by Glinda Bridgforth, published in Essence Magazine, February 2005
Once opening her mail began triggering migraines, *Helen could no longer ignore that she was in serious financial trouble. The 38-year-old Chicago hairstylist struggled each month to scrape together $2,400—more than twice what she paid for rent—just to make the minimum payments due on her car note and eight credit cards. No wonder the bills made her head ache: some accounts had interest rates as high as 27 percent! For years, Helen had been juggling bill payments, robbing Peter to pay Paul, telling herself she'd eventually get back on her feet after the cosmetics business she started went bust in 1988. But even with plenty of salon clients, she would wind up a little further in the red each month because of unforeseen expenses, or because she lost track of what she now calls "stupid" spending on clothes, dinners out, furniture and travel. Recently, with $47,000 worth of debt, she came to me for help and confessed "I used to have solid credit. Now all of my cards are maxed-out and past due, some for 90 days or more. I am worried that I won't be able to move into another apartment, or get a mortgage, or be able to lower my interest rate on credit cards. I can't keep doing what I'm doing. This isn't working."
Sisters as distressed as Helen walk into my office every day. And years before I dug myself out from debt and became a financial counselor, I too knew what it was like to live on the edge of fiscal collapse. To look at someone like me back then or like Helen, one would never know that we're stretched to the limit and have no resources—a savings reserve or available credit—to fall back on. We may make good money. But any financial setback—a car breakdown, a layoff, a serious illness, tax trouble, mounting credit or student loan debt—puts us in danger of going broke. It can happen to anyone. Most of us resolve to get our heads back above water as soon as we can. But if we panic and swim in whatever direction we hope will get us out of trouble, we could end up sinking deeper. To complicate matters, many of us feel secret shame about the situation as well as the stress.
To avoid financial crisis, we need to know ahead of time what steps to take so that when a cash crunch hits we can catch our breath, calmly assess the situation, find the help we need and make our way back to a safer financial state. Over the years, many of my clients have done just that. How'd they do it? I've boiled their success strategies down to five simple steps—your early response system for financial emergencies:
1. Don't panic
2. Look for ways to raise cash
3. Open the lines of communication
4. Find ways to minimize debt
5. Treat the crisis as a learning experience
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Financial Peace of Mind
Evaluation the situation, weighting your options, and then taking action will reduce stress and give you a greater sense of confidence and financial peace of mind. Most important, not only will you begin to stabilize your finances, but over time you'll improve your credit score and position yourself to accomplish your dreams for the future.
1) Don't Panic: With collection agencies calling or bills piling up, we're tempted to grasp at any immediate solution to address the problem. However, contract to the popular saying, desperate times do not call for desperate measures, but a cool head and a clear plan. When Deena, 26, faced the prospect of a $4,000 repair bill on her 2001 For Focus (it was valued at $3,000), leasing a new vehicle seemed to be the best option. But the Columbus, Ohio college student and mother of two didn't run out of and accept high-rate dealer financed offered to her because of past credit problems. The first thing she did was calm herself down: She began to pray, meditate, recite affirmations, and visualize financial success. Then she got busy. Her research led to the following plan: Although her upcoming final semester in college was paid for from scholarships and a Pell Grant, Deena took out a student loan (at an interest rate of just 2.77 percent) for $5,000. She then deposited those funds into a credit union savings account and obtained a secured loan for the same account. Deena used the secured loan funds to prepay a 3-year lease on a 2005 Dodge Neon. By using the prepay option, Deena insured that she wouldn't have to come out-of-pocket for the $199 per month lease payment, which would have meant a hardship for her and her kids.
While Deena's creative "solution" isn't the right move for everyone, it enabled her to avoid worse repercussions. Thanks to the student loan, Deena's interest rate was low and not payable until six months after her graduation. And by making automatic regular payments through the secured bank loan (also at a low interest rate), the transition is helping her reestablish good credit. But most importantly, Deena's back in the driver's seat and able to take care of business.
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2) Look for ways to raise cash: When an emergency strikes, you may need additional income as well as ways to cut expenses. Samantha, a 41 year-old dental hygienist in Toronto, anticipated an upcoming layoff. She opened her home to a recently married cousin and his wife who needed a place to stay. The $350 monthly rental income and shared utilities enabled Samantha to avoid a cash crunch.
What can you do to cut expenses and free up more cash? Get creative. Be willing to pack a lunch or do your own hair and nails. Lower your insurance premiums by increasing deductibles or "bundling" your car, homeowners and life insurance policies with one company for a discount. If you own a luxury vehicle, consider replacing it with one that will gain you a lower car payment, cheaper insurance and repair bills. Clip coupons from the Sunday newspaper. Cut back on gourmet coffees and bottled water. Also consider reducing phone lines and/or cutting features from your telephone service.
Also look for ways to generate additional funds. Document your value to your company and ask for a raise. Offer to work overtime. Get a part-time job. Start a home-based business. Clean out your closets and take clothes not worn in the last 12 months to a consignment store. Because a "mystery shopper," hired by retailer to evaluate customer service. Participate in marketing company focus groups, where people are paid to give their opinions about products and services. Call up those friends who owe you money and collect. Also consider modifying your withholding exemptions to increase your net monthly income, (even though that means reducing your annual tax refund).
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3) Open the lines of communication: When money trouble looms and there's no solution in sight, it's easy to feel powerless and decide to ignore bills and phone calls. But proactivity, not procrastination, is what pays off when you're faced with a cash crunch. Since her five-year-old was diagnosed at bright with Sickle Cell Anemia, and has required frequent hospital stays of weeks at a time, Lauren, 31, has been too overwhelmed to open mail and respond to telephone calls. With a mountain of medical bills growing larger, and bill collectors growing less patient having been ignored, the Baltimore mom's financial situation went from bad to worse, and she eventually had to declare bankruptcy. This situation could have been avoided. Creditors and other agencies will often work with you if you reach out, explain your situation, and negotiate in good faith. Here are some do's and don'ts:
Do accept responsibility. You received goods or services and should pay for them.
Do open your bills and respond to the senders, regardless of whether you currently have the funds requested. Prepare a script of what you plan to say when you speak with each creditor. Acknowledge the debt, explain that you plan to repay it, state what you can or cannot do today, and agree to keep them informed.
Don't avoid creditors by not answering the telephone. Don't lie about payments being "in the mail" or promise anything you can't deliver.
Do document conversations with creditors: Date, time, phone number called, first and last name of the party you spoke with, specifics of the conversation, and promises made by each party.
Don't curse agents or lose your tempter. Talk to the caller as a person, not as the source of your troubles.
Do be humble rather than arrogant. Consider saying, "I've got a problem. Is there any way you can help me?" People tend to feel good when they are helping someone, but not when you take the approach, "You owe me."
Don't despair if your account has been turned over to a collection agency. This sometimes happens before a creditor is willing to lower payments enough to fit your budget.
Do respond to any court summons. You need to explain your situation to the judge and show a willingness to repay. By not showing up you appear to be a flake and will likely have a judgment placed against you.
Do avoid reinforcement of lack and scarcity when you make payments. For example, avoid printed checks that state, "Money talks—mine says goodbye!"
Do incorporate your spiritual beliefs into tackling a money challenge. You might pray before you pick up the phone, asking God to give you favor in the eyes of the creditor. Bless your creditors. Thank them for having confidence in extending credit to you.
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4) Find ways to minimize debt: Ora, a 52 year-old mother of 7 grown children and grandmother of 27 (7 between the ages of 9 and 20 are living with her) was faced with a whopping gas and electric bill of $3,000! The Tacoma, Washington resident applied for payment assistance from a program through the utility company designed to help low income individuals. They were out of money and suggested she come back later in the year. But further investigation paid off. Ora sought help from a social services agency, which gave her $1,300.00 toward the bill. She still has a way to go, but every bit helps.
Claudia, a Las Vegas physician's assistant, forgot to contact her cell phone company and switch to an international calling plan prior to her trip to Mexico. Weeks later she has horrified to open a bill for almost $1,000.00! From past experience, Claudia knew you have to speak to creditors with respect and deference. "We Black women can sometimes get an attitude," she explains. "I've learned you have to ask for help rather than demanding it. My approach was, 'Can you please help me?' Not, 'This is bulls--t!'" Claudia's phone call to the cellular company paid off. They made the calling plan switch retroactive, resulting in an $870.00 reduction in her bill!
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5) Treat the crisis as a learning experience. That's what Helen, the hairstylist with $47,000 worth of debt whom we met earlier, did. When I suggested the debt management services offered through the National Foundation for Credit Counseling, she took action immediately. Helen called the toll-free number (see sidebar) and was referred to a local agency where she scheduled an appointment for the following day. After careful analysis, she was able to consolidate $38,000 of her debt into a single monthly payment of $940 ($1460 less than she was paying before!) and reduced the interest rates on her various accounts from the double digits to between 6 percent to 9.9 percent!
Most importantly, Helen has learned the importance of building a savings cushion. "I've reduced my daily expenses. I got rid of cable TV and long distance on my home phone," she says. "And I now understand that the world won't end if I don't buy ten pairs of shoes!" She's socked away $2000 so far—money she won't touch unless there's an emergency. If you're looking to stash some emergency cash, trying saving the $1 bills left your wallet at the end of the day. Or save the change from your pocket or purse each day. Set up a monthly automatic transfer of a set amount from your checking account to a savings account. Or sign up for payroll deduction through your employer.
Today, Helen has reached a new level of financial maturity. Gone are the headaches and the sense of panic. "I feel better now," she says, beaming with pride. She is current on her bills, and is looking forward to making her first investment in real estate in the next several months. She has regained a sense of control, and is excited about her future.
* Subjects' names and some identifying details have been changed to protect their privacy.
