As a young boy, I watched my family deal with a great deal of stress from unsecured debt. This forced us to live paycheck to paycheck. I didn’t know how to deal with it. I put $10 I had earned from my paper route in an envelope and gave it to my mother, hoping it would bring relief; instead, it brought tears.
As I grew up, I mistakenly thought that I needed to become wealthy to prevent this from happening to my own family. I didn’t focus on the root issue: very few people learn how to save and spend money effectively. In addition to the lack of education, the taboo around ‘money talk’ and subsequent lack of conversations created strife in my personal relationships as a result of different expectations around saving and spending.
Based on 2017 Census statistics, (here and here), I found out that my family and I were not alone. Debt is a part of life for 62.4% of people in the US. For the fortunate ones, that debt is manageable, but for the rest of us, it is a real stressor.
The good news is that everyone can defeat debt!
I came up with the 5 practical ways to help you on your journey to get out of debt. This doesn’t work for everyone, but it sure would have helped my family and me.
1) Get a Grip on your Debt
Average credit card debt for the American is nearly $10,000 (Source: Federal Reserve Data here). First, you need to know how much debt you have. There are plenty of free tools to do this, such as Credit Karma or Credit Sesame.
Next, it’s important to understand how much your debt is costing you. Let’s start with an example.
Calculate how much of your income is going to paying just the interest on your debt. There are a number of free credit card interest calculators, but I use the free calculator from Financial Mentor. Just for reference, let’s take the average American credit card debt of $10,000 at a 20% interest rate while only having to make a minimum payment of $200/month. Making the minimum payment will result in $11,680 of interest paid over 109 months, on top of the original $10,000! It can be depressing, but once you see it, that may give you the desire you need to get rid of it.
Once you completely understand your debt situation, you may consider doing credit card refinancing or debt consolidation. I wrote a couple articles that can help in your decision process: Credit Card Refinancing vs Debt Consolidation, and Pros and Cons of Debt Consolidation. I would carefully consider the cons to these options as you do not want to put yourself in a position where you are incurring more debt. You may also consider debt settlement if you realize that your debt has put you on the bring of bankruptcy. I would tread lightly with debt settlement and understand Debt Settlement Pros and Cons. Although Ascend specializes in debt settlement, there are definite pros and cons to the method that you should understand and consider before making your decision.
2) Prioritize and Simplify.
In Marie Kondo’s best-selling book, The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing, she has the reader, who is on the pursuit of tidying up, ask the question of whether an item sparks joy. This is an important question to ask as readers realize that many of their items do not give them joy.
This is an extremely important tool for getting out of debt.
First, look at some of the items you currently own and ask yourself whether or not they give you joy. If the answer is no, you may be able to sell that item and use the funds to pay down your debt. Ask that question to your vehicle(s) as well. Many people get into expensive auto loan situations where they’re unable to get future credit at better interest rates because their car loan is dramatically increasing their Debt-To-Income ratio (DTI). Car loans can be dangerous, and I try to avoid them as often as possible.
Second, before you make another purchase, ask yourself if they will give you enough joy to justify the purchase. This will help you prioritize future spending.
As a side note, there’s a popular idea that if you just stop buying a $5 Starbucks drink every day, then you will have over $1,000 saved at the end of the year. While you definitely will save on money (and calories), it may not be something you prioritize to save on since it may give you joy and help you to get through the day. The point is to be wise with what you purchase and honestly evaluate what gives you joy.
3) Budget – Don’t Smudge It.
Put together a budget. Start simple. Start so simple that you are literally only tracking and documenting how much you make and how much you spend in one month. Too often, we try to jump into hyper-complex budgeting apps/methods that burn us out in 5 weeks. I appreciate what J. Money provided Budgets Are Sexy, which is 8 free budget templates that you can use easily use via Google Doc or Excel.
Budgeting can be fun. Yes, I will repeat that: Budgeting can be fun. It becomes fun when you start getting your finances in order and you are able to control where your money is going.
4) Pay Down Your Debt Using a Specific Method
Now that you understand your debt and have a simple budget, you are ready to start prioritizing and strategically paying down your debt. Use as much of your free cash as you can to pay off your debt. It could take months or even years, but your future self will thank you.
There are two main approaches:
Snowball Method: Use the majority of your funds to pay off the smallest debts first, then pay off the minimums of your other debt. The goal here is that it feels good to pay off debts, and that will help you pay off larger debts. The problem with this method is that you can pay thousands of dollars more in interest.
Avalanche Method: Use the majority of your funds to pay off the highest interest-rate debts and pay off the minimums of your remaining debts. This is by far the most cost-effective way, but it can be depressing if your largest debts take the longest time.
5) The (Not So) Elusive Rainy Day Fund.
Dare I ask for such a luxury? Create an Emergency Cash Savings. Life emergencies happen, so starting to save an emergency cash savings is imperative to not adding on debt to your existing debt. While on the topic of saving, it is important to understand how to calculate savings rate as when you are planning for retirement. Furthermore, for help on understanding calculating how much to save for your retirement read, “Retirement Savings By Age” to understand the best steps to do so.
The emergency fund should start out small so that you do not feel burdened by it, but it’s imperative to start. If a car tire blows, you can now take it out of the emergency fund rather than accumulating new debt. Keep this ONLY for emergencies, but also be gracious with yourself if your definition switches here or there.
Getting out of debt is hard. It takes discipline and an honest assessment of your spending, along with the desire to change. Here are a couple final pointers:
1) Be gracious to yourself. Two steps forward and one step back is still one step forward, so keep that in mind when you overspend one month or you have to put money back on the credit card. If you are not gracious with yourself, this will never work.
2) Don’t give up, it’s worth it. When you don’t owe your creditors anything, the peace of mind is real and now you can start having your money work for you rather than having you work for your money.