Being in debt affects the whole family, so getting out of debt should be a family project. Whether from credit cards, student loans, car loans or other expenses, debt piles up quickly.
Parents have a natural tendency to protect children from the consequences of debt, but this is actually a golden opportunity to teach them how to handle money responsibly.
The lessons they learn today will stay with them all of their lives.
Getting out of debt as a family may seem overwhelming, but it can be done. Here are some suggestions on how to get out of debt as a family.
1. Identify why you and your family want to be debt-free
This first step probably seems unimportant. You’d much rather jump in and do something. But listing the reasons that you want to be debt-free will help you move forward when it seems too hard.
In general, you probably just want to be free of the crushing financial and psychological burden of debt. But what are the specific reasons? Do you want to buy a house? Contribute to your child’s college fund? Plan for retirement?
Whatever the reasons, this is a discussion you should have with your partner and your children if they are old enough. Even if the children’s reasons seem frivolous to you, take them seriously.
You will be more likely to achieve your goals if you write all of the reasons down. Your list of reasons will be your touchstone as you and your family travel out of debt.
2. Take a good look at where you stand
Subtract your monthly expenses from your monthly income. The money that is left is the money you can afford to put towards your debt every month. This is a simple process. There are all kinds of free online tools, phone apps, or other systems to track and categorize your spending.
Review your family’s spending habits for the past year. You need to know how much of your monthly income is spent on essential bills, such as housing, car payments, food, etc. and how much is spent on expenses that might be considered unnecessary.
If you are a first-time parent, for example, in your excitement you may buy a great many items that are unnecessary and quickly outgrown. When faced with that adorable, expensive baby outfit, pause and consider your long-term goals for baby.
You need to be honest about this. We all have guilty pleasures, and sometimes we convince ourselves that the cost is small, or that we deserve it. The key is to identify your spending habits and then make conscious choices.
3. Include the kids in the process
Most people are uncomfortable discussing finances with their children. How you go about this depends on the ages and comprehension levels of your children. Keep in mind that their perceptions may be skewed.
When talking about the family finances, you don’t want to frighten a child or leave the impression that you are one hot dog away from being homeless.
Start by talking, calmly and in small bites, about ideas such as wants versus needs. When deciding whether to purchase a non-essential item, talk to your family about choices. How will the choice you make today affect future choices?
Use allowance as a teaching method
You can use your child’s allowance to teach him or her about money. Instead of handing over the cash, set up a simple, easy to use a spreadsheet for a virtual bank account.
Give it a name, such as “The Bank of Billy.” Explain how a bank account works. If he leaves all or part of his allowance in the “Billy Bank,” he can earn interest. If he withdraws it, what is he spending it on? This gives him power over his spending on small items.
As for spending for the family, explain that from now on, you will carefully consider any purchase and only buy things if they are necessary. You may have heard of value-based spending. Value-based spending means spending money in a way that will be of the most value to their goals.
Nickname your debt to ease communication
When you include your children on the family debt reduction, it helps to have a motto. Call it, Climbing Mount Debt, (or whatever you want to.) The purpose of the motto is simple.
When the kids ask to have dinner out, or a backyard playhouse just like the neighbor’s, you don’t have to go into a long-winded economic explanation. Just respond with “Sorry, climbing Mount Debt this year.” You’d be surprised how effective it is.
4. Take specific steps toward achieving your goal
Once you know how much money you have available for debt repayment, use an online debt calculating system to determine how long it will take you to pay off your debt. There are many methods to pay off debt.
Some experts recommend the avalanche method, which you make a minimum payment on each debt, then put any extra funds towards repaying the debt with the highest interest rate. This process continues until all debts are paid.
If you want to pay your debt off faster, you will need to reduce your family’s expenses, find a way to increase your income, or both. Again, these choices affect your whole family, so talk to them and take their input into consideration. You may be surprised at the sacrifices they choose to make to get out of debt as a family.
5. Attitude matters
Debt is a psychological issue as well as a financial one. It may sound simple, but it’s not. Think of it as a challenge. You have to figure out what you want to do and then figure out how to do it. Take control of your income and your expenses.
Don’t fall into the trap of feeling guilty about past mistakes or about your debt. It is important that everyone in the family understands that getting out of debt is possible and is a worthwhile goal.
Getting out of debt as a family is a journey. Like all journeys, there will be difficult moments, but there will also be surprising moments of discovery and joy. For more information on how to get out of debt read The 5 Best Money Saving Apps That Work Hard So You Don’t Have To, and Keep More Money In Your Wallet With These 13 Money Saving Websites.