Getting Out of Debt
Since getting out of debt is one of the benefits of budgeting, it seems fitting that a follow-up article should focus on getting out of debt. Being in debt hinders both your financial freedom and your financial future. Benjamin Franklin once said, “When you run in debt you give another power over your liberty.” This article focuses mainly on getting out of various non-secured debt (like credit card and student loans), since that is the main type of debt that people struggle with.
Before we talk about some practical strategies for paying off debt, we need to change the way we think about money and debt. Debt is the visible symptom of an underlying problem. Many people work hard and pay off all of their debt, but because they don’t change the way they think about money, they end up back under the same burden of credit card debt. They fixed the symptom, but the problem remained.
Credit card debt is easy to get into because we don’t think about cash and credit cards the same way. There was a scientific study last year where researchers watched people’s brain activity when they bought things with their own money and with their credit cards. They found that people were much more likely to buy things with credit than with cash. When they bought things with cash their brains made a decision based on two basic emotions: the pain of giving away the money they had versus the desire of what they were about to purchase. Buying on credit, on the other hand, lessened the pain part of the equation and the balance tilted toward their anticipated pleasure.
If you have unpaid credit card debt, you have probably already found out that credit cards are traps, not tools. Or you might be thinking, “My balance on my credit card isn’t that high. I could pay it off in a couple of months if I really wanted to.” If it really isn’t that big of a deal, then just pay it off. You will truly be better off.
Cash is king but credit is a slave driver. Unsecured debt is your enemy. We have all heard the phrase, “debt can be a tool.” No, money is the tool. Debt is a way for people who lend money to make money, and those people are using money as a tool.
Hopefully I’ve convinced you by now that your excess debt is dragging down your life and your future. Now, here are some practical ways to get rid of that debt.
FIRST, stop using credit. In order to get out of debt you must first stop acquiring new debt. This may seem obvious, but in the paragraphs that follow if you find yourself making excuses about why you can’t take the recommended steps, you will probably not stop acquiring new debt.
The most fool-proof way to stop getting more credit card debt is to cut your cards in half. I know that’s drastic. You’re probably thinking, “But I need one for emergencies!” Now think about the last time you had an emergency where there was absolutely no other way out of it except by using a credit card. I can honestly say I have never had one.
My husband’s brother was recently on vacation and left his wallet at his hotel. He didn’t realize this until he tried to fill up his gas tank 200 miles away. Alone, with no money, a car he couldn’t drive and hundreds of miles from family, he was able to get enough money to get back to his wallet. (Thanks, Western Union!) If you have a true financial emergency there are probably other ways out of it than using credit cards.
This is where you have to get hard on yourself. If you cannot pay cash for it, you do not need it—really, you don’t.
Next, stop all your automatic payments, like gym memberships, Netflix, etc. (Right now your mind is going into excuse overdrive, right?) I know this isn’t feeling good at the moment, but if you truly want to be free from this debt, you need to cut out the excess until it’s gone. There are alternatives to going to the gym—like pushups—and you can check out movies for free at your local library.
Phew, that was pretty rough! The NEXT STEP is to set-up a budget. If you are married this needs to be a joint venture. If you have children, have a “family meeting” over your new lifestyle that you are going to implement to get out of debt. This will be an excellent lesson in finances for your children. Even though they may grumble when you start saying “no” to those new shoes, they will respect you for being open and honest and probably learn something about self-discipline and self-sacrifice by watching you. They will also come to understand the value of hard work (Proverbs 14:23) and the value of a dollar.
View your budget as a tool to get to the financial freedom you desire, not as a restrictive exercise that keeps you from doing what you want. There are many resources online for budgets. (March’s finance article here at Center 31 was all about budgeting. Click on Budgeting 101 in this section of the website.) Most online resources are free, so use them!
The NEXT STEP is to set up a rolling debt payoff plan. This is also referred to as a debt snowball. The idea is that you pick a credit card to start paying off. You put as much money as you can toward that card and pay the minimum payments on all other debt.
When that card is paid off you put all you can into the next card. This should be the amount you were putting into the first one plus the minimum payment of the second one. Continue to make minimum payments on everything else. This might take a while but keep at it. It will be so rewarding to not have that debt hanging over your head!
Don’t forget to reward yourself when you have hit some milestones. You might want to treat yourself (using cash of course) to something you’ve been wanting or take a night out after you pay off your first credit card. It’s good to celebrate progress!
It’s also a good idea to call your credit card companies and ask them to lower your interest rate. Most credit cards have special introductory rates, so look for a card with a better deal and call your current credit card companies and ask them to match it. If they don’t want to work with you there are plenty of cards out there at 0% for the first year. Look into getting one of these cards and transfer your balances over.
You can also find ways to supplement your income and use that money to pay off your debt. Sell things on eBay. It’s easier than you think, but if you don’t have a digital camera you can always take a trunkful of junk to an “eBay store” near you. If possible, get another job. A couple of nights a week waiting tables or every other Saturday cleaning someone’s house can really help you make a quick dent in that debt. Keep in mind that you shouldn’t get so busy that you neglect your relationship with God or your family. Use any extra money you get, like the surprise birthday gift from Aunt Jane, an IRS refund, this year’s economic stimulus rebate, the $20 you found in the pocket of your shorts from last summer, and put it toward your debt.
Once you’ve flipped debt on its head you’ll become a saver instead of a debtor. (We’ll talk about saving next time.) The best way to save money is to spend less than you make. Simplify your life and curb your spending. This will take some practice but embrace the challenge. It will dramatically change your financial future and you will be happier for it.
Other reading you might be interested in:
The Richest Man in Babylon
George S. Clason
Ageless financial advice told as a parable of the merchants of Babylon. Makes its advice seem so clear when seen through someone else’s eyes.
The Way to Wealth
Benjamin Franklin
A collection of quotes and sayings from Poor Richard’s Almanack. Great quotes, timeless advice. Emphasis on being industrious, shunning laziness, self-discipline.
Note:
Lest you come away thinking that I’m firmly against all debt in all
forms, I’m not. Most of us would be renters for life if we didn’t get
into debt to buy a home. Many of us couldn’t go to college without
some kind of debt. I personally have more than one credit card. Debt
is a two-edged sword: it can be useful provided it’s backed up by sound
financial sense, but when it’s misused it can cut deeply.
Quotes:
“Silks and satins, scarlet and velvets put out the kitchen fire.”
Benjamin Franklin
“A ploughman on his legs is higher than a gentleman on his knees.”
Benjamin Franklin
“Rather go to bed supperless than rise in debt.”
Benjamin Franklin
Written by Toni McCarty, the wife of Daniel McCarty, mother of three, and a certified public accountant.
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