless some major lifestyle changes are made as well.

Recognizing too much debt

The first step to financial surivial is to recognize just how bad your financial situation is. If you can agree with most of the following statements, it is probably time to make some major changes - along with a few minor ones - in your spending habits.

Signs that you may need to change your financial plan

• You have been late paying your bills more than once.
• You never pay the full amount billed to your credit card accounts.
• Cash advances to cover basic expenses are becoming more frequent.
• Late fees are beginning to appear on such a regular basis, that you are surprised when they aren't listed.
• Bank charges for insufficient funds have begun to eat into your disposable income.
• Making the payments on your installment loans, including your car payment, is becoming difficult.
• Each new expense, including appliance repairs, home repairs, dental bills, prescriptions, unexpected doctor visits, or car repairs is a major emergency that you cannot afford.

If you don't have any cash reserves to cover unexpected costs, no matter how minor, weathering a recession or even a simple slowing down of the economy is going to take a large toll on your financial situation.

It is time to attempt a personal debt reduction by developing a personal debt reduction strategy that includes an increase in savings, a decrease in spending, and a reduction in debt.

Creating a debt reduction strategy

When creating a debt reduction strategy, take a small step, move forward, and then repeat. Any improvement in your financial status is key to your financial survival and reason to celebrate.

The first step is to talk to other members of your household and include them in the debt reduction strategy planning. People who help to create the rules are more likely to follow at least some of them. Once you get them on board, move forward with the planning.

Next, create a budget for necessities that you can live with. This necessitates identifying necessities from wants. Your wants are simply those things that you would like to have, that make life more enjoyable, and that you can probably live without. Even with necessities, there's some room for paring down to the basics.

Recommended resource: Home budget analysis calculator

Pare down your home expenses with some of the following strategies. Try to use the ones that you think will work for you. Homes cost a lot of money to maintain, and, thus, there are usually multiple opportunities to save money if you look hard enough.

Examples of how to cut home expenses

• Consider refinancing your mortgage. This could provide both short- and long-term benefits if your situation is right.
• Insulate your home to reduce the loss of heating and cooling costs.
• Practice other energy-saving strategies such as closing the drapes, localized thermostats, replacing appliances with energy-saving models when necessary, exchanging incandescent light bulbs with fluorescent ones, and lowering the thermostat during the night.
• Reduce the cost of services that you currently have for your home. If you can reduce the cost of your telephone or cable services by eliminating special features, try it. You can always add them back on if you find you cannot live without them. If you have a cell phone, do you need a landline as well? Can you pay for your trash removal by the bag instead of a huge monthly fee?
• Obtain free home and/or auto insurance quotes from different companies to see if you could be saving money on your insurance costs.
• For your landline phone, be certain that you are not paying too much for long distance calls. Long distance plans for 2 or 3 cents per minute are commonplace these days.
• Complete home repairs immediately before they lead to bigger and more expensive problems.
• Put off major home renovations until you can save enough money to cover half of the cost in cash.

The necessities of life have been defined by some as food, clothing, and shelter. Pare down your food expenses with any number of strategies. Use the ones that will work for you. Most, if not all, of these ideas will save you money, some more than others.

Examples of how to cut food expenses

• Eliminate luxury items such as expensive cuts of meat or fish or designer brands.
• Reduce take out lunches to fewer days per week.
• Discover cheaper places to shop for your groceries and personal hygiene items.
• Only purchase items that are on sale or that you have coupons for.
• Learn to use coupons each and every shopping trip. Trade coupons with family and friends.
• Learn to read the store circulars and team up your coupons with items that are on sale.
• Obtain store rewards cards so that you are eligible for advertised savings.
• Use a cash back credit card for your grocery purchases.
• Purchase only what you can use. If you've thrown anything away in the last two weeks, you are overbuying.

Pare down your clothing expenses with any number of the following strategies. Use as many of the ones that you think will work for you. Again, all or most of these ideas will save you money, some more than others.

Examples of how to cut clothing expenses

• If you already own something similar, you don't need it so don't buy it.
• Swap clothing with friends and family. After all, how many times have you purchased an item, worn it once or twice, and stuck it in the back of the closet.
• Only purchase clothing when it is on sale. Learn to shop the discounted racks. In most cases, you will save anywhere from 20% to 60% off the original prices.
• Take proper care of your clothing so that it lasts longer.
• Avoid purchasing items labeled "dry clean only," since this can rack up quite a large expense over time.

Now that you have your budget in place for necessities, you can take a look at how much money is leftover from your income. Budget the remaining minimum payments for your credit cards out of this amount.

If there is anything leftover, that is the amount of your disposable cash that you should be spending. Try and earmark a portion of this for savings that can be used to cover unexpected emergencies.

Realize that while this might seem difficult, the situation will improve as you get your credit card debt pared down to nothing. As the debt on each credit card becomes smaller, you can pay a larger amount than the minimum due in order to reduce your debt even faster.

Start with the credit card that has the highest interest rate attached to it and work your way through one by one. Once you get your credit card debt under control, you should begin to see an increase in the amount of disposable cash that you have.

It's important to realize that changes can be implemented at any time in your strategy. It isn't necessary to change everything all at once either. Once you begin to improve your financial situation, you'll start to reap the benefits and become even more motivated.

Staying out of debt

In order to stay out of debt once you clean up your act, continue to work with a budget of some kind. Plus, continue using some of the strategies from before that seemed to work well for you. Once you begin to use your credit cards for discretionary spending, try to incorporate a few rules.

For example, consider paying cash for any purchases under $20 and using your credit cards for anything over that amount. That strategy will have you rethinking your purchases and being more selective, eliminating some impulsive spending.

Continue to place some money into savings for a rainy day. You never know when you might need it, but you will always be glad that you have it.