Updated November 27, 2013

Your Personal Debt Ceiling: How to Avoid and Overcome Your Own Financial Crisis

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It’s been hard to ignore the recent news about our nation’s current debt crisis and whether or not Congress will vote to increase America’s debt ceiling – which is the amount of money the nation will be allowed to spend to continue paying what it currently owes.

Although the national debt debate is intriguing (and frustrating), I feel it’s just as important – if not more immediately important – to focus on something that I have a little more control over: my own personal debt situation.

In this post, we’ll look at a few financial tips about avoiding your own personal debt crisis, how to overcome an overwhelming debt situation, and we’ll ask the question “should you raise your personal debt ceiling?”

Department of Treasury
Department of Treasury © Bureau of the Public Debt

Avoiding a Personal Debt Crisis

Personal bankruptcy filings have been on the rise as of late, even after the government made it more difficult for families to qualify for bankruptcy status with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 – the BAPCPA.

How have so many Americans gotten into such a bad situation with borrowing money? Well, there are many culprits that increase American’s debt, but one stands out over than all the rest: credit cards.

I know what you’re thinking, “Guns don’t kill people, people kill people. And credit cards don’t increase debt, it’s the people who use them.” You’re absolutely right (about the credit cards at least); but we American’s just can’t be trusted when it comes to using our little plastic friends to buy things we can’t afford.

So how does the typical American household avoid the national credit card debt average of over $10,000 per household? Think about these tips and how they might change your financial habits:

  • Create a budget and stick to it
  • Spend less than what you earn
  • Stop buying on impulse
  • Save up for larger purchases, gifts, and vacations
  • Don’t use your credit card as an emergency fund

Do some of these topics hit home? If so, take a broad look at your current financial landscape and figure out how you can apply these guidelines to your own situation. They all have one thing in common: they require you to show the commitment and determination to follow through.

How to Overcome Your Overwhelming Debt

Let’s say that you’re like most Americans these days; you’ve got debt and you hate feeling like your about to drown. Welcome to the club.

The sad truth is that most of us aren’t debt free. So instead of learning how to avoid debt, we need to first learn how to overcome the debt that we’re currently stuck with.

The best and easiest tip I can give you is to quit paying only the minimum payments on whatever debt accounts you have (credit cards, home loans, personal loans, student loans, etc.) Try paying double the minimum payments on your credit cards. If you only make the minimum payments, you’ll remain in debt for years and you’ll pay thousands of dollars in interest.

What about a mortgage you say? Even an extra $100 a month paid on the principle amount that you owe can reduce the length of your mortgage by a couple of years. That saves you time and interest!

Here are some other tips to help you overcome your current debt crisis:

  • Gather up all your debt accounts and add the totals together. You need to know the total amount that you owe so you’ll know what you’re up against.
  • Make sure you are spending less than what you earn (spending includes the payments you must make each month on your current debts)
  • Cut your unnecessary expenses – depending on the amount of debt you owe, this may need to be drastic.
  • Save at least $1000 for an emergency fund – you may think this doesn’t make sense, but consider this. If you pay down your credit card by $600 dollars over 3 months, but you have a car repair that comes up, how will you pay for it without an emergency savings fund? That’s right, with a credit card – and you’ll pay interest on that car repair too. A cash emergency fund helps prevent future debt.
  • Control your credit cards usage. I know, I know, this is crazy, right? But spending money you don’t have sounds even more crazy to me.

Should You Raise Your Personal Debt Ceiling?

Here’s what the government says about their debt limit, “The debt limit does not authorize new spending commitments. Raising the debt limit simply allows the government to meet its existing legal obligations.”

That sounds good on the surface, but who decides what our nation’s financial obligations are going to be, and when exactly is that decision made?

You might not be able to answer that question for the government, but you should be able to answer it for yourself. You should have in mind a certain amount of money that you are unwilling to go above to borrow.

Like a house for instance, you might not look for anything above $250,000. Or your car, it would be good to have a set limit for a new car so you don’t go hog wild with something that you can’t afford.

My suggestion is that you only consider raising the amount of debt you’re willing to accept after you’ve got your budget and spending habits under control. Whatever you end up doing, you want to avoid stacking important financial decisions on previously-made bad financial decisions.

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