How to know when it's time to face your debt

As a society, we shoulder a mountain of debt. Many individuals have so much debt that it keeps them from having money for emergencies or being able to fund long-term goals like retirement and their children’s education. In this current environment, we may be collectively asking ourselves a lot of questions about what it means to have too much debt, and what we can do about it.

Let’s break some of these questions down.

The question that is easiest to start with is: How much debt is too much? Ask yourself some straightforward questions to find the answer: Are you currently paying for living expenses with a credit card? Are you only making minimum payments? Do you feel strapped for cash all the time?

While it may be scary to look when you’re unsure of your financial situation, you have a problem if you don’t know what you owe. You might be facing bigger issues still if you find yourself needing to consistently borrow money from friends or family in order to pay bills.

In times where everything is uncertain, it’s critical that you ask yourself if your debt level is causing you intense anxiety. Signs of this can be losing sleep, not being as efficient at work, being cranky with friends and family, and excessive drinking or indulging in any medication so you don't have to think.

When you have no or very little savings, things can worsen. It’s recommended that a single person, or family with one income, has six months of spending in cash in case of an emergency. A two-income family may be able to get by with three months spending in the bank, but if two people work for the same company or in the same industry you may need to maintain a six-month cushion. It is best to keep this cushion in easy-to-access savings accounts.

Once you’ve determined that you have too much debt, you can move on to correcting the problem.

Step one is to admit you have a problem. Then, set goals that will solve the current problem and to help prevent it from happening again. Start by listing all your credit balances including your mortgage, student loans, credit cards, car loans — everything. You need to know precisely how much you owe. Consumer and student loan debt should be your priority to pay off, but you still need to know if your mortgage is too big and you’re limiting your ability to live like you want to.

Next up is developing a plan. This plan will involve reducing overall spending — perhaps drastically — to put money toward paying off debt. This can be hard and requires dedication, and it involves a major reassessment of how you live and how you spend your money.

Once you have the list of debts, you can start with what’s known as the snowball method. Start by paying off the smallest balance and paying as much as you can until it’s paid off, then go onto the next one and so forth.

You should celebrate each debt you pay off.

Something important to remember is that though our society might signal certain easy ways out, there is no such thing. Some examples include refinancing your mortgage to include your debt, or to get a "no interest" credit card to make the carrying cost smaller and easier to pay off. 

Will either of these options work? Probably not and you won’t have learned anything about managing debt. You might be able to get away with it once or even twice, but eventually your home equity will be used up and your no interest credit card will have interest. Worst of all, you’ll still be in debt.

The final step is to develop a realistic budget based on your income. By developing a budget, you begin to understand your take-home pay, your monthly obligations and what you can afford to spend. Work with your spouse each month to determine how the income will be allocated for living expenses and debt repayment. Develop some goals and make a habit of looking at the end of the month and see what you did right and, more importantly, what you did wrong.

What’s the payoff? You’ll be able to stop worrying about your finances, you’ll be able to afford to save for your long-term goals and you’ll be happier. And, if you ever find yourself in a pinch, you’ll know how to handle it.

Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult your financial advisor regarding your specific situation.

Teresa R. Sanders, MBA, RICP, CFP, is a partner at Aspen Wealth Management, Inc.