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Saturday, March 29, 2014

12. What are steps to get out and stay out of debt?

Here's a basic guide to getting out and staying out of debt. There are quite a few more resources out there but this is a good starting point. 




1. Make the Resolution: Spend less than you make. This is a tough one. Spending more money than you earn is common practice in the U.S., and increasingly in other countries around the world.

Learn to just say “No.” You must learn to say no to yourself, your spouse/partner, and your children. This is called delayed gratification. It is essential to getting out of debt. A) Are you ready to make the resolution?

Live like no one else [today] so you can live like no one else [in the future debt free].” – Dave Ramsey



2. Educate Yourself: The local library is a great resource. If you eventually want to purchase these Amazon.com or Half Priced Books is a good place to look. We used Dave Ramse's methods and went through Financial Peace University twice (first the audio CD and then the Dvd series) and I can tell you it works. We became debt free in the summer of 2011! We have since purchased a house so we do have a mortgage. B) Have you considered taking DR’s Financial Peace University course? The new FPU DVD course is only 9 weeks (1.5 hour sessions) long now instead of 13 weeks (2 hours sessions).

Some good personal finance books:

• The Total Money Makeover By Dave Ramsey
• The Millionaire Next Door By Stanley and Danko
• The Richest Man in Babylon By George Samuel Clason


3. Motivate Yourself: Getting out of debt takes commitment, energy, and intensity. This will require sacrifices. Set clear and achievable goals on one page or less. (I’d recommend the “The One Minute Manager” by Kenneth H. Blanchard and Spencer Johnson.) Put these goals on the fridge or as you walk out the door so you see them every day. Starting a financial journal on the GRS forum is a great idea. Reward yourself with little treats as you accomplish your goals. Normal = spend like there is no tomorrow. Being different or even “weird” by seeking to become debt free is a good thing. C) How are you and/or your spouse/partner motivated?


4. Organize Yourself: Create a balance sheet. This helped us a lot when looking seriously at getting out of debt. D) What is your total debt? How much is the interest rate associated with each debt? What is the total pay off? What is your total Net Worth? How are you tracking your expenses (Excel Spreadsheet? Mint.com?)

Assets(stuff you own) – Liabilities(debts) = Net Worth


5. Choose: D) How are you going to get out of debt? – Lowest balance (Debt snowball) or highest interest (Avalanche).


If the debt snowball…

1. Create a list of all of your debts: credit cards, car loans, student loans, mortgages, etc… (Note: You probably need to exclude your mortgage from the list until you have the other debts paid off)
2. Next to each one write down the total balance owed.
3. Re-order these from smallest to largest debts (use Excel to make this simpler.)
4. Pay the minimum payment on all of the debts – except the smallest one.
5. Put every extra dollar you can find towards paying off that smallest debt.
6. Celebrate like crazy when you get that first debt paid off.
7. Take the amount you were paying towards the first debt and put towards the next smallest debt. Do this until this next one is paid off.
8. Celebrate again!
9. Continue this process until each one is paid off.

If the avalanche method…

1. Create a list of all of your debts: credit cards, car loans, student loans, mortgages, etc… (Note: You probably need to exclude your mortgage from the list until you have the other debts paid off)
2. Next to each one write down the total balance and interest owed.
3. Re-order these from smallest to largest interest rates (use Excel to make this simpler.)
4. Pay the minimum payment on all of the debts – except the one with the highest interest.
5. Put every extra dollar you can find towards paying off that loan with the highest interest.
6. Celebrate like crazy when you get that first debt paid off.
7. Take the amount you were paying towards the first debt and put towards the next debt with the second highest interest. Do this until this one is paid off.
8. Celebrate again!
9. Continue this process until each one is paid off.


6. Cut Expenses: Sell something. Create a budget. Cut. Cut. Cut. F) What are some ways you can cut expenses out of your budget? See savings tips starting with this post. Once you’ve created your budget evaluate it periodically but most importantly - Stick to it!


Expenses > Income = Bad & Expenses < Income = Good


7. Spouses/Partners get on Same Page: While every couple is different, you could consider reading the same materials, talking openly about your feelings, and sharing like goals. When you share goals, you are usually more likely to take the necessary steps to accomplish your goals. If you or your spouse/partner are not on the same page, the process will be a lot more difficult. Communication is the key. Determine not to live life in the bondage of debt. Credit Cards are not the answer. G) Are you and your spouse/partner on the same page? What would it take to get on the same page?


8. Get an Accountability Partner/Coach: When you are getting out of debt, you want to be influenced by people who support your decision. Not everyone does. This can even include family. Hang out with friends who are frugal. Befriend people who enjoy movies at home instead of in the theater. H) Who do you know would be a good role model for you in getting out of debt and holding you accountable to your goals?



9. Save up for an Emergency Fund: $300 (if you make less than $15,000 a year), $500 (if you make more than $15,000 and less than $24,000 a year), or $1000 (if you make more than $24,001 a year) respectively. Do this quickly hopefully in less than 2-3 months. Emergencies can and always will happen – car repairs, home repairs, hospital bills, etc. It is better to be prepared for when the emergencies happen. I’d say a good goal would be an E-fund with 3-6 months of household expenses. We have 9 savings accounts we use to save for emergencies and expenses we know will happen – car repairs, new car, new computer, medical bills, baby related, purchases, vacation, etc. We don’t even touch our E-fund anymore for most emergencies. I) What system do you think would work best for you?


10. Increase Your Income: Seeking a raise is a good place to start. Getting a second job part-time is a good idea too. If a couple perhaps the spouse/partner who isn’t the main bread winner could get a part-time job making $1000-2000 per month. Or what about having a yard sale? Hopefully this extra income will lead to you paying off your debts sooner. Your income is your greatest asset. Time to stop giving other people portions of it through interest and fees! J) What ways could you earn extra income?



11. Set Financial Goals: Goals are the fuel that propel you through the slow days of debt repayment. Hey, the process will get hard and it will seem to drag on at points. You’ll want to quit and give up. You’ll start to think that your old way of living wasn’t so bad after all. These are the days you need to look at your goals and remind yourself of why you are making the decisions you are making. Make sure your goals are SMART – Specific, Measurable, Attainable, Realistic, Time specific. K) What goals do you want to establish for 2012? What are your long term goals over the next 5-10 years?


12. Stop Making Excuses: Sometimes, not always, we make excuses. I would get out of debt but … [fill in the blank with poor excuse].


Right now you have a perfect opportunity to change your life and create a new financial identity. Accomplishing goals always feels great. Imagine how you would feel if you paid off all your debt and didn’t owe any money to anyone! You are on the right road to change your family tree! L) Are you ready to make the changes necessary to get out of debt?


Have something to add? What has worked for you to get and stay out of debt? Leave a comment!