Finance and Fat » Get Out of Debt Series

Get Out of Debt in 9 Steps # 9 – Be Patient and Don’t Give Up

Eden — Tue, 27 Nov 2007 11:01:26 +0000

No matter how well you have done with budgeting, cutting your spending, and tracking everything it is extremely easy to get bogged down in the daily grind and feel like you aren’t getting anywhere. I believe this is the hardest part of the process. Depending on the size of your debt balance and the size of your income, you could be looking at years to get out of debt, maybe decades.

There are essentially two levels of debt freedom. One is obvious- having no debt at all. The other is being debt free except for the mortgage. This distinction is made because a mortgage is generally thought of as good debt (I don’t agree, at least not on a long term basis), but saving up the cash to pay for a house is rather difficult and most of us end up with a mortgage when we want to own a home. I want to be 100% debt free and that is my goal, but I will feel a lot better about my debt load once I am debt free except for the mortgage.

Right now, seeing my debt balance gives me a sickening feeling deep down and really motivates me to work hard at getting out of debt. I don’t know if that feeling will go away when I am down to just a mortgage (frankly I hope it does not), but some of the pressure should be off by that time. That pressure and sickening feeling can both motivate you and discourage you. You need to recognize that you have these feelings and think about why you feel that way and what you need to do to change your situation. Nothing will improve if you don’t take action to improve it.

You really need to think about what being debt free means to you and most importantly what it means to you in the long term. For me, being debt free is about freedom. Freedom to not take a job because I need the money and it is a tolerable way to pay the bills. I don’t want to settle for that, but at this point in my life I need to make that choice. I have so much debt that I need my ‘day job’ plus extra work to make my way out of debt.

Don’t get all fired up and work hard for a month and then fizzle out. That is exactly how I have started just about every life changing process I have ever attempted in the past. It’s scary to say things are different this time, but things really are different this time. I am going slowly and making real habit changes. Not superficial changes that only last a short while. You can’t succeed by doing that. You need to go slowly, you need to make small changes that you can handle, and you need to maintain those changes. The steps you take toward becoming debt free need to become habits, natural parts of your life that you live on a daily basis. You need a solid foundation. That is why you should go slowly. Don’t expect to get out of debt overnight. Think about how long it took you to get into debt and allow plenty of time to get out.

In this Get Out of Debt Series, I have outlined many tools and methods for making a successful financial turnaround. I believe this series can be the solid foundation you use to support your journey out of debt. Everything I have talked about here is exactly what I am doing and I know that it works. I know that it is now only a matter of time until I am done with debt. Start your journey today and please feel free to post comments on this site or contact me via email if you need help or encouragement along the way.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 9 – Be Patient and Don’t Give Up

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Get Out of Debt in 9 Steps # 8 – Make Yourself Accountable

Eden — Mon, 26 Nov 2007 11:01:14 +0000

Without accountability your plan to get out of debt is likely to fail. Unless you are a super-motivated, goal-oriented kind of person, you need a form of accountability to find success with your finances. Be honest and know yourself and know your limitations. Think about efforts you have made in the past to get out of debt and why those efforts failed.

I don’t know about you, but I am not that super-motivated, goal-oriented kind of person (at least not yet). I need a form of accountability to be successful in achieving my goals.

Accountability starts at home- unless you are single you probably have someone in your house that you can regularly discuss your finances and goals with. If not at home, find a close friend or relative who you can share this with. You may be embarrassed and I can certainly relate to that, I have yet to tell most of my friends or family about my situation or about this web site. However, I have found all of the accountability I need without involving anyone other than my wife (and all of you folks on the Internet).

You can find anonymous accountability by starting a blog about getting out of debt. I did it and so have hundreds of other personal finance bloggers. You don’t have to make a part time job out of it. You can just talk about where you are now, where you want to go, and document how you get there. You can start a blog easily and for free with blogger.com or wordpress.com. If you don’t want to make that level of commitment you could join a personal finance forum or find a local debtor’s anonymous group or consider Dave Ramsey’s Financial Peace University (often done for free at churches, also available online for a fee, which includes forums).

It may seem odd given the anonymous nature of this blog, but the accountability I have created here is an amazingly powerful force in keeping me on track. I may not know everyone personally who reads this blog, but I know that there are real people out there and this is all very real to me so it really matters to me that I keep up the hard work and stay on track with my finances. Obviously, discussing our finances with my wife regularly is great accountability too. I think the blog adds an extra layer of accountability though, in case we both decide to make a bad decision there is a third party out there waiting to offer advice and criticism.

Figure out what works for you, but find a reliable source of accountability and use that source regularly. I absolutely believe that is critical to success with getting out of debt and turning your finances around. If you try to do this all alone, it can become too easy to give in to temptation and break the budget. Don’t be afraid to ask for help!

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 8 – Make Yourself Accountable

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Get Out of Debt in 9 Steps # 7 – Visual Reminders to Track Your Debt

Eden — Sun, 25 Nov 2007 12:00:25 +0000

Making a financial turnaround and getting out of debt is likely to take a long time- I am faced with several years to pay off my non-mortgage debt and probably more than 10 years to be completely debt free. Seeing that long time span when I want to badly to be out of debt now can feel overwhelming or disheartening at times. I have found the best way to overcome those negative feelings is to make a visual debt reminder and look at it daily.

I have my budget spreadsheet for tracking debt that I look at regularly (above). I have this website with my debt snowball published for the whole world to see. I also have a white board on the refrigerator at home where I keep my total debt remaining and the amount I have paid down since starting this financial turnaround. It’s a safe bet that you will see your refrigerator each day and this is a great way to keep your goals in sight. You could even just write your numbers on a piece of paper and tape it to the refrigerator. You could easily take that down if you don’t want family and friends to see it. I would recommend leaving it up though, I think it could open the door for some interesting conversations. However, I must admit that no one who has been in my house since I put up the white board has asked about it.

The most important thing I have learned about setting and tracking goals is to write them down and review them regularly. I can really feel the power of this concept at work when it comes to my visual debt reminder. You need to be reminded daily about why you are making the sacrifices you are making and where those sacrifices will get you some day if you stick with them. Walking out the door each morning knowing that I have X amount of debt left to pay off is a great reminder. At the same time, I don’t want to feel buried by the debt so I also take the time to look at the amount of debt I have paid off so far. Without seeing these numbers daily I think it would be very easy for me to make excuses or get lazy and fall behind on my progress.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 7 – Visual Reminders to Track Your Debt

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Get Out of Debt in 9 Steps # 6 – Track your spending and keep your budget updated

Eden — Sat, 24 Nov 2007 12:00:25 +0000

Now that you have made a budget and you are living below your means, you need to keep track of your spending in order to be sure you stay within your budget and don’t spend more than you earn.

I use Quicken to track my spending, entering my receipts and transactions on a daily basis. You don’t have to use Quicken, Microsoft Money is a common alternative, or you can do this with just paper or a spreadsheet as well. Once a week I create a report with Quicken and import that data into my Excel budget spreadsheet. I enter my spending for each category and review how much money I have left in that category for the month (or recognize that I have over spent somewhere). Doing this weekly prevents my spending from getting too far out of control and it provides flexibility to change my budget if the unexpected occurs or if my needs change during the month.

In my earlier post about budgeting, I uploaded a simple spreadsheet sample to help you get started. Now I have an updated, slightly more complicated version that includes fields for tracking your money each week. Take a look at the new version to quickly get up and running with a budget and weekly tracking (Excel, opens in new window).

The key to using this budget spreadsheet is to start the month by filling in the ‘Plan’ columns with your best estimates. Then each week (I update mine every Sunday afternoon), put in your actual numbers for each category for the week. The ‘Total’ and ‘Difference’ columns at the end of the row will help you to see where you stand and how well you prepared for the month.

In addition to using a tool to track your spending, have a regular ‘budget meeting’ with your spouse, your kids, or anyone who helps you to stay accountable. Make sure that you are scheduling a time to discuss where you are at with your spending, how the month is shaping up with your money and any areas of concern. Communication is critical, and frequent updates help you to stay on top of things. If you keep up with this you shouldn’t have any ‘surprises’ or mistakes that lead to bank fees or bounced checks or anything else. This is not a time to place blame on anyone if mistakes have been made, but rather a time to discuss what went wrong and what went right in a comfortable way. You need to be a team!

Tracking every dollar spent and assigning it to a category may not work for everyone. It works for me because I’m the computer nerd in the house and I like to collect and analyze the data. If you aren’t wired this way, consider much more broad budget categories that you fund at the start of the month or with each paycheck. Maybe you put $100 in your pocket (or an envelope) for food and that covers your groceries and eating out for the week. You don’t have to track all of those dollars, but you do have to commit to the fact that this is food money and you aren’t going to mix in dollars from other categories and spend it on unrelated things.

You may think the budget process I covered is too tedious, but I would recommend trying to track every dollar for a month or two and see how it goes. At the very least, you’ll have a better understanding of where your money is going. If that’s not for you, just be honest with yourself about where you are assigning your money and don’t stray too far from your plans.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 6 – Track your spending and keep your budget updated

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Get Out of Debt in 9 Steps # 5 – Live Below Your Means

Eden — Fri, 23 Nov 2007 12:00:46 +0000

Live below your means is basically the mantra of the personal finance improvement world. This could be step number one in my Get Out of Debt series and it could even be the only step. The reason it’s not is that most of us don’t really understand what it means and it is much easier said than done. Lets be honest, living below your means isn’t the American way anymore. That is sad and I fear this behavior can’t last much longer (we have to get smart some day). When I got a job and went out on my own I thought I was supposed to finance a new car, sign up for credit cards, and buy what I wanted as long as I could make the payments. That’s how I thought I could afford something- if the payments fit in my budget, not how much the thing I was buying actually cost.

When I started my financial turnaround, I knew the phrase ‘live below your means’, but I really had no idea how to do it. I probably still don’t fully understand it, but I am at least putting it into practice now. It is an amazing change and I can’t believe I didn’t live like this before. You really have to embrace it and know that it is the only way you will get out of debt and build wealth. It’s common sense and it seems so obvious, but for some reason people just don’t get it. I didn’t get it and most people I know don’t get it (or they understand it but refuse to live that way).

I admit that it is difficult to do in our consumerism culture, but you must recognize the culture we live in and take steps to break free. People may think you are a bit strange when you don’t come home with a shiny new car every couple of years (unless you are paying cash for those cars) or when you don’t buy the trendy new thing that everyone wants (flat screen TVs these days), but you will likely learn to embrace being the ‘strange’ one in your circle of friends. It is certainly easier to do when you know you will be free from debt some day and financially prepared for anything life has to throw at you.

Living below your means can be accomplished through frugality or by earning more income (assuming you stop your spending at some level below it). Doing both is obviously the most powerful way to accomplish your goals and make the most progress with your finances. You have to choose the way you get there based on your personal values and what is most important to you. My advice is to work hard while you can and live frugally at the same time so that when you get a bit older you don’t have to work so hard and you already have a frugal lifestyle in place. Just don’t fall into the trap of thinking that you can always out-earn your spending. You can only work so many hours during the day yet there is really no limit to the amount of money you can spend. You need to understand the trade off of your time for the dollars you earn and how much of your time it costs you to buy the things you want. Find a balance that works for you, but don’t let our consumerist culture tell you what that balance should be.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 5 – Live Below Your Means

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Get Out of Debt in 9 Steps # 4 – Create an Emergency Fund

Eden — Thu, 22 Nov 2007 10:01:57 +0000

The personal savings rate in the U.S. is currently under 1%. Not quite negative territory as we often hear in the media (it was actually only negative for one quarter in 2005), but 1% is clearly not enough. Personally, I never had much more than $100 in a savings account until I started my financial turnaround and saved my basic $1,000 emergency fund. I do have small retirement savings as well, but if I were to look back at the money I have earned in my life versus how much I have now, it’s quite easy to see that my savings rate is less than 1%. We can’t allow this to continue!

If we know that the national savings rate is under 1%, odds are good that you too have very little cash saved for emergencies. Basically, that makes you ‘normal’, but to get out of debt we need to break away from the ‘normal’ American lifestyle.

If you haven’t saved any money yet, saving $1,000 probably seems like a daunting task. It did for me, but once I committed to saving the money it didn’t take very long at all. I started by setting aside $250 and opening an ING Direct Orange Checking account. I started with $250 because I had referral code that earned me a $25 bonus and my referrer received $10 (be sure to ask your friends if they have an ING account and a referral). I like the Orange Checking account because the interest rate is decent and you can use the debit card to handle your emergencies. ING has a very nice online interface as well and I am happy with my choice. You shouldn’t spend too much time worrying about the interest rate on your emergency fund though, you will find that rates vary a lot with the online banks and we aren’t talking about a lot of money in this account (at least not at the start) so just creating an account that you can easily access when you need it is the key.

How much should you save?

Starting with $1,000 is an arbitrary choice, really just a nice round number that will cover most normal emergencies. The rule of thumb is to eventually save 3 – 6 months of living expenses, but that isn’t very realistic for someone just getting started. I will be working on increasing my emergency savings more quickly once my credit card debt is paid off, but until that is done, I’m willing to live with only $1,000.

Ultimately, the amount of your emergency fund needs to be what you are comfortable with. What allows you to sleep well at night? You may need one year of living expenses available in cash. It is entirely up to you, there is nothing wrong with having cash. As your emergency savings grows to larger levels you could safely look at putting some of it to work in CDs or Treasury Bills to earn a little more interest if you wish, but you aren’t going to get much more than a good money market fund if you want to keep your money safe and liquid- which it must be if it is an ‘emergency’ fund. Remember, this money is not an investment, it’s a safety net that will allow you to pay the bills if things take an ugly turn in your life. Just think about how you would feel if you lost your job tomorrow. Then think about how you would feel if you lost your job tomorrow and you had $30,000 in the bank. That money really changes everything- you wouldn’t have to rush out and look for a job or take a job that you don’t want just to survive.

It is true that you could have some of your emergency fund invested in mutual funds and most of the time you will earn a far better return on your money. The problem is, you will be at the mercy of the stock market. If your emergency hits when the market is at an all-time low, that $30,000 might only be worth $15,000. You have to decide how much risk you are willing to take, but I strongly advise treating this money as strictly reserved for emergencies and not invested in anything that can go down in value. You will have other dollars to invest so don’t feel like you have to have every dollar in high-yield investments. Remember, it is okay to have cash!

Next up in the series I will cover Living Below Your Means.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 4 – Create an Emergency Fund

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Get Out of Debt in 9 Steps # 3- Turn Your Junk into Cash

Eden — Wed, 21 Nov 2007 10:01:07 +0000

If you have been living beyond your means for a while and spending frivolously with credit cards, you probably have a lot of ‘junk’ in your house that you don’t need and never should have bought in the first place. It’s time to get some of that money back! This isn’t easy, and it can take a really long time (I’m still working on finding stuff I bought frivolously and getting it sold), but it is well worth the effort. I have made roughly $800 since starting on this step and I still have more junk to get rid of.

There are several ways to sell your stuff and I will offer a few ideas here.

Mention it to friends and family – you don’t want to nickel and dime your loved ones so this may or may not work for you, but there is a good chance that people you know will want to buy some of the stuff you have. This can save you time and shipping expenses.
Yard sale – I’ve never tried this, but obviously yard sales go on all of the time. Your success here will probably vary by the community you live in and how much time you feel like investing in the process. Check out this comprehensive list to see if you can handle it.
Craigslist – Again, I have not done this myself, but I know many people who have and it is obviously a very popular resource. Check out this link to learn more
Ebay – Probably the most popular way to buy and sell used stuff these days. You can search for tips on selling with Ebay and you will certainly find a lot of information. One thing I have noticed though, no one really seems to agree on the ‘best’ way to be an Ebay seller. I recommend picking a process and trying it, but be ready to change your methods and learn as you go.

I don’t want to turn this into a how-to article on selling your stuff since those articles are plentiful on the Internet. Instead, I want to focus on how to go about finding the stuff to sell and why you should consider certain things.

The easiest way to start is by looking for the stuff you have hidden away in closets, the garage, or storage. There is a good chance if something is hidden away already you won’t miss it if you sell it. A good rule of thumb is if you haven’t used something for 6-12 months you can safely get rid of it. Of course you will need to make these decisions based on your needs. I find it very helpful to look at the item I am considering getting rid of and think if I would rather have it or rather have the cash in my emergency account or the extra money paid on my debt. Emergency funds and debt payments will trump most things, but you also need to consider how much cash the item you have is going to bring in- I’m not generally going to bother with something that is only worth a few dollars so that item becomes a candidate for charity or the garbage.

A wonderful benefit of this process is not just the cash you can raise by getting rid of junk, but you will also be simplifying your life. The junk we have accumulated has to be moved, cleaned, or stored- that takes time and energy. This brings us back to living simply and de-cluttering, topics brilliantly covered in Your Money or Your Life. You should really read that book if you haven’t already. I have reached a point that I am annoyed by seeing clutter or junk that I don’t need in my house and I am constantly moving things to boxes for donations, sales, or garbage.

One major downside to selling your junk is the time it takes to get it done. I spent several hours listing things on Ebay for a couple hundred dollars worth of stuff, followed by the hassle to package the items and bring them to the post office. Personally, I find those tasks highly annoying but I made the time to do it because I wanted the cash and I also consider it partly as paying for my mistakes of the past and using it as a reminder not to make frivolous purchases in the future. If you are really busy and don’t want to invest the time, you might try finding someone to do this for you- teenagers in your family might be a good option since they likely know Ebay well and will be happy with a small commission. There are also businesses that take your stuff and list it on Ebay for you. You’ll have to decide how much of the cash you are willing to sacrifice for your time.

It’s up to you to decide how ‘vicious’ you want to be with getting rid of your junk, but so far I don’t miss anything I have sold and I keep adding things to my box of stuff to sell. Spend time thinking about your wants versus needs and decide where your priorities fall.

Some people are very serious about selling on Ebay and there are a number of ways to run an Ebay business to earn an extra income. We aren’t taking it to that level for purposes of getting rid of some junk, but it’s something to think about if you have the time and desire to find another source of income. This can be a test run of sorts to see if maybe that is a viable option for you some day.

This step is great to do early in your Get Out of Debt phase because it can give you a nice head start on saving your starter emergency fund, catching up on late bills, or getting a quick start on making extra debt payments. I strongly encourage you to take the time and try to be a bit brutal on your first pass through the house to find stuff to sell.

Good luck and come back for the next step in the Get Out of Debt series- Creating an Emergency Fund.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 3- Turn Your Junk into Cash

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Get Out of Debt in 9 Steps # 2(b) – How to Make a Budget

Eden — Tue, 20 Nov 2007 21:01:56 +0000

In the previous step, I covered why you should make a budget and now it is important to talk about how to make a budget. As with any new thing you endeavor to do, the best advice is to start now and start with something, don’t worry about making it perfect on your first try.

No matter how you start, just get started- start on paper or start with a spreadsheet, whatever works for you. Start by writing your expected net income for the month at the top. Don’t just take your average salary for the year and use that. Look at how many paydays you will actually have this month and how much money you expect to earn. Admittedly, this is more difficult if you have a variable income, or if you expect large commissions or bonuses from time to time. There is a slightly different approach to budgeting for variable incomes that I will look at later.

Assuming you have a mostly fixed income, follow this basic format:

Income-
Cash on hand: $500
Net Income: $2,000
Total: $2,500

Expenses-
Mortgage: $1000
Utilities: $200
Groceries: $300
And on and on…
Difference- calculated field subtracting your expenses from your income.

Download this sample spreadsheet if you want an easy way to get started (Excel file, opens in a new window). The categories included are mostly what I use now, but you will of course change them as appropriate for your needs. Remember, this is supposed to be a simple starting point. I have come up with something a lot more complicated that I use now, but it didn’t start that way and I only made changes as I saw needs develop.

If you have a variable income, the same concept applies, but you need to go about it in a slightly different manner. Start by making a list of your expenses for the month and rank them in order of most important to least important. Then list your income, base income and cash on hand (whatever you know you will have) and start applying that to your expenses. Keep working your way down the list until you run out of money. I’m not an expert at managing a variable income. I have worked as a freelancer in the past and relied on a variable income, but I didn’t budget or spend my money wisely at the time.

The first time I created my budget I realized I was deeply in the red! It was over $1,000 negative. Of course, the only way to spend more than you earn is to use credit cards or savings, which is why stopping the credit card spending is critical to getting started on getting out of debt.

Ideally, your difference in income and expenses will be $0.00 or slightly positive. The idea is not to spend every dollar you have, but to allocate ‘extra’ dollars either to savings or debt payments. For example, if you work hard at cutting your grocery spending for the month, change your allocation and send that extra money to debt or savings.

Making your first budget is a huge step toward taking control of your finances. However, it is highly unlikely that your first month of living on a budget will go as you planned. Don’t let that discourage you! Just track your progress, update your budget weekly, and make changes as needed. You will get better at this each month, but it takes time to get it right.

In the next step I will look at how to raise some extra cash to give you a nice head start on getting out of debt.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 2(b) – How to Make a Budget

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Get Out of Debt in 9 Steps # 2(a) – Why You Should Make a Budget

Eden — Tue, 20 Nov 2007 11:01:28 +0000

Step 2 is Make a Budget, but I thought I should break that step into two parts- first explaining why you should make a budget, followed by how to make a budget.

We have all heard that you should run your finances like a business and all businesses have budgets right? Well, I imagine that any successful business does have a budget, but I’m not an accountant and I don’t know about you, but that advice never resonated with me. Let me tell you why I, a person who never had a budget before and never planned my finances ahead of time, think you should have a budget. It comes down to one word for me- empowerment.

You may think that making a budget will be boring, time consuming, difficult, nerdy, restrictive, or any other number of negatives that seem to surround the word budget. Guess what- I thought all of that before too, but since I’ve started living on a budget I can tell you that most of those words do not apply.

Boring - Yes, unless you love math and details this will probably be a bit boring.
Time Consuming – Yes, it will take a lot of time, especially at first, but it will get faster each month.
Difficult - Somewhat difficult at first, but once you’ve set it up the first time you are basically done with only minor tweaks left to make here and there.
Nerdy - Subjective, but nerds are a bit more popular these days so it isn’t all bad.
Restrictive - Not at all. I have found it to be exactly the opposite!

I think the greatest hurdles most of us face when it comes to budgeting are the fear of the budget restricting our fun and the amount of time we will have to spend managing it. These are valid concerns and it does take time to properly manage your budget, but the time commitment is far outweighed by the empowering benefits and control you gain after making a successful budget.

Empowerment

I’ve used this word a lot now so let me talk about how I find a budget to be empowering. If you are anything like me, your finances have probably been out of control for a long time. A budget is the only way to take control of your finances, and it feels really good to take back control of something that I couldn’t handle for so long.

Benefits

Make faster decisions – Can we afford XYZ this month? Just look at the budget and you will have your answer.
Resist temptation – can I afford a video game this month? The numbers don’t lie. You can lie to yourself about how good or bad your finances are, but if you have it all on paper the truth is easy to see.
The power to say no – Having a hard time saying no to friends or family who want you to spend your money? It’s a lot easier to say no if you know for a fact that you can’t afford to spend the money and as an added benefit you can blame your budget for forcing you to say no.

If you still aren’t convinced, I can only encourage you to give it a try. Commit to at least two months and see what you think. I’m speaking to you as someone who was skeptical, but I am now convinced of the benefits of having a budget.

It’s nice to know why you should start a budget, but you still have to take the time to make a budget. In the next part, I will cover how to make a budget.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 2(a) – Why You Should Make a Budget

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Get Out of Debt in 9 Steps # 1- Stop Borrowing Money

Eden — Mon, 19 Nov 2007 11:01:07 +0000

It may sound obvious that you need to stop borrowing money to get out of debt, but it isn’t always easy. If it was easy, why would people be in debt in the first place? If you want to get out of debt, your journey must start somewhere, and that starting place is where you stop accumulating any more debt as soon as possible.

The most common debt problem is credit cards. If you are serious about getting out of debt you need to stop using credit cards and that probably means you need to cut them up too. If cutting the credit cards isn’t enough to stop you from using them, then close the accounts. This decision comes down to personal responsibility and how well you can resist the temptation to use your credit cards- you need to be honest here or you will only hurt yourself more and make your road to debt freedom even longer than it is now. *Important- don’t destroy or close all of your credit cards until you have an emergency fund! Lets be real here, most Americans have no savings- what would you do if your car broke down tomorrow or you lost your job? Cash is the ideal way to handle these emergencies, but most of us can’t just snap our fingers and have an extra $1,000 in the bank.

If you have accounts that are behind, make getting current your top priority. Late fees or over the limit fees are only going to bury you further. Call the banks and try to negotiate. It costs you nothing but a few minutes of time and aggravation to ask for help. They are likely to at least cut some of the fees and give you a chance to get current. You will have more luck here if you can also promise to send an immediate payment when making the phone call (just don’t give them direct access to your checking account).

Once you have stopped using the credit cards and everything is current, you will have gone a long way toward slowing the growth of your debt balance. However, you are likely still being charged monthly interest on your credit cards. Make a list of your cards and order them by interest rate. Start calling the high rate cards to ask for a lower rate or look at transferring balances from high rate cards to low rate cards that you already have (consider the balance transfer fee first) . You can even go out and apply for new credit cards if you can get a better rate- a 0% introductory rate would be wonderful if the terms are decent. Just be aware of fees for balance transfers and how long these lower rates will last. Do a little math to see if you will really be saving money when all is said and done.

Putting an end to your borrowing is the most important step toward getting out of debt. Look at every dollar you are paying in interest as your enemy. Compound interest is a wonderful thing when it is working for you, but against you it is devastating. If you haven’t already, take the time to total up all of the money you spent in interest over the past month. On a personal note, I was really sickened when I did this. I had no idea how much interest was really costing me. Think about the number of hours you have to work in a month just to pay interest if you need some extra motivation to stop borrowing.

This step is where you ‘stop the bleeding’ and figure out how badly interest is hurting you. Without doing this, all other efforts would just be covering up the real problem, possibly making the symptoms look less menacing yet not treating the source of the pain. The next step, making a budget, is where you can start to take control of your money and treat the debt problem at its source.

9 Steps to Get Out of Debt

Get Out of Debt in 9 Steps # 1- Stop Borrowing Money

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