Or maybe you were unprepared for the unexpected and ended up with so much debt from medical expenses that you’re struggling to get by. Whatever the case may be, you have debt, and it needs to be eliminated.
Since this blog started 8 months ago, I haven’t written about how to get out of debt. I had imagined that every reader of this blog was well on their way toward Early Retirement, and just read my articles to stay motivated in their quest. But, thousands of people realize every day that they want to leave the Rat Race, and most of them are still in debt, so they need the tools to get out of the red so they can get way into the black.
As you may remember, I used to suck with money. It wasn’t until I was about 25 years old when I started giving a shit about my finances. My wife and I had made some poor financial decisions — who hasn’t? — all before we were officially deemed The Moneyseeds, of course. We ended up with a mountain of debt, big enough to warrant its own ski lodge, and if it sold us season passes we probably would have just added that to the pile as well.
Shortly after we decided to spend our lives together, we realized that our debt was a big, ugly problem and it needed to go. We began to look at our debt, not as a monthly bill, but as financial shackles that were holding us down from making any progress in our new life.
Now, we are debt free* and well on our way to Financial Independence. How did we get there? We followed what would eventually become “Johnny Moneyseed’s Guide to becoming really, really, ridiculously debt free“. We didn’t have a fancy name for it at the time, but the concepts were cemented into our thoughts and actions, and it became clear that things were working when our debt started disappearing at an incredible rate.
Have you ever heard anyone say any of the following ridiculous statements?
“Having more money would fix all of my problems. I would be out of debt so quickly!”
“This new iPhone is great, and thanks to my credit card it only costs me $20/month.”
“I don’t think getting out of debt is even possible. Where do you want to get dinner from tonight?”
These people are in debt denial. It’s a serious case that affects around 50% of North American consumers. Basically, people think it’s OK to carry debt. That it’s OK to buy something now that costs $300+ and only pay the bare minimum every month to pay it off. Then, there are people that know that having debt isn’t OK, but they have it anyway and spend most of their debt repayment money on shit they absolutely don’t need.
50% of U.S. households have credit card balances that are, on average, in the $14k range! Those same people are in front of you in line at Starbucks, they’re browsing for new TVs at Best Buy, and they’re getting box upon box delivered to their house through Amazon. They don’t treat debt like a priority. For you, reckless spending ends today. Follow this guide, and you won’t just get out of debt, but you’ll get out of debt way faster than you had ever imagined.
Step One: List all of your debts, their balances and interest rates.
This should be a pretty obvious first move, but don’t let the simplicity of it get the best of you. Get a piece of paper, a Google Spreadsheet, or open Notepad on your computer. Go to the website of every financial institution to which you owe money. Then, copy down all balances with their respective APRs (interest rate) exactly as they appear. It’s also very beneficial to know what your minimum payments are for every account.
After tracking down all of your debts, you’ll have a decent idea of how much is owed. Let it sink in, but don’t worry, in a few more steps we’re going to start getting rid of it.
Step Two: Set periodic goals.
Becoming a goal-oriented person is one of the most powerful things you can do for yourself, in finances and pretty much every other area of life. Goals allow us to break really hard things into manageable chunks that we can feel good about after we complete them.
When you set a goal to pay off your debt you first assess how much money you can contribute toward debt repayment every month. Then you can do a rough estimate of how long it will take you to get out of debt. (Debt / Monthly repayment = Amount of months until you’re debt free) Just understand it could take longer than this to repay your debt, but this is a good way to understand roughly how much longer you have to bare this burden.
The big goal, the final goal, is to pay off all of your debt. That should be the end point of your timeline. Then, it’s up to you what other goals you’d like to set. You could make every $5,000 mark a goal. Or every $10,000 for those with student loans.
Once your goals are in place, they’ll be almost impossible to ignore. This will push you toward accomplishing your goals way faster than you would have originally anticipated.
Step Three: Start paying off balances from highest to lowest APR.
There are a few trains of thought when it comes to the actual debt repayment portion. The first being: Pay balances low to high. This is dumb, because it doesn’t take interest rates into consideration. The second, and more logical: Pay off the debt with the highest interest rate first, then work your way down.
Make the minimum payment possible for every account, besides the one that you’re trying to eliminate first. This allows you to focus on it, and to lose the least to interest.
I’ve heard of people going to debt consolidation counselors, and also of people who transfer all of their balances to new credit cards that have 0% APR for an introductory period. While in theory these ideas could work for you, they aren’t the best ideas. Just imagine for a second: Why would anybody want to give you an unsecured loan to consolidate your debt? Or a 0% rate?
Step 3.14: Every time you pay off a debt, you have more money to throw at the next one.
This concept is known as “snowballing”. I think “avalanching” sounds cooler, so let’s call it that instead. Now, when you’ve paid off a debt, you’ll have freed up some money that you can now use in conjunction with the minimum payment that was already being made on the next debt down the list. Then when the next debt is paid off you keep the avalanche going.
Here’s where you become whiny.
Step Four: Trade in big ticket items.
Do you have a shiny new-ish car or two in the driveway? You can significantly reduce your total debt by trading in your car for something cheap. If you can get $18,000 for a trade-in, and you can find a $10,000 car on the lot then you just came into $8,000 to help you pay off debt. If you can trade-in two cars and concede to just having one you could double or triple this amount.
You can further apply this to boats, yachts, jet-skis, snowmobiles, Segways, or any other ridiculous self-balancing modes of transportation. Now isn’t the time to have toys. You can have toys when you’re debt free.
Step Five: Sell almost everything.
Now that ALL of your big ticket items have been either sold or traded in for less expensive versions, you can start becoming a professional Stuff seller. American houses and apartments are filled with crap we don’t need. A good way to figure out what you do need: Carry around a notebook and write down every item that you use over the course of a given week. It’s going to be a lot less stuff than you imagine. The rest — the crap that added to the debt problem — has to go. It’s unnecessary and dragging down your recovery efforts. Get rid of the stuff. There’s always time for stuff when you’re debt free.
Step Six: Work, work, work.
This one is going to blow your mind: To pay off debt faster you can work more. Overtime, second jobs, babysitting, etc. Check out this article I wrote about how to make more money.
Pretty obvious, right? More money, more debt repayment.
Step Seven: Reward yourself.
Achieving your goals, no matter how big or small should be celebrated. Don’t take this to mean that you should go out and spend hundreds of a dollars at the Mall for paying off $100 of your debt. Instead, buy yourself a cup of coffee. For a free alternative you could guilt people into congratulating you by posting your achievements on Facebook.
Step Eight: How to use windfall money.
My definition of windfall money is: Any money that you receive that didn’t directly come from your employment. Tax returns, bonuses, inheritances, birthday money, wedding gifts, whatever. If you are in debt then windfall money isn’t fair game. You should apply it directly to your debt. In most cases you’re getting free money to pay your debt. You couldn’t ask for a better gift, so don’t blow it.
Step Nine: This isn’t a step, it’s what you shouldn’t do when you have debt.
I talk to people who are in debt, or behind on their bills all the time who:
- Continue to go out to eat on a regular basis
- Go on vacations, elaborate or otherwise
- Buy new model electronics
- Purchase coffee drinks at coffee shops
- Add to the mountain of debt
- Don’t bring a homemade lunch to work
- Go to concerts, the movies, or out drinking
- Browse online retailers or hang out at the Mall
- Trade in their vehicles for newer, prettier ones with more cup holders
- ….And the worst kind of person: One who doesn’t read Johnny Moneyseed
Step Ten: Breakdance party.
You’ve made it.
All of your debt is completely paid off, so you officially earn the right to have a breakdance party. Turn on some old school Run DMC, have a friend flick the lights on and off, throw down a cardboard box and start busting out your best Suicide Rubberbands (learn how to do that move from a 12 year old).
If anybody has any other sweet tips for people in debt, please leave them in the comments below!
*Somebody is going to point out that I’m not debt free because I have two mortgages. Those readers can hold their comments and check out the posts I’ve written about not giving a fuck about paying off my mortgage early. Part 1 and Part 2.