This is a guest post. Opinions are that of the author (although I think they are pretty sound!) Enjoy!
It can be difficult to define a definitive debt payoff plan for everyone, because an effective plan should be largely dependent on several factors that are specific to a person’s situation. Considerations such as the amount of debt, the type of debt (credit card, student loans, etc), and income should be taken into account.
Nonetheless, there are some general steps that I think everyone can take in order to begin getting out of debt.
1. Get Organized
The first thing you must do is develop the right mindset. It may sound impractical but it’s necessary that you make getting out of debt a primary goal in your life. Unless you want this to drag on for years, you need to organize your debts and systematically pay off each one.
By “organize your debts” I simply mean gather all of your most recent statements and put them in front of you. I know this can be an emotionally difficult thing to do in some cases, but remember, your new “systematically pay off debt” mindset has no emotions –only determination. Also, you will eventually need contact info for each debt –whether it’s a collection agency or credit card. The best way to get this information if you don’t have it on hand is by getting a current copy of your credit report.
2. Start A Simple Budget
It’s really important that you keep a close eye on the money you spend. If you’re serious about getting out of debt, you have to become that person who asks “Is this in my budget?”, and if the answer is no, you don’t buy it.
The purpose of using a budget is twofold. First, you need to find the money that you’re going to use to pay off your debt. Aside from getting a second job, the only other practical way is to analysis what you’re spending your money on and slim that down as much as possible. Every dollar left over from your monthly expenses should be applied to debt (we’ll get into that in a minute). The point is that you’re probably spending hundreds a month on little things here and there and don’t even realize it because you’re not tracking your spending. Budgetable has some great tools for tracking wasteful spending and managing your budget.
The other purpose of a budget is that it forces you to develop healthy money habits. The key to success with money is actually pretty simple in most cases: don’t be careless. Did you know that most millionaires are more frugal than non-millionaires? Check the book The Millionaire Next Door for a detailed look at the unique spending habits of millionaires.
Don’t try to over-complicate your monthly budget. Your budget should simply list your income for that month, minus your expenses. The goal is to get the “what’s left over” number as high as possible, but don’t be unrealistic. You should allocate some spending money, but experiment with ways of cutting down your daily consumption. For example, start drinking a cheap cup of coffee instead of a Red Bull every morning. Be creative but don’t set yourself up for failure by trying to cut out too much right off the bat.
3. Your Social Life Is Suffocating You
Many of you will find that this is the hardest part of getting out of debt, but the good news is that it’s only temporary. Maintaining an active social life can get really expensive, and because it’s extremely hard to include in your budget, it needs to be on your radar –it will sneak up on you!
Social events are hard to include in a budget because many times they “pop up” unplanned and you feel obliged to participate. For example, you might be asked by co-workers to have a couple of drinks after work on a Friday afternoon and think to yourself, “a couple of beers won’t cost much”, but “a couple of beers” can pretty easily turn into $10 Patron shots and buying everyone Taco Bell at 3 AM. I know it’s happened to me more than once.
I’m not advocating complete isolation from the rest of your friends, but I simply want to emphasize the importance of being mindful about how social situations can end up costing you much more than you anticipated and ultimately blowing your budget.
4. Sweat The Small Stuff
Now that you’ve created a budget and became a hermit, it’s time to start attacking your debt. There are several methodologies out there for getting out of debt, but I’ve found (without a doubt), the most effective one is the Debt Snowball method (See wikipedia article). The idea is simple: pay off each debt smallest to largest and apply the savings from paying off one debt to the next debt –hence “snowball”.
Obviously this works best with revolving debt where there is a monthly payment, but I recommend applying the same method to all of your debts. It’s satisfying to get rid of those old, little debts (e.g., phone bill collection) that have been in the back of your mind for years. Also, you will have a better chance of staying motivated if you start seeing progress early on.
The exceptions to the “smallest to largest” rule are the IRS and creditors who are very close to suing you. The IRS has unyielding power and they will use it to wreak havoc upon almost every aspect of your life. Your chances of fighting the IRS and winning are very small so just take a deep breath and attack the debt. You want to pay off creditors who are about to sue you in order to avoid getting a judgment slapped on your credit report.
5. How To Stay Motivated
Depending on how much debt you have and how quickly (or slowly) you’re paying it off, you might find yourself getting discouraged at times and consider just giving up and filing bankruptcy. I won’t go into bankruptcy too much but I believe you should only use this as an absolute last resort –that is, you’re having problems feeding your kids or some other essential life need because of your debt.
The truth is, getting out of debt isn’t going to be easy. It’s surely not going to be as easy as it was getting into debt.
Nonetheless, what you are doing here isn’t just paying off some people who are bugging you. It’s about developing new habits and becoming a better person by integrating those habits into your daily life. Not only will having these habits insure that you never get overwhelmed with debt again, but it will eliminate all of the stress that you are feeling now. In fact, it’s something (if you make it through to the end), that might become one of your crowning achievements.
About: Ryan Bales is co-founder and CEO of Budgetable, the budget you’ll actually stick to. Ryan also occasionally writes on money matters at the Budgetable blog. You can try Budgetable for free at http://budgetable.com.
I also blog at A Five Star Life. I write about anything that comes to mind but try to focus on finding the good in daily life.
These are great tips.
It is too true that your social life can cause great problems when saving money or cutting back.
There is always something coming up and even when you say that you have no money so you’ll come next time, there is always somebody who offers to lend you the money and thus defeating the point of not going along in the first place.x
Emma recently posted..Bye Bye Sleep
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Having a social life is such a money suck. this is why I’ve decided to live the life of a recluse.
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on January 23, 2012 at 1:33 pm
Thanks for mentioning the social situations that cost money. That’s one reason we’ve made very public our goal to get out of debt this year – people understand when we say no because they know what our goals are. A few of our close friends even keep us accountable!
Lindsay(Quote)
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on January 23, 2012 at 1:35 pm
Wrong Twitter username in previous comment. Oops.
Lindsay(Quote)
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on January 23, 2012 at 3:52 pm
I agree with the Debt Snowball plan — it really does work, and it’s really motivating to see the debt with the lowest balance rapidly approach zero.
frugalportland recently posted..Strategy: Implement Spend-Nothing Days
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