There’s a lot of talk about getting out of debt. It happens in coffee shops and over kitchen tables. Dozens of books are written about it each year. It’s a virtual cottage industry on the Internet, and it makes the rounds on TV financial programs as well. And yet tens of millions of people are still deeply in debt. There’s a glaring disconnect here, and I think it’s that a whole lot of people aren’t really serious about getting out of debt.
And serious is exactly what you need to be if you want to make it happen. That will require major alterations not only in the way you manage you money, but also the way you live your life. If you have been living above your means for several years – which is the usual cause for debt – the only way to get out from under it is to spend several years living beneath it.
It’ll take some serious sacrifice, and here are some examples…
Cut Out Any and All Expenses that Aren’t Absolutely Necessary
If you’re in debt, there’s an excellent chance that you’re continuing to spend more than you earn right up to this very moment. That will have to change.
Review your expenses for the past 12 months – and summarize them by category on a spreadsheet. Look at the summary totals to determine where most of your money is being spent. If there are any categories of spending that are not absolutely necessary to your survival they will have to go. At least until you get the situation under control.
Restaurant meals, lattes, summer vacation, premium cable TV, premium cell phone service, unused gym memberships, the mobile doggie grooming service – you can live without all of them, so they have to go.
Lower a Primary Living Expense – Or Two
For a lot of people living above their means turns up in a lot of small categories. But for others, the problem is more fundamental. Their basic living expenses are simply too high for the amount of money that they earn. It could be an excessively expensive housing arrangement, a premium car, or a second home. Each is a possession that represents a significant drain on your cash flow. If you are serious about getting out of debt, these expenses will have to be adjusted to more realistic levels.
If more than 30% of your income is going cover your housing expense, seriously consider trading down. That might be living in a smaller home, a less expensive apartment, or even going from house to an apartment.
The same applies with a car. If you’re struggling to maintain a $500 monthly car payment, then it’s time to get rid of the car. Sell the premium car, and buy the best used car that you can afford without having to take a loan. If you have a vacation home, the best advice is to sell it for whatever you can get for it, payoff the mortgage on it, and use any proceeds to help payoff your debts.
Debt and a premium lifestyle go hand-in-hand. If you can’t afford one, then you have to get rid of the other. The upshot is that this will probably do more free up your cash flow than anything else you can do.
Create an Additional Income Stream
Creating an additional income stream is one of those strategies that can work wonders to help you get out of debt, but only if you use it in combination with expense reduction strategies. Otherwise the additional income stream will simply get swallowed up by the high cost of your lifestyle.
The best advice here is to create some sort of side business that’s based on your talents and skills. That will not only give you better control of your time, but it also holds the potential to earn you a lot more money in the future. Failing that, getting a part-time job is the next best strategy.
If you have specific skills, such as carpentry, auto repair, or computer troubleshooting, you can take on extra work as a becomes available.
But make sure that extra income goes to payoff your debt.
Move Your Credit Card Debt to Zero Interest Cards
If you are in a position – meaning that your credit is strong enough – to move your credit card debt to zero interest cards, then you should take full advantage of this. There are dozens of banks that will allow you to pay no interest when you transfer your balance, and it can provide you with some valuable breathing room while you reorganize your finances.
It’s important understand this is only a temporary step. For starters, zero interest transfers are only zero interest for specific a period of time, generally no more than 18 months. Be that as it may, the reduction in interest all the way down to zero will make it easier for you to begin paying off your debts. And if nothing else, prospect of a looming interest rate deadline will provide you with additional incentive to payoff the cards faster.
Throw Any Windfalls You Get at Your Debt
If you have been licking your chops planning to fund your summer vacation with your income tax refund, get that idea out of your head. With the average federal income tax refund floating somewhere in the range of $3,000, that can be substantial in your debt payoff effort.
Any windfalls that you receive from any source – tax refunds, bonuses, large commission checks, proceeds from the sale of any personal assets, or payments from side jobs – should go directly into debt payment.
When added on top of your regular monthly debt payoff efforts, putting your windfalls into the mix can seriously accelerate the process. But it’s going to take a lot of thinking past the moment.
Use the Debt Snowball Method
There are various strategies recommended for use in the payoff of debt. But I think that Dave Ramsey’s debt snowball is the best overall, especially for those who’ve never made a serious attempt to get out of debt.
The strategy involves paying off your smallest debt first. Once that’s done, you move on to your next smallest debt. The basic concept is that you are starting at the bottom of the debt pile, moving from smallest to largest.
The major benefits are that:
- Each debt that you payoff – no matter how small – represents a very visible evidence of the success of your effort, and
- Each debt that you payoff makes it easier to tackle the next one, if only because your cash flow will improve as a result of paying off the first.
Since getting out of debt is a long-term process, the psychological aspect of it cannot be ignored. You’ll need to see progress in your plan, or risk a strong likelihood that you’ll abandon it. The debt snowball will give you that much-needed progress, and help you to keep on track right through to the end when you’re last debt has finally been paid.
These strategies are not pleasant, it’s true. But being buried deep in debt is not pleasant either, especially when you consider the prospect that you could potentially spend your entire life as a debtor. It’s better to swallow the bitter pill now, get your life clear, and move on to better things. You deserve nothing less for yourself.