With the record amount of debt in the U.S. today, you would think it’s a just part of being a citizen. As sad as that sounds, it’s true. And, it’s not like our government is setting a great example with the millions of dollars it adds to its books every single day.But trust me when I say this; going into debt isn’t what the cool kids are doing. Debt sucks. It’s a burden and can do irrefutable damage to not only one’s credit but more importantly, to one’s overall lifestyle.
So, you might be asking yourself if it’s so bad, then why do I and everyone else have so much of it? A great question indeed and one that could require an entire book. But, when the rubber meets the road, it really comes down to our education system.
We are absolutely terrible at raising our youth to be fiscally responsible. If you don’t have parents or some kind of mentor to teach you about money, then you’re pretty much on your own to figure it out for yourself. And, as you could have guessed, that’s not good.
Financial education should be one of the core tenants of our educational system, but it clearly isn’t. We’re all left guessing what to do when it comes to managing money, and that usually means spending more money than we make, which ultimately leads to debt.
Before I completely get on my soapbox about the lack of financial education in the United States, let me get back on course to what I really want to address; how you can get out of debt.
If you’re already there, then education isn’t going to do you much good. You’ve made your mistakes – and hopefully, have learned from them – but now, you need to start chipping away at your financial transgressions that have led you here in the first place.
While I wish there were some kind of magical solution to get you out of debt – and no, filing for bankruptcy doesn’t count – it really comes down to forming better spending habits, having a plan and then sticking to it. With that being said, let’s tackle the right ways to get out of debt.
Correct your Spending Habits
You probably didn’t need me to tell you this as this is most likely how you got into debt in the first place – unless you had some kind of unforeseen expense (think medical), which certainly happens.
Regardless of how you got to this point, you need to get out of it. So, the first step is to start correcting those spending habits, which means the dreaded “b” word; budget. I’ve written countless times about budgeting – you’re probably tired of me talking about it – but it truly is the key to having a productive and successful financial life (check out How to Make a Budget Bearable).
A budget is there to help with your incoming and outgoing cash flow. In its simplest form, you find out what comes in on a monthly basis and then divide that up into where that money can then be dispersed. However, if you’re in need of digging yourself out of debt, then that means cutting a number of expenses in your budget and redirecting those towards paying down the debt.
You really have two choices to pay down the debt. You're either going to have to bring more money or cut expenses. That’s it – and no, buying lottery tickets doesn’t count as an opportunity at more money.
For most people, they rely on the latter. So, that means cutting back on those monthly expenses you can do without that can surprisingly add up to a lot of money over the month. All of this savings will have to be redirected towards paying down the debt.
To get started on your budgeting, check out our handy budget spreadsheet. I hate to say it, but this might be a painful process. If it isn’t painful, then you’re not cutting enough from those variable expenses. When you have your budget complete – and it hurts a little – and you have money freed up to pay down the debt, come back to create a plan for what debts to tackle first.
Create a Plan
As for which debts to tackle first, there are a couple of ways to do this, and I’ll leave it up to you. Option A is simply paying off your highest interest debts first. This will allow you to save on these interest payments over the long-term.
The other option is to pay off the smallest debts first. Many individuals like this route because they will achieve that sense of accomplishment at a faster pace when that first debt is paid off. It can be a great motivating factor for staying the course.
Something else you may want to consider is looking at a home equity line of credit – if you own a home and have enough equity in it. This will most likely be a much lower rate than what you’re currently paying when it comes to credit card type of debt.
Regardless of how you do it, it’s important to have a game plan in place and to also track your progress on a monthly basis. Don’t forget to make sure your loan repayments are set up as monthly fixed expenses within your budget and that payments are made automatically from your checking account. More money should be applied to those debts on a monthly basis when it’s available.
Implement and Stick to it
Now that you have a budget, know how much you can apply towards paying off your debt and know which debts to start with, it’s now time to follow Nike’s motto; Just Do It!
No more thinking about, no more planning, no more contemplating. It’s time to do it. Yea, you might have to go back and make some adjustments, but that’s fine. Nothing has ever been perfect from the get-go. However, nothing has ever gotten better either if it wasn’t actually started in the first place.
Was Facebook perfect from the get-go? Nope. Was Apple perfect from the get-go? Obviously not. Was any successful startup company perfect from the get-go? No. However, every single one of them decided it was good enough and to just do it.
Your budget probably isn’t going to be perfect. Your plan probably isn’t perfect. But who cares. It’s better than the alternative of doing nothing. Suck it up and get moving.
Many people have been in the same situation, and while it can look overwhelming, just like everything in life, you have to start somewhere. Like building a successful business or retiring at an early age, it doesn’t happen overnight, but people accomplish these things every day. Keep at it, and your debts will be a thing of the past before you know it.