By Jackie Beck, The Debt Myth
Many people believe getting out of debt is all about math: spending less than you earn and paying the difference to your debt until it’s gone. In truth, becoming debt free for good is about more than math. It’s about changing your money habits and the way you view debt, plus putting in some good old-fashioned work. Here are the steps that can get you there.
Wiping out debt: the big picture
First let’s talk about the big picture — things that will truly make a debt-free life possible long-term.
Change the way you see debt. The use of debt as a tool is ingrained (and heavily pushed) in America, but if you want to become debt free, the first step is to admit that it’s not a tool that works for you. Yes, you can get things now and make monthly payments — but that only works when everything is perfect.
Since we don’t live in a perfect world, it’s time to start viewing debt as dangerous. It’s risky and expensive. (Even 0% interest debt — because what happens if you can’t make your payments? Or you miss that final payment deadline?) Commit to a new attitude of only buying things with money you already have, and you’ll have made the most critical change in wiping out debt.
Learn new money habits. The next most important change involves learning new money habits. “Only buying things with money you already have” means “No more borrowing.” Period. Work at getting in the kind of financial shape that will allow you to avoid borrowing.
Build up at least a small emergency fund, if you don’t have one already. (Start with whatever you can scrape together and go from there.) Make sure you’ve got a plan in place for how you want to spend your money. This is your monthly budget. Finally, track your spending (just write down what you buy as you buy it) so you can see where your money is really going. This will help you stay on track with your budget and find extra money to put toward debt. Reducing your expenses (at least temporarily) and increasing income can help, too.
Wiping out debt: the nuts and bolts
As you’re learning and implementing new money habits, of course you’ll be actively paying down your debt at the same time. Remember that doing so takes time, and that you don’t have to be perfect. You just have to be persistent. Here are the nuts and bolts of getting your debt repayment plan together:
What debts do you have? Start by identifying all of your debts. Find out the following information for each debt:
- The name of the creditor
- What kind of debt it is (such as credit card, car loan, student loan, mortgage, home equity line of credit, personal loan, etc.)
- How much you owe
- The interest rate
- Due date
- And your minimum monthly payment
Lay it all out there, and if you’re feeling brave or are the type to be scared straight, add it all up when you’re done.
Organize your debts. Now that you know what your debts are, it’s time to decide in which order you want to pay them. There are several schools of thoughts on this, but I’ll tell you a little secret: Don’t get overly caught up in finding the “ideal” order. If you get stuck, just pick a debt (any debt) to focus on first and go from there.
Typically you’ll put your debts in one of the following orders:
- Lowest balance to highest balance: Best for most people because of the quick wins and motivation factor
- Highest interest rate to lowest interest rate: Good if you are a very persistent person or have extremely high-interest debt
- Custom order designed by you: Good if there are specific debts that you really want to pay off ASAP.
Start knocking out those debts. Once you’ve gotten your debts in order, start knocking them out as quickly as possible. That means using the debt snowball method. To do so, make minimum payments on all of your debts except for the first debt on your list. Send the minimum payment to that debt, plus as much extra as you possibly can each month until it’s gone. That’s when the magic starts.
Once the first debt on your list is repaid, you’ll have more money available to send to the next debt on your list. This is because you’ll be able to take what you had been paying to debt #1 and apply it all to debt #2. The process continues as you pay off each debt, with the size of your payment growing like a snowball rolling downhill each time. Until one day, you are DONE.
Jackie Beck is so passionate about getting out of debt that she not only paid off her house, but she created an app called Pay Off Debt to help others get out of debt, too. If you ever want to talk to her, just give her a shout.
Image by Renjith Krishnan, freedigitalphotos.net.