The current economic and political climate, as well as the projections for the near future, have convinced me of one thing – there has never been a better time to get out of debt and build an emergency reserve of cash. That’s right, the day of debt reckoning has arrived.

Yes, I do say that to alarm you. I think people need to be alarmed. Some people need to take off their rose-colored glasses, remove their political hats, ignore their favorite celebrities, and look at the stark reality we face. Our country is bankrupt. We are at war. We are tearing ourselves apart along the lines of Left vs. Right, and they have both been wrong.

I don’t know what might happen in the next year or two. None of us do. However, I do know this – those who have freed themselves of the burden of debt, built an emergency fund, and made adequate preparations for a worst-case scenario, are those likeliest to succeed – even thrive – in the coming years.

This is where I differ from others in the personal finance realm. I think the number one priority for anyone, particularly those with a family with people depending on them, is to build a six-month emergency fund of liquid cash to cover basic household expenses (food, rent/mortgage, utilities, transportation). I don’t care how much debt you have. I don’t care how much interest you are paying. You have to start building a cash reserve…now.

Why a six month emergency fund? The average unemployed person in America has been looking for work for 39.7 weeks, so we really aren’t even covering that full period of average unemployment, but it’s a start.

Most disability insurance policies have a six-month waiting period. If you get sick, or are injured, and cannot work, it will likely be six months before your disability coverage kicks in.

Why not nine months, or a year? If you are still deep in debt, you must start paying down that balance. Six months of savings is a good point to make the switch from savings to debt repayment. Once completely debt free, I think everyone should have a full 12-month emergency fund.

The Four Pillars of Paying Off Debt

1. Pick a plan, any plan. There are plenty of “get out of debt” plans floating around out there. A couple of my favorites are the debt snowball, made popular by Dave Ramsey, and the Debt Tsunami, which advocates giving an even higher priority to emotions elicited by a particular debt, and using that emotion to prioritize a repayment plan.

Both plans largely ignore interest rates, unless everything else is equal, as a determining factor in which debt should repaid first. I generally agree with this approach, as the emotional “win” from paying off a low-balance debt quickly is more valuable than paying a little more interest on a larger balance.

However, I don’t think completely ignoring interest rates is the perfect solution either. After all, paying down a large credit card debt at 19% interest while making the last nine minimum loan payments on a 3.99% car loan with a smaller balance seems to make a lot of sense, from purely a financial perspective.

On the other hand, paying off that small car loan balance in three months, and freeing up another $400 a month that used to go towards car payments, may provide a quicker win in your own plan. Do what works for you.

2. Keep it simple. Whatever plan you choose, my best advice is to keep it simple. The more elaborate the plan, the less likely you are to stick with it. That’s just human nature.

Ask anyone who has tried (and failed) elaborate diets how successful they were month after month. Chances are, somewhere along the way, they slipped. Not that slipping is necessarily bad – we will all do it, but if we have a simple plan to begin with, it makes it that much easier to get restarted.

3. Stop spending. This one is probably the most obvious, but it also the most difficult. People who spend more than they earn on non-essential items are often trying to fill an emotional void. That was certainly my case. I bought stuff because it made me feel good, because I was bored, and because I was trying to keep up with others who made much more money than I did.

Of course, others are swiping their credit cards because they have no cash, for a variety of reasons – some quite legitimate. This prolonged recession (when will we finally admit this is a depression?) has left many, many people unemployed and under-employed. In fact, a record 44.7 million people are now receiving food stamps.

That means a lot of families out there are having to decide between swiping the credit card, or going without food, gasoline in their cars or paying an electric bill. Chances are, many of these families have already cut most frivolous spending from their budgets. If not, or if you find yourself in debt, but not to the point of having to ask for assistance, I plead with you to radically change your spending habits and start working to pay down debt (after establishing a minimum 6-month emergency fund).

4. Increase your income. Earlier, I mentioned #3 was by far the hardest step. However, in today’s climate increasing your income is a very close second. Many families have been hit by layoffs, with one or both spouses losing their jobs. Self-employed people have seen work dry up, particularly those involved in residential construction and similar industries.

I think we are living through a monumental shift, a turning point. For the last 50-60 years many families made their living by working at a factory, or for a city, or a utility or similar, large institution. They were offered pensions and health benefits after reaching retirement. Their jobs were relatively stable, as was their income.

However, things are changing. Many manufacturing jobs have left, and will likely never return (at least not in our working lifetimes). Politics have made public-funded pensions and benefits an endangered species, and likely a thing of the past. No longer can one count of getting a college degree, finding a job and working there for 30 years until retirement.

New generations will have to be much more adaptable, much more creative in their ability to earn a living. They will have to create a variety of income streams by cultivating a combination of their personal and professional talents and interests.

• White-collar professionals may find themselves building privacy fences and decks on the weekends (or going full-time with a popular blog).
• Teachers may host tutoring workshops after school to earn extra cash.
• Policemen may start landscaping companies to supplement their income.
• Nurses may offer to watch an elderly person in poor health to relieve caregivers.

The possibilities are endless, and in reality, we already see many examples of these types of things happening. The difference is that in the past we looked at people with two careers (or a side hustle) as a bit odd – like they were workaholics or people lacking the ability to pick a career path and stick with it.

Going forward, this will be the norm. And those not looking to diversify their income will be the hardest hit every time there is a downturn.

Get creative. Coordinate a block yard sale with neighbors and split the advertising costs. Build a blog about whatever it is that interests you and write about it. Engage with others online in your area of expertise or fields of interest. Ask your current boss if there are any overtime opportunities. Put in applications for part-time work.

Use every single extra dime you can scrape up to put towards that 6-month emergency fund, and then towards your debt repayment plan.

I’ve never been more convinced that this is the time to get out of debt. And if I’m wrong, and things suddenly turn around and the economy booms, you’ll still be better off without debt and a solid emergency fund.

You will be able to seize opportunities others can’t. You will free up income to make investments others will miss (yes, I’m still bitter about being in debt back in 2008 and missing the many opportunities during the “recovery”).

The bottom line is this…you have to start today.

Ignore the television tonight, sit down with a pad and pen and list your debts. Figure out how long it will take to save six months of basic expenses. List things you can sell to make that happen even faster. Brainstorm ideas for increasing your primary income, and for creating new income streams. Now’s the time.

“Paying off any high interest debt will save you money in the long run, but it can be pretty tempting to buy something frivolous with the money, especially if you weren’t expecting it.

I feel completely different about the money that I’ve worked really hard for, than something like a refund that I wasn’t counting on. I really want to buy an Ipad, but i’m going to do my best to resist that urge.”

I can relate to Ross’ comment, and wondered if others shared our reservations to frivolously spend money we worked to earn, but feel more temptation to spend money we receive unexpectedly. Of course, one could make the argument that a tax refund is simply a return of money you have already earned and overpaid (assuming you paid taxes at all). In that sense, it is a little different than inheriting money or lottery winnings, etc.

Back to the original idea. Many times financial planning types suggest taking 10% of an inheritance received, or some other type of windfall, and doing something fun with the money. Take a vacation to visit a place you’ve always dreamed of seeing. Buy something of your heart’s desire, even if it isn’t very practical.

I generally think that is good advice, but only if you stop at 10% of the windfall amount. The problem is, many who find themselves on the receiving end of a windfall allow it to change their lifestyle. The expensive, once-in-a-lifetime luxury vacation becomes a once-a-year expense that eventually drains savings accounts and can lead to the accumulation of debt.

It also begs the question: Is it easier to spend money you didn’t have to work for? After all, when you apply a real hourly wage concept to your earnings, it may not be worth X amount of hours worked to pay for that trip to Tahiti.

There are some who would scoff at the very idea of spending any percentage of the money frivolously. I can understand that argument, too. After all, there are plenty of things most households could do with the money to better prepare themselves financially, such as.

• Getting out of credit card debt
• Eliminating some or all of your mortgage balance
• Setting aside a one-year emergency fund
• Setting up sinking funds for known future financial events such as insurance renewals, tax payments, annual Christmas shopping, etc.
• Investing for retirement, or future college expenses for kids
• Preparing an emergency stockpile of food, water and basic household goods

In an effort to maintain some balance I would probably do a little of both. I would spend a small portion of the windfall on something I really wanted, but I would lean heavily towards investing the money into something that would continue to provide a return long into the future.

That might mean paying off any consumer debt I owed, or dropping some money into a few quality dividend stocks that would spin off income for years to come. Better yet, it might make sense to eliminate a chunk of our mortgage. That would be like getting an immediate 5% return on the money through saved interest.

One last option would be to do nothing. Just let the money sit in a money market account safely drawing a small amount of interest. We live in an era where people are encouraged to be doing something all the time with their money – actively investing it, monitoring it, counting it, etc. However, often the best move is to simply do nothing.

I came across your web site today and I love it!  My husband was out of work for nearly 2 years.  We always had enough money to pay our bills so our credit line was very high.  Well, I used it, all of it.  I paid the phone, the car, taxes, one credit card paid another and so on.  I know I broke every cardinal rule but I did what I had to survive.

My husband is now working.  We are paying the mortgage company every week $500.00 to catch up.  My credit cards are over $80,000.00.

Here is my question…Now that we are getting back on our feet, how do we square up with the credit cards with out ending up in the same position?  I can give them each (all ten of them) 40.00 a month, but that won’t make a dent and I don’t even think they will take that low of an amount.

Laura, thank you for taking the time to share your story. It sounds like you and your husband have had a rough couple years, financially, but there will be brighter days ahead. My first piece of advice has little to do with finances, and more with your relationship with your husband.

I want to encourage you to fully disclose your financial situation to your husband. Perhaps you have already done so, but in your email you indicated “I used it, all of it. I paid the phone, the car, taxes…” I just want to make sure you and your husband understand the situation fully, and understand that while you did what you had to survive, we must now work together to clean it up.

Kudos to you for working to get the mortgage caught up, and for making that a top priority. So many times people in your situation make payments to credit cards before the mortgage payment because some obnoxious credit card collector is breathing down their neck. Prioritize the income you now have coming in putting things like food, shelter, lights, and transportation at the top. You’ll work around to the credit cards when you can, but those things must be paid first.

Consolidate Your Accounts

With ten credit cards you do have an uphill battle, but paying them off is not impossible. You didn’t share exact numbers/balances with me, but I understand your current budget only allows for $400 to go towards repaying the credit cards (hopefully you’ll have even more once the mortgage is caught up).

Spread across 10 cards, that $400 budget only leaves $40 per card. You might consider a consolidation loan with Lending Club to reduce the number of accounts (and minimum payments) you are required to pay each month. Also consider this 18 month promotional balance transfer offer from Discover® More Card.

If you can successfully consolidate your accounts, but sure to close or tear up the cards of those that are paid off. Else you may revert back to old habits and begin using them again.

Sell Stuff to Raise Cash for an Emergency Fund

It would be great if you could build up a small emergency fund of a couple thousand dollars before starting your debt repayment plan. I worry the next emergency will lead you back to credit cards, and zap any progress you’ve made towards paying them off.

Do you have anything you could sell to fund this emergency fund? An extra vehicle? Old jewelry you no longer wear, but may have cash value? Appliances? Electronics? Consider hosting a yard sale or two. I’m not advocating you sell all the contents of your home, but this step will require an extreme measure or two to get an emergency fund in place.

The Debt Snowball

Here’s my advice for handling the remaining credit cards. Start with the traditional debt snowball. List your cards smallest to largest according to their current balance. The standard advice here is to pay the minimums on all accounts to keep them current, and pay anything extra on the smallest debt. In your situation, I’m not sure that’s possible, considering the sum of all minimum payments is likely much higher than $400.

I’d advise you to consider making a substantial payment – at least a couple hundred dollars – on the account with the lowest balance. Use any remaining funds to pay minimums on the next card or two. Hopefully, that card with the lowest balance can be paid off within a couple months, and when it is, walk that money right up the debt snowball to the account with the next lowest debt, and so on. The guys at the end of the list will probably be kicking and screaming for payments, but if you can’t get to them, you just can’t get to them.

Increase Your Income

While working this debt snowball, it would be great if you could find creative ways to increase your income. Perhaps you or your husband could work some overtime or a part-time job, or work from home in off hours. As you acknowledged, you are in a pretty big hole, so increasing the size of your shovel would certainly help get out of credit card debt that much faster!

I wish you and your husband the best on your journey to debt freedom. It will be a long road, but as someone who has just recently experienced debt freedom, I can tell you that every sacrifice is completely worth it!

Ask the Readers: Do you have any additional advice for Laura? Words of encouragement?

In our own household we have reduced outstanding credit card debt by about 30% since May of this year. We have been 100% sold out, gazelle intense about being credit card debt free, and if it weren’t for a few family emergencies we would have closer to 50% paid off by now. The bright side is we did not accumulate any new debts during these mini-crises.

How are others doing? Here’s a look at the Credit Karma survey results from last month.

Average consumers had:

• $6,818 in credit card debt
• $193,036 in home mortgage loans
• $52,559 in home equity loans
• $14,449 in auto loans
• $26,368 in student loans

$26,000 in student loan debt? Yikes! That figure and the home equity loans stood out to me. Combined, those two categories alone represent nearly $80,000. Wonder how many people took out those loans for the tax deduction on interest, or to pay off other debt, and just ran it back up again. I also can’t help but feel bad for new graduates who racked up thousands in student loans to find one of the worst job markets in recent history. While the outstanding debt balances still seem high, I’m hopeful that the downward trend continues.

Another nugget from the survey is that Midwesterners seem to have the lowest amount of debt. Wonder what lessons from the Midwest we could learn throughout the rest of the country? I know in many Midwestern states there is a thread of self-sufficiency running through many households not felt in other parts of the country. Homes are probably more reasonably priced than in other areas of the country, too.

I’m curious to hear from you on this one. Have you also paid down debts during the recession? Do you think you would have done it otherwise, or was the negative economy a motivating factor?

Pros and Cons of Credit Card Debt Consolidation Products

1. Social lending
Two years ago this would have probably been at the bottom of the list, if it made it at all.  However, social lending organizations such as Lending Club have introduced great debt consolidation loan options.  The benefits of consolidating debt with a social lending service is that you can bypass traditional bank politics to score a lower interest rate, fixed terms, predictable payments and pay off dates, and avoid many of these “gotchas” the credit card companies are currently engaged in.

You might also consider this 18 month promotional balance transfer offer from Discover® More Card.

2. Personal loans from small, regional banks and credit unions
Often times small, regional banks and credit unions are more willing to work with you than the larger banking institutions.  Chances are you can actually walk into a branch, look a human being in the eye, explain your situation and discuss what consolidation loan opportunities might be available. Try doing that with one of the larger banking firms headquartered in New York with hundreds of branches around the country.

3. Home equity lines of credit
While there are tax advantages associated with tapping home equity for credit card debt consolidation, I would rather save this as a last resort option.  Here’s why.  When you secure unsecured debt using your home you are putting your primary residence, your source of shelter, at greater risk.  Having a mortgaged home in this economy is risky enough, no sense piling on additional risk.

4. 401(k) loans
Borrowing from 401(k) plans used to be a popular option, back when people still had money in their 401(k).  Now days few of us have enough money in our plan to consolidate debt, and even fewer of us can assume such a risk with an unstable job market.  Remember, in most cases if your employment ends the 401(k) loan is due within 60 days, or you face early withdrawal penalties.

5. Family and friends
In general, I don’t like the idea of borrowing money from friends and family.  It changes the relationship dynamic, and often leaves one or both parties with a bad experience.  Having said that, there are times when, as a last resort, you may turn to family or friends for help in consolidating high-interest credit card debts. If you do, I suggest having a formal promissory note drawn up outlining the terms of the loan and what is expected of both parties.

Regardless of the approach to credit card debt consolidation you take, the most important thing to do is to close out the accounts of paid-off accounts once the transfers have been made.  I made the mistake of leaving a couple accounts open, just in case, after I consolidated debts a few years ago.  As you would expect, those debt balances began to creep up over time so then I was left with a consolidation loan and new credit card debt.  This is  definitely a trap you will want to avoid.

If You Wait for the Perfect Time, You May Wait Forever

So many times in our lives we put things off in the name of waiting for a better time to get started. Many people put off weight loss plans until next Monday, or next month, or maybe January 1st.  High school graduates put off immediately attending school to “experience life” through backpacking adventures, or working, or just taking a break and living at home.  But those things seem awfully trivial compared to the idea of having a child.  Children are our legacy.  Raising a child is one of the most beautiful experiences two people can share, and it deepens the love shared between partners in parenting.  Because we never know what twists and turns life will throw our way, it isn’t advisable to wait to have children simply in the name of finances.

Kids Are Not Really That Expensive

When you think about it, babies do not require as much upkeep as us adults.  Sure, they must be diapered and fed, and there are a few other baby expenses unique to having children, but babies do not eat nearly as much as grown adults.  Infants have not yet been exposed to commercialism, so their wants and desires are fairly easy to cover without spending much money.  Of course, as they grow older kids do add additional expenses to your household budget.  Hopefully by the time you are school shopping and fitting them for their first bicycle you will be doing better financially, and can easily handle any budget impacts.

Kids Can Inspire Greatness From Parents

When my wife and I decided to try for our first child some thought we were a too young.  We married at 20 years old (well, my wife was 19, a bit shy of her 20th birthday).  We were so young we toasted sparkling grape juice at our wedding!  However, we were both mature beyond our years and neither of us believed in long engagements.  After all, once you’ve met your soul mate, why delay the inevitable?

I had just started an entry level call center customer service job when my wife and married, and I quickly recognized moving up in the corporate world would be more difficult without returning to school to finish up my degree.  I put school on the back burner, and instead spent the first year or so of marriage just enjoying being married.  When my daughter was born everything changed. It was a reality check that led to a wake up call, of sorts.  Suddenly I realized there was more at stake than just my wife and I surviving, financially.  I wanted nice things for my daughter.  I wanted her to have an easier path than I did (although thanks to the hard work of my mom and grandparents, I had it pretty good, too).

So the summer after she was born I enrolled in a local university, changed majors to business, and embarked on a long, challenging pursuit of a college degree.  It was probably the worst timing possible considering I had a wife and newborn daughter at home, but I was not going to put off the pursuit of my dreams any longer.

When deciding whether or not to start a family, do not allow financial issues to completely dissuade you.  Give more consideration to the partner you have chosen to share this responsibility.  Give more consideration to readying your home for a child.  Do not allow money to control your destiny, and the destiny of your children.

The “Scared Straight” Snowball Debt Reduction Plan

Basically, the plan is to make minimum payments on all your debt and pile your remaining get-out-of-debt money into a high-yielding savings account such as the one offered by Smarty Pig. When the balance in that savings account exceeds the balance of your smallest debt by 30%, the snowball plan calls for you to transfer the money into checking and eliminate that smallest debt.

As Trent points out this is probably not the smartest (mathematically) way to approach the debt snowball, but for those of us with somewhat shaky jobs, or in one-income families, it makes for a better night’s sleep to have a few thousand in savings at any given time. I’d gladly give up a couple months worth of interest to have a pile of money in the bank at the ready.

I may make one slight variation to his plan and preserve a $1,000 savings threshold – so when my savings balance equals my smallest debt, plus $1,000, I will bring the savings balance down to $1,000 and pay off the debt. Another idea to consider if you have several smaller debts (like I did in the beginning) would be to group those debts together to make one larger debt.

For instance, I had three debts under $500. If I was using the “Scared Straight” plan back then I would have grouped them into one $1,300 debt and used that as my target savings amount, otherwise you’ll be making several transfers out of your high-yield savings account to pay down the debt snowball, and it could cause a fee to be assessed on your savings account.

The Original Debt Snowball Plan

The original debt snowball plan was made popular by Dave Ramsey in one of my favorite personal finance books and New York Times bestseller, The Total Money Makeover. If you haven’t read the book, I highly recommend it (here’s a link to my review of The Total Money Makeover).