(Yesterday, I published Debt Makes Slaves of Those Who Owe, part one. Today, I hope to answer the question: How does a person get out of debt?)
Let’s budget… did I hear moaning? Don’t worry, it’s really not difficult… you’ll see.
But, before you can make any decisions on how you’ll handle your money you’ve got to see the big picture and understand where your money is going, on a monthly basis. If you don’t take the time to do this, it’s like driving blindfolded.
Gather up some sticky notes, a pen, calculator and your bills. Separate out necessities such as your mortgage or rent payment, taxes, child support obligations, your church tithes, insurances, utilities, food, medical and car expenses. Label that stack “NEEDS”.
The second stack should be your credit card bills along with any loans you may have such as: extra vehicles, motorcycles, snowmobiles, campers, boats, a cabin, student or other types of personal loans… whatever it may be. Label that stack “WANTS”.
If you have other types of monthly expenditures, such as cellphones, internet service, newspaper subscriptions, music or dance lessons, karate classes, a membership at the athletic club, etc… This stack is labeled “EXTRAS”.
Write down what you spend on a regular basis such as: restaurant meals, fancy coffees on the way to work, what you spend at the bar, cigarettes, trips to the hair salon, and other incidentals. Label this stack “HABITS”.
You may need to carry a small pad of paper and a pen with you for a week or so and actually record what you are spending, as most people underestimate what they think they are spending on these incidentals. Keeping track by jotting them down will help you to realize how these items actually add up.
When you are satisfied you have all of your data, tally up what you owe or spend for each category, along with a grand total and write it down.
Next, figure out your monthly income. Hopefully, that number is larger than what you owe. But even if it isn’t, you can fix it.
It’s time, now, to prioritize. By separating your obligations into these piles, you’ve already begun. The NEEDS stack is a given. Subtract that total from your income.
Then, take a critical look at the items in your WANTS stack. Ask yourself how often do your actually use each item. Look at your loan balances. Think about what you can do without… what can be eliminated. Maybe you can sell some of the things adding to your debt load. Do it.
Now, if you’re really serious about getting out of debt and attaining financial freedom for yourself and your family, sell everything on your WANTS list that is a tangible asset. In other words, if there’s something you can stick a “For Sale” sign on, do it.
Trust me. The sacrifices are only temporary. Go ahead, call up the newspaper and write up your classified ads to sell that stuff you can’t afford… the things which are weighting you down, keeping your head under water and your life in bondage to debt.
Carefully look at each item left in your WANTS stack to determine what interest rate you’re being charged. Chances are, you are paying the highest interest on your credit cards. But whatever the case may be, arrange your stack with the highest interest items on top and the lowest on the bottom. Make a list recording the bill with the highest interest on the top, then the next highest, and so forth. This is your WANTS LIST.
You’ve just prioritized your debts.
Arrange your EXTRAS stack according to what’s most important to your family. Eliminate as many of the less important items as possible.
If you have a child who takes dance, piano or karate lessons, perhaps he or she can find a part-time job to pay for it. If they are too young, maybe you can request family members consider gifting the child with cash or a gift certificate from the business at birthdays or Christmas to cover or defray the expense. A child is never too young to begin learning the value of a dollar, goal setting and personal responsibility.
Take the same approach with your own items on the EXTRAS list. If there are little ones in your home, you will be setting a good example for them to follow.
Depending on your circumstances, you may have to entirely eliminate your HABITS list. I’d strongly recommend doing so. Remember, it’s not forever. If you give up these HABITS, at least for now, it will speed up the process, enabling you to become debt free sooner.
If you have credit cards, stop using them and cut them up, if necessary. I know, that’s plain old common sense. But many people are addicted to reaching for their plastic and by destroying the credit cards, it lessens the temptation and risk of ending up farther in debt. The rain has to stop before you can succeed at bailing the boat out.
Although I believe in building a savings account, if you have a heavy debt load, you may be better off temporarily applying your resources to becoming debt-free because most likely the amount of money you are paying in interest, alone, is probably greater than the amount of interest you are likely to earn on a savings account. So it makes sense to put your resources where they will do the most good. But I should emphasize, as soon as you do get some breathing room… some relief from your debt, get in the habit of making regular contributions to your savings.
Now you can begin to get yourself out of debt.
Each month, after you’ve first met all of your NEEDS obligations, pay the minimum amount due on each of the remaining WANTS items, except for the one bill at the top of your WANTS LIST. This debt item becomes your TARGET to pay off as quickly as possible by making double or triple payments… or even just an extra $100, $50, or $25 a month. When you sell anything from your WANTS list, be sure you pay off the remaining loan balance, then, if there is any extra money, apply it to your TARGET. Likewise, all of the funds you’ve freed up by eliminating WANTS, EXTRAS and HABIT items are to be paid to the one debt item you’ve identified to TARGET.
Of course, it goes without saying, always pay your bills on time… or early, if possible. But I said it anyway. By paying your debts as soon as you’re able, rather than waiting until the due date, you can save yourself some interest charges. A little each month adds up over the long run.
Once you accomplish your goal of paying off that first TARGET, cross it off your WANTS LIST and pat yourself on the back. Congratulations on your first success!
When the next month comes along, take the monies you were using to pay on your first TARGET item’s debt and add it to the minimum amount due on your second TARGET item. As you begin to pay off these TARGET items, one by one, you will gain momentum because you’ll actually have more available income to use towards paying off your next TARGET. And the quicker you are able to bring down the credit card or loan balances, the less interest it will cost, so you’ll save money and come out ahead.
If you stick with it, it won’t be long before you will see the fruits of your labor and if you are determined and committed to becoming debt-free, you will get there.
After you have paid off and eliminated all debt associated with your WANTS LIST, set your sights on your NEEDS list, applying the same principles to paying off your vehicle or family vehicles, then work on your mortgage, if you have one.
Now comes the fun part of getting your finances in order and learning how to manage them responsibly, so you can avoid debt in the future.
After you succeed at getting yourself out of debt, put these same principles to work for you in setting aside money for your savings to build up a nest egg. And likewise, consider setting up a special savings account earmarked for a specific purpose – so you can afford to pay cash for things you used to go into debt to purchase.
Of course, there may be times when you can’t avoid debt, such as the purchase of a home or replacing a car, for instance. However, by planning ahead and earmarking some of your savings for these purposes, you can at least have a down payment for these major purchases. If you do get a loan, pay it off as quickly as you can.
Living within your means is simply spending less than what you earn. If you get a raise or a better job, continue to live as you did before. Spending less than what you earn allows you to set aside money in your savings… and, with faith and obedience to God, you can enjoy prosperity. Life is full of expenses so you really cannot afford not to save.
Owe nothing to anyone–except for your obligation to love one another.–Romans 13:8a (NLT)
Personal finance management is all about making wise choices, walking in faith and obedience to God, exercising restraint by living within your means… and always remembering: Debt makes slaves of those who owe. I wish you peace and prosperity.