Well, it’s the first month of another new-year and what you need now is the action plan to see your goals through to the finish line. For many people, they choose “get out of debt” as their primary goal in 2010. In order to get out of debt you need a simple action plan. I put together these 5 simple steps that I hope you will take seriously. I want to promise you that if you take these steps seriously, your life will improve and everything will become more simple.
Getting out of debt involves 5 steps:
- Understand Your Relationship with Money and Debt
- Stop acquiring new debt
- Establish an emergency fund
- Implement Your Debt Snowball
- Start Now!
Let’s break each of these steps down and see how we can help you get on track to get out of debt in 2010.
1. Understand Your Relationship with Money and Debt
There is a reason I have this as Step 1. (Getting and understanding this first step will make the rest of these steps so much easier.) Okay, I am going to get a little “psycho” on you here. One of the things I will ask you to consider is that up to the present moment you’ve acquired certain beliefs about money and debt. These beliefs have led to certain behaviors and in particular, they currently define your relationship with money and debt. So, let me ask you; is it a good relationship? Is your money serving you and working in your best interests? Or, perhaps you need to improve this relationship. If so, that’s ok; just recognize what is driving you. Speaking about relationships, ask yourself this; how do you feel about your credit cards? Does simply thinking about them, bring pain? Well, if you have a maxed out card of say $25,000 at 12-15% interest, of course you aren’t going to have a good relationship with money. Don’t worry. Stay with me and we can fix that, as long as you are willing to get started.
For years, I was running around and not understanding my relationship with money and debt. Here is something to remember: We either let money serve us by telling it what want it to do for us, or, we become a “slave” to our debt and bad habits with money. In order to get out of debt, you need to be honest with yourself and your relationship with money. Who is running the show? Have you ever wondered why lottery winners usually end up broke? Yep; they have a bad relationship with money.
Ok, now that we have the heavy stuff out of the way, time for a simple step!
2. Stop Acquiring New Debt
It’s as simple as making the decision and having enough resolve to see it through. The key aspect here is that you need to make this decision for yourself and on your own. I say this because there will always be other people telling you that a little debt is okay, the urge that comes with those crazy department store offers and that voice you are constantly arguing with. Well, I am here to give you my opinion and I say, ignore the advice of using credit cards for a safety net.
That is really just an excuse and partially due to your beliefs with money and debt (See #1) up to this point. Also, don’t use the argument that you need to keep credit cards for the bonus points, etc. That is an excuse and a trap door for keeping you in debt. Stop making excuses and get rid of the credit cards. Don’t worry, I know what you’re thinking; what about emergencies? I have that covered.
3. Establish an Emergency Fund
Now I am a little “crazy overboard” when it comes to this step. If you ask any of my close friends, they will confirm that I live well below my means. And I can personally tell you that I go to a bit of an extreme with how much I consider is appropriate for an emergency fund. Once you meet a certain threshold, it’s really a personal choice as to what brings you peace of mind. For some people the amount of the emergency fund is going to be 3-6 months of living expenses and for others it may be 2 years. This step will probably take you several months or maybe even a year, but that’s okay. In order to get out of debt it can take as little as a month and in some cases up to 5 years.
The reason you have an emergency fund is to cope with those unexpected expenses that always come in the form of a car repair, kid’s expenses for school, medical emergencies, layoffs, etc. Don’t kid yourself and think you can avoid these things. Ideally, you will start off with a goal of $1,000 and then work your way up to an emergency fund that covers at least 3-6 months of living expenses. How many months of expenses you save beyond this is a personal decision.
The answer is found by asking the following question: “How many months of living expenses will I need in order to feel comfortable and have peace of mind if I should get laid off or have an unexpected life event occur?” Listen to your gut here. One last note on this step; this money is not for vacationing, buying tickets to the game, shoes or that ideal date, it is to be saved. Remember you are buying peace of mind and that is priceless.
4. Implement Your Debt Snowball
Now that you’ve laid the foundation, it’s time to get to work! This step may take several months or even years but remember by just getting started things will get dramatically better. At this point, you’ve put a halt to the credit card habits and you have an emergency fund and you have a better relationship with money. Finally, you are beginning to change your relationship with money and take control.
Most experts advise to pay your high interest debts first. There’s no question that this makes the most sense financially. But if it were really that simple, you wouldn’t be in debt in the first place. In order to get out of debt you need to score some early wins and get the (snow) ball rolling.
Here are the steps of the debt snowball:
- Order your debts from lowest highest balance.
- Budget a certain amount of money to pay toward debts each month. (eg. $50,$100,$500)
- Pay the minimum payment on all debts except for the one with the lowest balance. This will keep you from receiving late fees.
- Throw every other penny at the debt with the lowest balance.
- When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.
I can tell you that this method really helps you gain momentum along with the feeling of relief each time you get one more credit card off your back.
5. Start Now!
Today is not too soon. If not now, when? Make the decision to start today, right now. Don’t let this go till next payday, next weekend or next year. Make the decision right now!
Please share any other ideas you have that is helping or helped you get out of debt.