Last week I shared how my wife and I will be debt free in a couple of weeks! Earlier this week, I expanded that by saying that everyone should make getting out of debt a goal. Not just a long term goal, but a goal they focus on now. Today, I present five simple steps for getting out of debt.
1. Accept Where You Are Starting From
You need to start by accepting where you are at. Too often people get into a state of denial around their debts. They don’t see everything, or don’t admit to the seriousness of the problem. For others, they like to imagine, or live like, their debts don’t exist. No matter whether you are deep in debt, or just a small amount of debt, accept where you are.
Part of accepting where you are means you should not run around chasing magic solutions to your debt problem. Don’t chase fancy “debt consolidation” schemes or companies with all sorts of promises about paying only a small amount of their debt. It also means that you don’t even contemplate bankruptcy. You need to start digging your way out on your own. But here’s the good news: you can do it!
You may have heard that you need to have a budget, but most of the time budgets are too complicated or too rigid. You need a simple, but flexible budget system. There are a lot of advantages to having a budget. It allows you to track your spending so you know where money is actually going. You might be very surprised when you see where you actually spend your money. Further, having a budget allows you to plan where you will spend your money. This plan allows you to make space for paying off your debts. Finally, having a budget keeps you from spending more than you make. If you spend more than you make you will only go further into debt. Using a budget to plan out month will help ensure that you don’t spend more than you make.
As you can see, having a budget can be very beneficial. Of course, this is only true if you use it. Unfortunately, most people that try budgeting don’t stick to it. That is where the Simple Budget System comes in. You can read about the Simple Budget System here.
3. Cut Your Costs
Once you have established your budget, and have an understanding about where you spend money, look for ways that you can cut your costs. What are some things that you can give up? Certainly, this will mean sacrifice. The deeper in debt you are, the deeper the sacrifices you will need to make. Look through your expenses and determine what you can cut. For some, it is their daily Starbucks coffee. For others, it means cutting cable TV. My wife and I went without cell phones for the last four years. What can you cut?
Another way to cut your costs is to start using cash for your expenditures. If you use cash instead of debit or credit cards you will spend less. It’s been said that people with cash spend 18% less than if they used a debit card, and 28% less than if they use a credit card. Why? Two reasons: One, there is an emotional attachment to cash. You actually have to hand it over, and there is an emotion to that. It’s not as easy as handing over a piece of plastic. Secondly, you always know you what you have left. If you have $200 in your wallet and you are about to spend $50, you are very aware that this is 25% of what you have. You are going to have a lot less. It forces you to ask, “Do I really want to spend this?” If you switch to using cash, you will spend less.
4. Increase Your Income
This step is one that people often overlook, but it can be extremely valuable. If you increase your income, you can take 100% of the increase and apply it to your debts. That’s what my wife and I did. Over the past few years we have made over $10,000 a year extra with our side business. We then applied that money to our debts! Those extra payments dramatically propelled us towards being debt free.
There are many ways you can increase your income. You can work hard at your job and try to get a promotion. This may work, but it is not guaranteed and it may take a lot of time. For many, the better choice is to start a part-time business. This might be a traditional business, such as doing book keeping or babysitting , or it might be an online business or other home business. My wife and I have partnered with a direct marketing company. It’s not multi-level marketing, or direct sales. Instead it allows us to earn an income without having to stock products or sell things to others. (Enough about that here, if you want to learn more, visit my site.)
5. Snowball Your Debts
The final step is to snowball your debts. This means that you focus on one debt at a time, and when it is done you take that payment and snowball it into the next debt payment. This is a technique recommended by several financial experts including Dave Ramsey. There are a couple of ways you can do this. One option is to start with the highest interest debt and pay it off first. I prefer a second way, which is to pay off the smallest debt first because it helps create momentum.
When you are doing your debt snowball you make your minimum payments only on all of your debts except your focal debt. On your focal debt you make as large of an extra payment as your budget allows. You do this until that debt is completely paid off. Then you take the extra payment you were making, as well as the former minimum payment on the debt you paid off and start on the next debt. This way the extra amount you are paying on your debts each month snowballs as more and more of your debts are paid off.
There you have it: five simple steps for getting out of debt. You can do it. Being debt free is within your grasp. Just get started today!