This was my recent advice to a family member who still has his entire adult life ahead of him. Thankfully, he’s still debt free, which means he has plenty of options. He can choose to spend his income, pile up debts, and eliminate these options, or remain free. It really is that simple.

Photo by Justin Donnelly

It felt a little strange giving this advice since from the time I was his age I have largely done what I had to, or whatever I could do, to earn money. That included staying at a particularly lousy job for over six years in my early twenties while working my way through the rest of school. As bad as that job was, I couldn’t afford to quit. After all, I had a wife, a baby, and student loans to feed!

Yes, I jumped onto the debt bandwagon in college, accumulating debt for schooling itself and credit card debt for the little “perks” that came with college life (college textbooks, late-night pizzas, and a few Sony Playstation games I just HAD to have). I spent the next decade working to pay off my years as a spendthrift.

But my cousin has the chance to take a different path. I’ve joked with him before that if I knew what I know now at his age, I’d be approaching early retirement. He laughed, until I told him he wouldn’t be laughing when he’s my age with very little savings, and a list of monthly obligations for which he trades in his free time to be in an office 40-50 hours a week. I told him to simply do something he loved, before he had to something for money.

Do Something You Love

I’ve never liked the “Do Something You Love” mantra, probably because I feel a little like I missed my chance to take that advice. I suspect there are plenty of 30-somethings out there who share this same feeling. But there is still time to reinvent ourselves. There is still time to chase our own dreams of what we want to be when we grow up.

The first step is to free ourselves from the financial shackles we voluntarily placed around our own legs years ago. So many people think a framed diploma and a job offer entitle them to a new car, a big house and new toys. Not so. It is far more important to build emergency savings, begin to invest for retirement, and save cash to pay for large purchases. But try telling that to your average 23 year-old.

We’ve all heard this before from parents and grandparents, but life really does have a way of sneaking up on you. After college there’s some single life to be enjoyed, but soon a spouse and child come along with a whole new set of financial worries.

You get your wills done (the first real wake up call that yes, you are mortal), buy some life insurance, look for a home, scan the safety ratings of a potential car purchases, and open a college savings account. And that’s just in the first few months of being a parent!

Over the years, you’ll celebrate certain milestones, which have a way of coming quicker and quicker the older your kids get. Before long you’ll be worrying about them driving (and worrying about what they will drive), wondering if you’ve saved enough for college, and then hoping they land on their feet, financially, instead of landing back in their old bedroom.

All that to say, if you are young, please choose to live frugal and do something you love. It’s a decision much easier made at 25 than 35.

Let’s face it; most Americans love cars. Unfortunately, most Americans also have way too much car debt.

In an article from Auto Blog posted just a few months ago, they cited increases in new car pricing, and the effect those prices are having on family finances.

A study by Comerica Bank shows that the average purchase price of a new vehicle went up $300 in the second quarter versus the Q1, bringing the average transaction price to $26,300. The upward swing in prices came at a time when the average household income remained stagnant. The average family needs 22.1 weeks of median family income to pay for their new vehicle purchase…

It’s true; cars typically represent one of the largest expenses in a household budget. Only housing costs the average family more each month. Factor in gas, maintenance, taxes, repairs and insurance, and the cost of owning a car pushes even higher.

The most significant expense most people neglect to factor is depreciation.  New cars go down in value like a rock. Some new cars can lose as much as 20% of their original value when you drive it off the car lot. This quick depreciation, and the accelerated depreciation that often follows, leaves people owing much more in car loans than their car is worth.

If you find yourself in an upside down car loan, it is a safe bet your situation could be improved if you sell that “new” car and buy a much cheaper used one for your work commute. You may still owe money, but you’ll owe much less money, and that is almost always a good thing.

How to Get Out of An Upside Down Car Loan

1. The very first step to getting rid of an upside down car is to evaluate how much your current car is worth. Using sites like Kelley Blue Book and Edmunds, try to determine the amount of your current car’s private sale value (not trade-in, which is often much lower). Be sure to be honest about the condition of your car, and enter the exact mileage to get a good valuation.

2. Save $2,000 to buy a “beater” to get back and forth to work. If you really want to get out of your upside down car loan, now is the time to swallow your pride, and put aside your love of shiny cars. Over the next couple months, try to scrape up a couple thousand dollars to buy an old, ugly (but mechanically reliable) car to get you to work. That’s the only requirements. No sex appeal; no bells and whistles (and no car payment!).

3. Get an updated loan balance on upside down car. Contact your bank or auto finance company and get the current “pay off” balance on your car. Compare this figure to the estimated sale price from step one. Often times car owners discover that they are not really upside down after all. However, if you bought new with nothing down, and/or rolled the balance of your previous car loan into your new one, chances are you are in fact in an upside down car.

4. Contact local bank or credit union to pre-qualify loan for the difference. Let’s assume you owe $22,000 on a car estimated to be worth $17,000. Unless you have $5,000 sitting around, you are going to need help paying off the car loan when you sell the car (this is a required step to clear the title for the new owner).  Discuss options for a personal loan in the upside down amount. This step is a lot easier if your loan is already financed at a local bank or credit union. Simply explain to the loan officer that they are already exposed to $5,000 in unsecured liability based on the figures you’ve obtained.

5. Consider alternate sources of funding. If your bank or credit union won’t budge, or your car is financed through the manufacturer, you will have to look for other ways to fund the difference. If you have good credit, Lending Club is a potential source of financing. Tell your story as part of the borrower profile and ask for help in dumping your upside down car loan.

6. Get your car detailed, inside and out. Back when I was in the market for a car I was amazed to find so many dirty cars for sale. It doesn’t take a lot of money or time to give a car a thorough cleaning, and clean cars bring more cash, so there is definitely a return on your investment.

7. Advertise your car is for sale in every legal place you can think of – and include pictures. Pick up a “For Sale” sign at an office supply store and stick it in the windshield with your cell phone number. Place a flyer with color pics (take a couple good photos, design your own flyer in Microsoft Word or Photoshop, and get a few color copies made) on your gym’s bulletin board, at work (where allowable), and post on Craigslist, community classified sites, etc. Tell your Twitter followers, friends on Facebook, email distribution…everyone you know that you are trying to sell your car.

8. Create a bill of sale to provide buyer, and immediately drop your insurance coverage on old car. Since it might take a while to deposit the money from the buyer, and close out the financing on your loan for the difference owed to pay off your car, prepare a bill of sale for the new owner to show proof of transfer of ownership. Bill of Sale forms for your state can be found online at places like LegalZoom.com. Be sure to also get new owner’s mailing address (if different than listed on the bill of sale) so you can forward the title to them when the finance company returns it to you after loan is paid in full. Also, be sure to contact your insurance company immediately following the sale to update your policy.

With your upside down car gone, and the huge car payment replaced by a smaller loan payment, start a car replacement fund to prepare to buy your next car with cash. Over time, you will eventually be able to trade up in car, but only do so when you have the cash to pay for it. Who knows; you might even find yourself driving a million mile car one day and skipping car payments forever.

Photo by ozjimbob

“Geraldine”, a sassy lady portrayed by the late Flip Wilson, answered her husband thusly when he demanded an explanation for yet another new dress: “The Devil made me do it! I was walking down the street minding my own business when he snuck up behind me and pushed me into that dress store. He MADE me try on! Then he pulled a gun on me and forced me to buy it and sign your name to a check.”

Geraldine’s humor is timeless because so many of us can relate to it. For example, have you ever bought a new car and then wondered what possessed you to do it? I doubt if it was the devil, but the devil’s first cousin, car fever, will have the same results.

Do you currently own a car you wish you had never bought? Are you asking yourself if you should try to sell it or just live with it? This post is designed to help you think through this dilemma.

Start by asking yourself these questions:

How much do I owe on it?

If you paid cash, then you are probably not facing a financial crisis necessitating the sale of the car. If you simply don’t like the car, then take your time, sell it and pay cash for another one. If you are in debt, move on to question two.

How big a burden is this car on my budget?

If one hiccup in your life will cause you to start missing payments, then you need to amputate this car before that hiccup occurs. Even if you are easily making your payments, you still might be deceived into thinking all is well. Long term debt on a depreciating asset such as a car is a formula for staying perpetually in car debt. To break that cycle, you need to get the car paid off in 24 months or less and then keep driving it while you save cash for your next car. If you are on track to do so, then keep the car and enjoy it. If not, you should seriously consider getting rid of it.

If I am seriously considering selling, how do I go about it?

Knowledge is power. First, you need to learn if you are upside down (owe more than the car is worth). Check http://www.kbb.com/ to learn the private party value* of your car. If this value is less than what you owe, you are upside down. *(Use private party value because you are money ahead selling the car yourself).

But how does this work? Here is an example: You owe $22,000 on your “Geraldine” car and you could sell it for $18,000 (private party sale on www.kbb.com), thus putting you $4,000 upside down. If you decided to buy a $3,000 car (we will call the “beater”), your new debt would be $3,000 plus $4,000 = $7,000. You are still upside down, but you have eliminated $15,000 of debt.

How do I go about selling a car I am upside down on?

Unless you have an extra $4,000 available, you will need to borrow it in order to get the title released. So where do you borrow the money from?

Start by checking with the title holder. You have done your homework, so explain your rationale. In effect, you are asking for an unsecured loan on your upside down amount. Most lenders are not thrilled by this, but explain that this same amount of the current loan is already unsecured and you are simply asking that they move this amount from a more expensive car to a less expensive car.

If the title holder balks, don’t give up. Try your credit union or your home town bank, explaining that you will be moving your business to them. If you simply can’t find financing, consider other options such as selling stuff (Craigs List or Ebay or yard sales) or temporarily working a part time job.

REALITY CHECK: Are you ready to get your Geraldine car out of your life? Good! Doing so will not only be a huge relief, but will teach you to never again succumb to car fever. Still, you need to go into this decision with both eyes open, so the following pros and cons will help you preview the reality of your decision:

The Good

• LESS DEBT. You have just reduced your total debt by $15,000!
• OUT OF DEBT QUICKER: From our example, with an 8% loan and monthly payments of $400, your Geraldine car will be paid for in 5 years and 9 months. Your “beater”, on the other hand, will be paid off in only 19 months.
• STAY OUT OF DEBT: Once the beater is paid off, you could save $4,800 toward another car by making payments to yourself for one year. Assuming your beater would bring $2,000, you could upgrade to a $6,800 paid for car. Had you stuck with your Geraldine car, it would have depreciated to about $12,000 by now and you would still owe $13,300 on it.
• PEACE: You will know that you have taken the steps to undo that Geraldine decision. This is a great feeling.

The Reality Check

• INCONVENIENCE: Selling your car and buying another is a hassle.
• A DOWNGRADED DRIVE: Face it: your Geraldine car is nicer than a beater will be. Be prepared for it.
• LESS DEPENDABILITY: No doubt your beater will have some issues. You need to be realistic in assuming that it will not be as dependable as a newer car.
• MORE MAINTENANCE: With less dependability comes more maintenance.
• FRIENDS WON’T UNDERSTAND: Reality? Yes. Negative? Not really. Just be prepared for it.

One Final Reality Check

You may not be able to arrange the necessary financing. Why? Either your credit score is not adequate or you are too far upside down. Should this be your scenario, you will need to strategically pay down all other debt in order to free up enough cash flow to make huge car payments. Keep the car until it is paid off or you will be swimming in car debt for years to come.

Readers: Have you ever regretted a car purchase? What did you do and how did it work? What tips would you offer?

When are you “done” financially?  Are you ever “done”?

When do you kick back, sip lemonade under a shady umbrella and just relax?

I asked myself this question after reading a post by Frugal Dad several weeks ago.

You may remember the post. FD wrote about his family becoming debt free. And he mentioned that his next mission is to work on savings and retirement.  He said that he planned on dealing with these issues with the same fervor that he did debt.

I, along with all the other faithful readers and supporters of FD cheered him on.

But that post really got me thinking.  At certain points of my life, I’ve been convinced that once I accomplish a certain goal, I’ll be able to relax.  But I soon find myself with a new goal and I often approach that new goal with the same intense energy.  I’m convinced that this new goal is mission critical – just like the prior goal.  It creates a lot of stress.

Let me give you a few personal examples:

When I first got married, I was certain that if I could just hold on (financially) long enough until my daughter grew out of diapers, I’d have it made financially.  (Do you know how much Pampers cost?)

Then, when we bought our first home I borrowed money from anyone who could fog a mirror to do it.  I told myself that if I could just repay those people, I’d be in great shape.

Within a few years – I had a different goal.  I wanted to save a certain amount of money in an emergency fund.  I was sure that once I achieved that goal, I’d be satisfied.

Now, the goals are bigger.  But I’ve approached each one along the way with great determination.  I stayed focused-which is good.  But I didn’t relax until my goal was accomplished. And I only enjoyed that relaxed state for a very short period of time.

I think I’ve been way off on this.

The truth is, nobody is really ever really satisfied – and that’s a good thing.

Heck, even Bill Gates and Warren Buffet work full-time.  They probably actually work more than full-time.  Maybe they aren’t trying to acquire more money, success or power for themselves, but they are still striving for something.  Right?

It seems to me that the trick is to enjoy the progress and process rather than focus on the end result.  At least that’s what occurs to me.

I don’t really know how to do this.  I’ve always been “bottom line” focused rather than “process” focused.

I believe now that the only way any of us to be truly happy is to understand that their will always be another hill to climb and we have to learn to focus on doing the best we can and enjoy the process because that’s really all we have.

Am I happier now that I can afford Pampers and I’m out of debt?  Absolutely.  But I just don’t want to tie my peace of mind to achieving yet another financial goal – because it’s a lie.

Do you struggle with this like I do?  How have you come to terms with the long list of goals you have?  Are you waiting to be happy until you’ve checked those off your list or have you found a way to enjoy the journey?

In a recent post I reported that the Frugal family was nearly debt free. Well, we’ve crossed that pinnacle point, and are now enjoying life after debt. A comment from that post, and my initial experiences, have me wondering if life really is any easier after crossing over from being in debt to enjoying a life without it.

The first thing we did after reaching debt freedom was realign our financial goals. The first, of course, was to secure a fully-funded emergency fund, one that represented about six months of expenses. Admittedly, it was tough to keep up the same intensity towards saving money as we had for paying off debt. That brings me back to the thought-provoking comment left by Rob from PassionSaving.com. Here’s a portion of that comment that struck me:

If your experience is like mine, it won’t be all smooth sailing from this point forward. I say this not to be discouraging, but to point out what might be a basic reality of human life — it is a journey of ups and downs no matter how skilled one becomes at handling one’s money issues.

What I believe today is that accomplishing a big money goal like paying off one’s debt does not so much solve all your problems as open you up to a higher class of problems. The old problems truly are solved. But solving them provokes you into taking on new adventures, which lead to new problems. You will continue to find yourself frustrated and stuck and in pain and in fear in days to come.

My initial reaction? Yeah right! What could possibly be any more painful, financially, than going through the motions of paying off debt? What money struggles could we face that are even close to the struggles faced in the past? I suspect most people still deep in debt probably had that same reaction. But as I thought more about Rob’s comment, and began to experience life after debt, I understand his point.

Yes, we no longer have to contend with debt, but that doesn’t mean more daunting financial challenges aren’t ahead. My oldest child will soon be ten years old, which apart from terrifying me as a father, also serves as a wake-up call to get her college savings in order. Because we spent so many years toiling with debt and trying to get on solid footing, her college savings have suffered. The good news? Without debt we can afford larger contributions to her 529 plan, which should help us make up ground.

It’s a similar story for our own retirement plan. I diverted money we could have, and probably should have, used for retirement savings to pay down debt. Unfortunately, this means we missed a great opportunity to invest in our 20’s and let that money compound for a few decades. Are you reading 20-somethings? Make long-term savings a priority now!

In the final analysis, I would have to admit that yes, life is easier after debt. Paydays are now an exciting event because it means making more contributions to savings, rather than distributing most of your income to credit card and auto finance companies. But life after debt is not without challenges. And those challenges can conjure up the familiar fears and anxiety felt when looking at a pile of debt.

How will I even save enough to retire? How much will my kids need for college? Will I ever be able to save in taxable investments to chart a course to early retirement? I’ll approach these new challenges the same way I approached, and overcame, the ones related to debt. We’ll tackle them head on, and remain disciplined through the same frugal approach we take towards nearly all of life’s ups and downs.

I was recently fortunate enough to have the opportunity to interview Dale Siegel, author of The New Rules for Mortgages. We exchanged emails in a Q&A format on the subject of mortgages, the housing market, etc. Here are her responses to my questions.

Lending Guidelines

Frugal Dad: Lenders used to operate under a 28/36 mortgage-to-income/debt-to-income ratio when calculating maximum mortgage eligibility. How has the housing bubble affected those ratios for lenders?

Dale: Lenders use ratios as guidelines for qualifying a borrower for a mortgage. It is the total housing expense divided by gross monthly income and then total housing expenses plus all monthly debt divided by gross monthly income. Depending on which lender you go to, the typical ratio that lenders work with can range from 28/36 to 33/41.

Before the implosion of the mortgage industry, many lenders would push ratios upwards of 65% of the borrower’s gross (before taxes) monthly income, using compensating factors such as good credit or low loan to value. There were also products such as no income and no ratio loans which would eliminate the calculation all together and a borrower could mortgage multiple amounts of monthly income- and are behind the eight ball now!

Ratios are a guidance tool for the lender to calculate what they think a borrower should take out. However, the true number comes from the borrower themselves.  Use the mortgage amount the lender tells you you qualify for and really analyze it based on what you know about your own finances.  Make lists of your monthly income and expenses, create a 5 year plan and see what larges expenses might be coming up in the short term and think about things in life that can mess up your plans. Only the actual borrower knows what they can comfortably afford for a housing expense without compromising too much. Remember, the lender does not take into consideration things such as food, clothing and summer camp-but you should-and you can’t have it all.

Down Payments

Frugal Dad: How much (%) should homeowners aim to put down on a mortgage to secure the most favorable terms?

Dale: Down payments should be as large as you can manage: no money or little down mortgages are history-except for the FHA. Two years ago, you could get the same interest rate with 5% as you could with 25% down. Now, the lenders use a matrix consisting of FICO score and loan to value to calculate the interest rate. So, the better your FICO score, the lower your interest rate and the more equity you have in a home the lower your interest rate.

Many lenders will not allow loans over 80% now and it is harder to get PMI (Private Mortgage Insurance) for those loans. The lenders charge higher rates for scores over 620 and for loan to values over 60%. So if your credit score is 640 and you are putting down 20% your rate will be much higher than the guy that has a 720 FICO score and is putting down 30%. This is the way all lenders work now and they all go off of the same chart. So, one bank will not be better than another in this instance. What the borrower needs to understand is how the lender calculates their interest rate and they have the right to ask for the actual computation used.

FICO Scores

Frugal Dad: To qualify for the best mortgage rates, what credit score range should home buyers aim to be in?

Dale: The credit score is more important than ever now, because the lenders go off of the pricing matrix and there are no longer compensating factors used to cover a bad credit score. The score is what it is with no deviation in pricing the mortgage interest rate. As said, the lenders would do a loan with a FICO score of 500 if the borrower had other things going for them such as low loan to value, little debt or a lot of assets in the bank after the closing. Now, those things do not matter.

Most lenders will not take a loan with a FICO score under 620 and the new “good” score is currently 720. So, if your score is not over 720 you can still get a loan, as long it is not under 620-you will simply pay a higher rate. Of course there are lenders out there that will budge on that, but be careful which promises you follow.

Shopping for a Mortgage

Frugal Dad: Where is the best place to shop a mortgage for first-time home buyers? Current bank? Mortgage broker? Online?

Dale: The other day I was misquoted in the Tribune as saying do not use a mortgage broker to shop for a loan. I received hate mail from a bunch of Texas mortgage brokers and had to convince them that, being a mortgage broker myself, I did not specifically say that. What I did say was that the consumer needs to take responsibility for themselves and shop for a loan with the best interest rate themselves. I truly believe that no one is too busy, too important or too dumb to put their financial future in the hands of one person and must always be checking the information provided to them. (Think if Bernie Madoff was also providing mortgages to his chosen clients.)

When shopping for a loan, one should never use the internet as more than an educational tool. The internet is a fabulous world for loan terminology and mortgage calculators, but why would you get a mortgage from a provider that you found in cyberspace? Companies such as Lending Tree, Quicken Loans and others, are more so lead generating companies for the mortgage industry rather than direct providers. Remember free credit reports and loan qualifications come with a price tag. This price being your information is being sold to a loan officer somewhere that will hound you to get your mortgage through them.

So, now that I have told you where you should not get a loan, where should you go to get a mortgage? There are the commercial banks, such as Bank of America, Wells Fargo and the like. They are great big institutions which have lots of loans to choose from and competitive interest rates. What they also have are departmentalized loan processing systems and voicemail. So, if you have the patience to call around, shop for a rate and deal with many different people through the loan process then a large bank would be for you. Next, we have the smaller regional community banks known as savings and loans. They work just like the big banks do, but you might get more personalized service. Again, shop around and ask a lot of questions.

Third party mortgage providers are mortgage bankers and brokers-like me. Having assisted with over 65% of all mortgages obtained over the past five years, they were a big part of the real estate boom and bust that we have seen.  These companies are not the direct lenders and simply provide a service of assisting the consumer with getting a mortgage with hopefully the lowest interest rate. Their job is to shop your loan and work with you and all the parties involved from beginning to end. For this, they receive a fee from the lender your mortgage ultimately goes to. It is a win-win for all if you are working with a professional and honest broker.

The fact is that no matter what institution you get your loan from it is the loan officer you choose that should be the big decision. I believe it does not matter where I work, whether a bank or a self employed mortgage broker. It is my experience, stability and integrity that makes me a good loan officer. A consumer should choose carefully who they want to use based on a series of questions and how the loan officer handles that conversation. Think of the initial conversation with a potential loan officer as a first date. If it does not go well, why go out on a second date? There are a lot of fish in the sea!

Paying Off a Mortgage Early

Frugal Dad: We frugal people like the idea of living without a mortgage. What are your thoughts on paying off a mortgage early?

Dale: Frugal living in my book, means living within, or below your means. It means not buying that 56-inch flat panel and paying it off over time, not driving the expensive car because they offered you 0% interest rate on a 60 month loan and not going out to dinner every night of the week. Frugal living means thinking before you spend money on something you need or already have, being able to save every month and having a reserve fund on hand in case you lose your job or have an unforeseen expense.

Living mortgage free is more of a luxury for those frugal followers. Since most people cannot buy a home without a mortgage and there is a tax benefit for writing off the mortgage interest, it is not such a bad thing. In other words don’t feel that you need to buy a home for cash, pay off your mortgage as quickly as your credit card or keep renting if you cannot afford to buy a home.

Assuming one can afford the mortgage payments, I love to suggest accelerating them. One extra mortgage payment per year knocks a 30 year mortgage down to approximately 24 years and a few months. One extra payment can be made as adding 1/12 of the monthly payment to each month, paying one total extra payment to the lender each year or making a ½ payment every two weeks. Anyway you do it, it adds up to a total of 13 payments a year. The saving in interest is approximately 1/3 of the total interest for the life of the loan. Knocking off this much interest equates to lowering your effective interest rate by almost 2%! This is a huge savings for the borrower and paying it off early is a gigantic satisfaction.

Any way you want to look at it; homeownership is a luxury and is not meant for all. The American Dream is a dream not an entitlement.  A home is typically the largest single asset one owns and should fit nicely into the entire financial picture. Remember the whole is only a sum of the parts and this part should not be too big as to swallow up everything else. With times the way they are today, the consumer should be much more vigilant, diligent and responsible in their homeownership and mortgage selection. Moving forward, there were lessons to be learned by all and hopefully we will not forget what happened in the past when making future decisions.

End of interview.

I’d like to thank Dale for taking the time to answer my mortgage questions, and I wish her much success with her book. In fact, she was nice enough to send me a copy of her book, which I’ll be reviewing here at Frugal Dad in the next couple weeks.

More About Dale

Dale Robyn Siegel is a licensed attorney in New York and owner of Circle Mortgage Group, a boutique mortgage broker in White Plains, New York. She is an adjunct professor at Baruch College as well as NYU Schack Institute of Real Estate.

Dale has been speaking to the public and teaching real estate professionals about mortgage finance for the past ten years. You can learn more about The New Rules for Mortgages at TheNewRulesforMortgages.com, and you can purchase a copy at Amazon.com or visit her virtual book tour.

The following guest post was submitted by Knight Hooson. Knight was born and educated in Canada before moving to Great Britain in 2002. Now based in London, he writes for The Credit Letter where he blogs about managing credit cards and personal finance. When not working, he enjoys learning about wine and exploring France – especially at the same time.

As the old adage goes, when you find yourself in a hole, stop digging – a classic piece of advice to be heeded by those who have found themselves jobless and getting further and further into debt.

Image by Coljay72

The downturn in the global economy has struck hard, and some people are suffering from the brunt of the fall out more than others. Unemployment numbers are at their highest levels since the financial turmoil of the 1980’s, and the situation only seems to be getting worse rather than better. And because lending was totally out of control in recent years, many of those who are now unemployed have access to large sums of money on credit, which they use unwisely with no means to repay their debts. It’s a predicament that could all too easily get out of hand, further compounding the amount of debt owed.

To ensure a bad situation doesn’t get any worse, it’s important for those currently unemployed to nip their bad habits in the bud and set up a good survival strategy so their chances of incurring yet more debt are limited. Here are a few ideas that will help you escape sinking further into debt while looking for work:

1. Devise a Budget

Before you know what you can spend, you have to know what you have available. The only way to do that is to draw up a budget. It doesn’t have to be anything fancy; you could do it on the back of an envelope, if you like. Start by tallying up what money you have available (severance package, spouse’s income, savings, unemployment insurance, etc.) and then divide by six – the amount of months it may take you to find a new job. If your geographic area or industry has been badly hit, you may need to plan for longer. You will then have more of an idea of how much money you have available to spend each month.

Now tally all of your monthly outgoing expenses. Start with the most important ones – your rent or mortgage, food, and utilities. Then move down the list: travel, car expenses, health care and any outstanding loans or credit card debts. Get everything down on paper.

You are left with two numbers: one representing your income and the other your expenses. Provided the income is greater than the expenses, you should be fine, but those who are unemployed will be very unlikely to be in this position. If that’s the case you need closely scrutinize what you do with your money.

2. Make Do With Less

It’s important to take a close look at your spending habits and see what you can do without – at least temporarily, until you’re back in work. Depending on the circumstances, you may have to be quite brutal. It’s time to ask yourself what are necessities and what are luxuries. You may need to forgo the luxuries for awhile.

Do you really need deluxe cable television or satellite TV? Do you need new clothes or Starbuck’s lattes? Probably not. It might require some tough questions to fully determine what you can and can’t afford on your budget, but in the long run you’ll be better off for having made the sacrifice.

3. Look for Additional Sources of Income

While you’re job-hunting it might be useful to think about other ways you can bring in some much-needed cash to keep you going.

• Declutter – now might be the time to sell some of your extra belongings on eBay, or in a garage sale. It will give you something to organize, help clear out some of your cupboards/closets and bring in some cash.
• Consulting – do you have a skill or a knowledge which you can offer on a consulting basis? Can you teach someone else how to do what you do? Would someone pay for your expertise in a certain area?
• Start your own business – is there a business idea you have always wanted to explore but never had the time? Now might be the right time to draw up a business plan and seek funding.
• Rent a room – Do you have a spare room in your house that you could let to help pay the bills?
• Casual jobs – don’t overlook dog walking, babysitting or doing yard work. They will get you out of the house and interacting with people, which is important for developing your network.

4. Fight Depression

It’s natural to feel depressed when you’ve lost your job, especially one you’ve had for a long time, and it’s hard to not take it personally. You must do everything you can to fight the urge to get down in the dumps. It’s all too easy to start charging everything to your credit card in an attempt to cheer yourself up, even though you know it’s the wrong thing to do. Thinking, “Oh, I’ll pay that off when I get a new job.” That will only lead down the slippery slope of debt, and the further you get into debt when unemployed, the longer it will take to get out of the red when you’re back in work.

Acknowledge that you’re experiencing a temporary set-back, adopt a positive attitude and you’ll soon get back on your feet and find another job. It’s important to keep physically active – go for a walk everyday – it doesn’t cost anything, and avoid day-time TV like the plague – it has a tendency to suck people in, keeping them from focusing on what they should be, and that’s finding a new job.

5. Ask for Help

Now is not the time to go it alone. Put your pride aside and ask your friends and family for help – whether it’s emotional support, a loan or a hot meal; their assistance will make a huge difference. There are resources in your community too which can help, whether it’s a food bank, a charity, or job search assistance.

If you’re eligible for government assistance, then be sure you apply for it. You may have to jump through some hoops, but it is better than losing your house or saddling yourself with additional debt.

And, if you’re not going to be able to meet payments on your mortgage or credit cards, then you can’t ignore the problem. You must phone them up and speak to them. Explain your situation and ask for help in finding a solution. Banks and other creditors are much more understanding than you would think. Don’t be tempted to go to debt management agencies, either. They will only charge you to do what the banks will do for free. Creditors just want to get their money back, so will help you devise a repayment plan that suits your budget.

These are trying times. Remember that what doesn’t kill us makes us stronger. Keep your focus on finding a new job and follow these tips to help you meet that goal without falling further into a hole.

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