You want to buy a home but your debt jeopardizes qualifying for a mortgage. Don’t give up. It is just a case of bad timing. You can likely buy a home if you do these simple things first.
1. Start Budgeting. It’s the first step of the financial journey you’ll be taking. You must have a good understanding of your entire financial picture when trying to reduce your debt. I hold regular webinars on budgeting. It is important to remember that budgeting is not an overnight process; it will take a month or two to collect your financial information and to understand your cash flow of what is coming in and going out. Budgeting needs to be done on a regular monthly basis, or it will not be beneficial.
2. Pay More Than the Minimum on Your Debt. That includes all debt. Pay down your most expensive debt first. Credit card debt is going to be a lot more expensive than, let’s say, your student loan debt, or even your house payment. Commit any windfalls to paying off your debt: any influx of unexpected cash, a stimulus check, a tax refund or inheritance should be put toward your loans instead of splurging on yourself.
3. Stop Creating More Debt. Cut back on your spending. Going out to eat at restaurants, the daily Starbuck’s trips, where you’re spending five or six dollars on a drink per day, and any other expensive hobbies should be put on hold. Golf, which I love to play, is an expensive hobby. It’s more important to get yourself out of a debt first. You will enjoy your golf game a whole lot more when you no longer have that awful debt weighing on you.
4. Try to Earn Extra Income. A second job or a side gig with skills you know well enough to earn money at, and that people will want, is a great idea. Maybe you are good at working on homes and can help your neighbors. If you are good at selling, look around your house at all the things you aren’t using anymore, and find what you can sell to someone who will put it to good use. That money will also help pay down debt quicker and without a lot of effort.
5. Downsizing Where You Live. When we live above our means, it puts us further into debt. We’ve grown accustomed to our home, the memories, and everything in it. You can gain control of debt quicker by downsizing. You might not have a house payment anymore. When it comes to furnishings, don’t buy the designer labels or heavily advertised brands. They aren’t always the best. Usually, it comes down to what people think they need to have.
You Will Still Need to Save for You
Basically, essentials will vary from person to person in each situation but it must be budgeted for. Some people say 50 percent of your take-home pay should cover your essentials and repayment toward your debt. Obviously, if you are in a single income household, the percentage you need is different from someone who is married with children and living in a bigger house.
So we typically say to earmark roughly 10 percent toward your debt and 10 percent toward your savings with no interruptions. It is so important to keep saving for yourself. Your expenses will fluctuate, like in July, for lawn care and those types of good-weather things, rather than snow removal occurring in January. So knowing what the expenses are, and what the cash flow is for both incoming and outgoing should work out in your favor in the end.
Pay Off Debt to Create More Debt?
It sometimes seems like the American Way, doesn’t it? It’s funny, but really, it’s not. Once we get into debt, we concentrate on getting out of debt to create more debt.
Some people can develop a false sense of security with using zero percent interest credit cards. When they downsized their home they bought new furniture and thought they were fine for those first six, twelve or eighteen months. But didn’t they know what happens at the end of the period? Usually, the interest rate skyrockets if you haven’t paid the balance. Lesson learned: make sure you understand the nuances of zero percent interest first, before you go deeper into debt.
Do you really need new furniture? Do you really need it right away? Can you use what you have for a while? However, if do you need it, want it, and are going to buy it, think about selling your used furniture and putting the extra money toward your debts.
There is a Silver Lining
This type of conversation is uncomfortable for most people because they don’t like to talk about their finances. That’s why we do what we do. We make that process easier. We explain to our clients that they will outlive their money if they don’t change their current habits. We usually run a retirement income analysis so they can see what their financial future will look like if they continue down their current path.
I understand change is difficult for most people and, believe me, it won’t happen overnight. However, I would not want to see them in a worse position either, which is why I believe there is a silver lining to everything. The coronavirus pandemic proved to us that we don’t need to go to the grocery store three times a week or order out for food twice a week. We can cut back. We did cut back. We learned to workout at home.
Your debt should influence you to cut back on unnecessary expenses in order to get on course toward your financial freedom. Falling back would simply be an injustice to you. It is our job to make sure you understand the situation you’ve gotten into, to then develop a plan with you, to help you get out of debt so you don’t repeat it.
This a priority because even if you are not worried for yourself, think about your family and their future if something were to happen to you. You don’t want to leave a financial burden on them.
I would be happy to talk with you either at the next budgeting webinar or whatever is most convenient for you if you are interested. Just let me know.