Your Personal Debt Ceiling Crisis

It's impossible to escape. The debt ceiling deadline and impending possible default are dominating the headlines. Whether on the television, Twitter or print media, there is plenty of analysis and prognostication out there about the issue. So let's put a little spin on it.

Imagine you are coming upon your own "debt ceiling." You have your mortgage and car payment and a few credit cards carrying a balance. You recognize that your current debt load and payments are not sustainable for the long term and some major financial adjustments are needed in your life. There is just no keeping up with all the payments and your interest is building on top of your principal.

How would you deal with this crisis? It's not far-fetched. We are a country laden with heavy debt burdens, from our federal government down to the individual.

The Congressional Way

You could choose to follow the example being set by the U.S. Congress. You could decide to not make your next mortgage, auto and credit card payments unless you figure out a way out of this mess. You've created a deadline to force a decision or make no decision and deal with the dire consequences of missing payments.

However, it's unlikely any professional would ever advise you to take this route. Dealing with a crushing debt burden is no easy task, and it requires very difficult decisions that will impact your lifestyle. But deferring to the choice of no choice is not a good financial decision.

The Well-Considered Way

Making good, well-considered financial decisions requires active participation on your part. It requires you to consider your options and potential outcomes, and then select the choice that fits best with your personal values.

So how does the decision get made when you reach your personal debt ceiling? First, decide not to make a decision through inaction! Decide that you will decide on a course of action. Second, make your next set of payments whether you've decided on a course of action or not. Creating an arbitrary deadline can make sense to prompt you to make a decision, but skipping payments will only compound your problems.

Once you've agreed with yourself to make a decision, the difficult part begins. You have two options (ignoring bankruptcy for the purposes of this piece) to begin digging out of a mountain of debt. Spend less, earn more, or do a bit of both.

To spend less, go through your spending for the past month (or through your budget if you've prepared one). For each item, determine whether it is a need, a want or something you didn't even realize you were spending on. The needs list should be quite short: housing, groceries, basic utilities. For now, set aside the needs list.

Move on to your "didn't even realize" list and write each item on that list out by hand, with pen and paper. Stick it on your fridge or mirror where you get ready in the morning. Commit yourself to not spending any money on those items. This list may have items you don't really want to give up, but that's the burden that needs to be paid. Add up how much you will save weekly by eliminating these expenses.

Next, review your wants list. Some of these may be very important to you and others may be luxuries that you enjoy. You have to decide what is critical, what is almost a need and what is really not that important. Add up how much you will save by eliminating the "not that important" items.

At this point, determine how much you'll save weekly? Is it enough to stop the need to incur more debt and allow you to begin chipping away? If so, great work. Now do it. Only you can commit to cutting out those expenses.

If you aren't saving enough yet, it's time to make some really difficult choices. Take your needs and very important wants lists and decide what you can cut. Can you spend less on groceries for a couple years? Do you need a cell phone or cable TV? If you get to this point, the decisions will not be fun. You may even have to consider moving into an apartment with lower rent or looking for a tenant to live in your house. That's the burden of your past financial decisions.

Oh, Yeah

You could also get a second job or make more at your current job. Losing a couple weekends a month may be easier than only eating ramen noodles for a couple years. If you do choose to earn more income, set up a direct deposit program to send that extra money directly to pay off some of your debts.

It's not fun or easy, but overcoming your personal debt ceiling is possible in most cases. There are difficult decisions and sacrifices. But the rewards on the other side are well worth the effort. You might even discover that you really don't need many of those things to have a happy life.

Now, about Congress...

FPA member Nathan Gehring, CFP®, provides financial planning services to young individuals and couples at My First Financial Planner, a service of Conceptual Investment Advisors, Inc.