Understanding the vicious circle is the first step out of it
Chronic overdraft and debt is a widely spread illness. Chances are many of the household who suffer from it are caught in a vicious circle of negative cash flow and debt. Even more likely is the fact that they are unaware of their situation and of the behavioral pattern responsible for it.
The vicious circle
A vicious circle is comprised of an interlinked series of events or behaviors which constantly reinforce themselves through feedback towards greater instability. In household finances the classic vicious circle would like this:
The total negative cash flow of the household keeps getting bigger and bigger. The end is obviously and painfully clear.
Getting caught in such a vicious circle is terribly easy. Express loans, credit and other magical solutions are handy and available to everyone. These magical solutions obviously carry some of the highest interest rates known to man (other than loan sharks I guess) which bury us further in the circle. Financial awareness and education is unfortunately a lot less available and so many people find themselves stuck in such circles.
Getting out of a vicious circle is the tricky part. It will require painful concessions and, without a doubt, a sudden drop in your standards of living.
How to break the vicious circle and stop negative cash flow and growing debt
The strategy required to break a vicious circle should be clear. Attack one, or more preferably all, of its links. In the case of household debt and negative cash flow action should be taken on the following:
#1 Know where you stand - Awarness and acceptance
Find out how sizeable is your debt and how serious your negative cash flow is. By budgeting and concentrating all your financial data together with some hard work and the help of endless helpful posts from personal finance blogs around you will be able to draw these numbers. Getting professional financial assistance is always recommended but will cost additional money (I believe it’s worth it if it’s good counseling).
#2 Consolidate your debt - Immediate Action
Getting caught in a vicious circle usually means having multiple loans and credit lines. Consolidating your debt and setting a fixed monthly payment with a known period is very important to planning your way out of debt. Your monthly payment should be within your new budget (Step 2,3 have a lot in common).
#3 Adjust your standard of living to your income (don’t forget to include your debt payments) - Balance
The most important and maybe hardest step of all is to create a new, balanced, budget which will ensure you live what you earn. This is difficult in a world where consumption is the new god but you will also discover, as many of us have, that there is a lot more to life then consuming.
This post is about the bigger picture.More detailed guides, advice and how-to’s are available here, at The Personal Financier, and also at leading personal finance blogs which can be found in my blogroll and links section.
I especially recommend this guide by Trent Hamm from The Simple Dollar titled “31 days to fix your finances”.
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