For our final “official” installment of the “How to Budget” series I’d like to chat about getting out of debt. Debt is like a huge ball and chain that weighs down your financial plan and slows your progress toward your goals. Being willing to sacrifice in the short term to get rid of debt will pay off in HUGE ways in the long run. What if, instead of paying a $300 car payment, $50 toward your credit card, and $200 against your student loan you could instead invest that $550 so the interest was working for you instead of against you? You could be a millionaire someday!
Once again I’ll remind you that I am not a certified financial planner, accountant, or investing professional. I am a mother who learned personal finance from the “School of Hard Knocks” and is willing to share what she’s learned in the spirit of chatting with a friend over coffee. If you require professional advice, please seek it from someone with the appropriate certification.
You Must Balance the Equation
Before you can get out of debt you need to balance your budget, meaning you are not taking on any more debt and are making at least the minimum payments on all of your debts. The simplest way to get out of debt is this: Do not borrow any more money! Debt repayment schedules are set up so that the debt eventually pays off, so if you make minimum payments on your debts and do not borrow any money, you will eventually be debt free. But there’s a catch: If you make only minimum payments, it may take years. Wouldn’t it be nice to be in control of your money instead of letting a lack of it control you?
When you were working out your budget, did you get it to balance? In other words, were you able to set up a system where your income was sufficient to pay your expenses? If not, there are two potential problems. One is that you have too many expenses or are spending too much in one or more expense categories. The solution to that problem is to reduce your expenses. Spend less on groceries or skip going out for entertainment. If things are more serious you might sell an expensive car and get a less expensive one.
But sometimes you’ll cut expenses as far as you can, meaning beans & rice for meals, no restaurants, no new clothes, driving a “beater” car, and living a very simple lifestyle, and you still can’t pay the bills. Your problem may be your income. If that is your situation, particularly if you’re carrying debt, you may need to get a second job for a period of time in order to have enough income to cover your expenses and pay off your debt. This doesn’t sound pleasant to most people, but it beats watching the ball & chain called debt grow larger.
If you didn’t have to make your debt payments, would your budget balance? How would it feel to be free of that burden? Would you be willing to do some extra work in order to get rid of those payments and the anxiety that comes with them?
The first step to getting out of debt is to get current with your budget and all of your obligations. You can’t get out of the hole if you’re still digging it deeper and deeper.
You Must Get Emotional
I’m old enough to remember Larry Burkett, founder of Crown Financial Ministries, teaching about the “debt snowball” and I’m also old enough to have seen it work in my life. From personal experience I’ll say that it takes more than math to get out of debt. If I were so great at math I would have paid attention to the part of civics class where we talked about personal finance and debt and I would have realized that being on the wrong side of compound interest, paying it instead of earning it, was a losing proposition. So my advice is, once you’ve figured out your budget, are current on your debts, and have a plan…loosen your grip on the math and get mad at the debt.
Pile up your bills and debt statements. How big is the pile? How much money are you spending every month in slavery to your debt? How much could you be saving and investing if you didn’t have to send all of that money to lenders? How much could you afford to lavish on the people you love if you didn’t have to use that money toward debt payments? What charities could you support if you had the leeway in your budget?
Does it make you angry? Are you mad enough to do something about it? What are you willing to endure in the short term to get out of this slavery in the long run?
You Must Own It
Being mad at the debt is good. It will give you the energy to get started on the journey to being debt free. But you need to make sure you follow the simplest path to becoming debt free: Don’t borrow any more money. In order to do that, you’ll need to acknowledge that the reason you got into debt is because you chose to do so.
I can admit that for myself. Yes, there were times when money was tight and Jay and I chose to put things on credit cards. Sometimes those “things” were formula and diapers for our baby. But if I’m honest, we had other choices. We didn’t take on extra jobs. We didn’t always make the best decisions. We started making progress on eliminating our debt when we owned our debts, quit blaming “society” or circumstances for them, and made the sacrifices and choices that allowed us to get debt out of our lives.
And I’d be remiss if I didn’t mention the “God factor” in our finances. We continued to tithe through our getting-out-of-debt process and we learned to make better decisions in light of God’s instructions for our lives. As we did more and more things “His way” we saw Him working for us through our family and friends, blessing our efforts. We weren’t instantly back on solid ground and we haven’t been without trouble, but we’ve never been alone in the process. I can’t explain it…it’s a matter of faith. But I can testify that it works.
In order to get rid of your debt you must own it. You must quit blaming circumstances and quit acting like a victim and start campaigning with the heart of a warrior. Get the extra job if needed, get mad at the debt, and attack!
You Must Have a Plan: The Debt Snowball
If you haven’t already set up a budget, please start here and read the previous articles in the “How to Budget” series and write out your budget before we go any farther. We’re going to edit it for the debt snowball, but for now just lay out your basic plan. Make sure you’re current on all debts and making at least minimum payments on each of them.
Now make a list of all of your debts, except your house, with the total amount due and the minimum monthly payment. Rewrite your debt list so that the debt with the smallest amount due is first, then the next smallest total amount due, and so on so that your largest debt is at the bottom of the list. Don’t include your house in this list. This is your order of attack for the debt snowball.
Now rewrite your monthly budget, making minimum payments on each of your debts except the smallest. You want to throw every extra penny you can scrape out of your budget at that smallest debt. This is where you need the emotion. Get mad! Make sacrifices! Stay out of restaurants and movie theaters. Avoid clothing boutiques or hardware stores or whatever tempts you to spend. Skip the “extras” and use that money to destroy that smallest debt!
Imagine what it would feel like to send one of your creditors packing. Buh-bye! See ya! Get out of my life! I’m no longer a slave to you! Nice, right?
Let’s take a minute to consider why you want to attack your debts from smallest to largest. Remember how we set the math aside? In order to continue with the sacrifices that will likely be necessary to get out of debt you’ll need to get a little rush from conquest…something to replace the rush you get from spending on your luxuries or hobbies or whatever. If you start with the debt with the highest interest rate, which would be what a math nerd would do, you could go for a very long time before you get the thrill of a “win” that comes from crossing one debt off of the list.
When you pay off the first debt the snowball rolls over. You cross the small, now paid off, debt off of the list and start attacking the new smallest debt. Pay minimum payments on everything except that new target and pour your energy and extra money into paying it off. Now that you have one less payment because you paid off the first debt, you should be able to attack the new target debt even harder each month and get it paid off. Then cross it off the list and watch the snowball roll over as you attack the third debt with even more cash.
Warning: By the time you get to the end of the list you’ll probably be working on a bigger debt like a car or student loan. Those big debts can take time to kill.
Suggestion: If you like video games then you may have seen game levels that show a “life” meter as you attack the enemy. As you continue to attack the gauge gives you a visual representation of how much more you need to do to defeat the enemy. Make a life meter for your debt. Every time you send a payment, mark that life meter. Enjoy the little “whoo-hoo” moment as you remind yourself that you’ve taken a little more away from that debt enemy and claimed a little more of your freedom. Celebrate when you destroy it!
Disclaimer: I am not a graphic artist! But since we’re just friends having a chat over coffee and not professional anything, I am willing to share my non-talent with you and offer a sample chart. Thankfully I never had a student loan (Thanks, Mom & Dad!) but I know many folks do. The sample is set up for a $48,000 student loan paid off over 48 months. I decided it would be easier to divide each year 3 x 4 rather than trying to mark off 12 slivers from left to right, but you are welcome to use my goofy green monster and divide the payments up any way you like for your situation. If you right click on the blank chart jpeg you should have the option to save the file so you can print it and giggle at the silly debt monster as you destroy him. And if you are a graphic artist and make a fancier (and also free) blank chart you are willing to share with everyone, please send me a jpeg at Leigh at A Chat Over Coffee dot com. Thanks!
What are your suggestions for getting out of debt? If/when you destroy your debt monster and want to share your celebration, please send a jpeg of whatever chart you use to Leigh at A Chat Over Coffee dot com or post it on my Facebook or Twitter. I’ll be happy to raise my coffee mug to you with a celebratory WHOO-HOO!
The “How to Budget” series posts are:
- How to Budget: Why?
- How to Budget: How – Part 1
- How to Budget: How – Part 2
- How to Budget: Irregular Income
- How to Budget: Emergency Fund
- How to Budget: Getting Out of Debt
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