This post is by Greg Johnson of Club Thrifty.
It sucks up your paycheck. It sucks up your energy. Most important, it sucks up your options.
In our new book, Zero Down Your Debt, my wife Holly and I explain how our debt was holding us back. It was destroying the power of our paychecks, tying us down to our jobs, and forcing us to work longer and harder to pay for things we really couldn’t afford. Debt kept us from chasing our dreams, and it’s probably doing the same to you.
Debt may seem normal. Each individual piece might even appear affordable. But, when you add it all together, it’s killing your ability to save.
I mean, how can you get ahead if you’re constantly working to pay off debt? How do you save money if most of your paycheck is already spoken for? When debt rules your life, it’s tough to make ends meet – which is why it’s so important to destroy it right away.
That’s how it was for us. In essence, we traded our immediate wants for the cost of our future freedom. Our debt was a prison sentence created entirely by us. The only way out was to make some radical changes in how we handled and thought about our money.
If you’re tired of living paycheck to paycheck, fed up with frittering away your money, and sick of feeling like you don’t have options, it’s time to seize control of your finances. There’s no better place to start than by destroying your debt.
It might feel overwhelming, but you can do this. By organizing big goals into small, achievable tasks, those huge hills don’t seem so hard to climb. Here’s how to start confronting your debt right away.
Determine the Damage
Before you can reach your destination, it helps to know where you’re starting from. So, the first step to dealing with debt is understanding how much you have. Take some inventory and come face-to-face with what you owe.
Yes, this might be painful. It may feel overwhelming. Trust me, it’s necessary. You’ve got to know what you’re dealing with. So, grab your bills and total it all up. Write it down. Stare at it. Let that number sink in. This is your debt… and now you’re going to destroy it.
Harness the Power of Your Paycheck
Chances are, you already have the money you need to live comfortably; you’re simply not using it efficiently. In Zero Down Your Debt, we discuss how your paycheck is the most powerful wealth building tool in your arsenal. Debt is its mortal enemy. To unlock the full potential of your paycheck and seize control of your money, you need to reclaim your income from the jaws of debt. The best way to do that is with a written budget.
I know what you’re thinking, but a budget isn’t something to be despised. It isn’t something that restricts your every move. When used properly, it actually creates more freedom. A budget is simply a plan for the month. It helps you design a monthly strategy for your income and expenses. By making conscious decisions about your money, you’ll spend less on things you don’t want so you’ll have more to use on things you do.
My favorite type of budget is called a zero-sum budget. At the beginning of each month, give every dollar you make a purpose by earmarking it for expenses or savings. When your income minus your expenses and savings equals zero, you’ve successfully completed your plan! It’s super simple and will go a long way toward getting your finances on track.
Now that you’ve started a budget, it should be easy to see where your money is going every month. With your monthly expenses clearly listed, search for areas where you can save.
Question each and every expense. Determine if those expenses are necessary. The more you cut, the more money you’ll free up to pay down your debt. After that, you can use it for things you really want.
Each of us has unnecessary expenses. In our case, we were spending way too much on things like cable TV and restaurants. These items weren’t things we valued, so we nixed them. Once they were gone, it felt like we’d given ourselves a raise. Then, we used that money to fund our savings goals and debt repayment.
Build an Emergency Fund
One of the biggest reasons budgets founder is because we fail to plan for emergencies. Most of the time, we’re super excited to put our new budgets to work. We use it for a month or two… and then trouble strikes. An emergency rears its ugly head, the unexpected expense sends our new budget into a tailspin, and we decide budgeting can’t work for us. Phooey!
Resist the temptation to throw the baby out with the bathwater. Starting a budget can work wonders on your finances, but only if you stick with it. Since you already know that unexpected expenses will eventually arise, why not budget for them?
Having an emergency fund is key to successful budgeting. Think of it like an insurance policy, protecting your budget from the inevitable emergency. Try saving at least 10% of your take home pay until you’ve got $1,000 stashed away. Once your debt is paid off, fully stock your emergency fund with 3 to 6 months’ worth of expenses. This will help get you through even the toughest of times.
Create a Debt Repayment Plan
Now that your financial foundation is set, it’s time to pay down that debt. To keep you motivated and in control, focus on paying down one debt at a time. Remember, large goals are accomplished by completing small tasks.
Start by organizing your debts from smallest to largest based on the total amount owed. Now, make the minimum monthly payment toward all of your debts EXCEPT on the smallest amount. We’ll work on that next. (You can also organize your debt based on interest rate, working from the highest to lowest rate instead.)
Now, check in with your budget. Take all of your available funds, including the extra money you saved by questioning and cutting expenses, and pay them toward your smallest debt. When you’ve paid off that one, move on to the next smallest. Use the minimum payment plus the additional money you just freed up by paying off the first debt. Continuing doing this until you’ve got every debt wiped clean!
If you’re drowning in debt, you’re not alone. It may seem overwhelming, but with the right tools, you can reclaim your income and build a life you’ll love. Creating a budget, cutting expenses, and building an emergency fund helps unlock the powerful potential of your paycheck. And, when you’re making the most of what you earn, it’s much easier to pay off debt and live life on your own terms.
You can do this! By committing to the process, creating a plan, and setting small achievable goals, you’ll zero down your debt and be back in the black in no time. For a step-by-step plan on using these techniques together, grab a copy of Zero Down Your Debt here.
Greg Johnson is a writer and entrepreneur who leveraged his online business to quit his 9-5 job, spend more time with his family, and travel the world. As a money nerd, he focuses most of his writing on topics that relate to budgeting, frugality, and investing. With his wife Holly, Greg co-owns two websites, Club Thrifty and Travel Blue Book.