Debt is an embezzler.
It steals your security for the future while dramatically diminishing your quality of life right now. If you are in debt, or have ever been in debt, you know how agonizing and destructive it can be.
Getting out of debt is only the first part of taking back your present peace of mind and your future. The second piece, the most important one, is to stay out of debt.
People get out of debt all the time. Think of it like yo-yo dieting. The debtor goes on a money diet, slims down what they owe and feels tremendous relief--only to find themselves saddled by an even heavier debt load in a few months’ time.
The good news is, you can get and stay, out of debt. Over my thirty-year career as a financial recovery coach I developed a process that works no matter how much debt you are in or how much you earn.
It’s called, "Saving Your Way Out of Debt". And, in this post, I’m going to share the first 5 of 10 steps that will allow you to get out of debt once and for all. (I’ll be sharing the rest next week)
Step 1: Don’t Go Into Deprivation Mode
When people try to get out of debt, they think they have to cut out everything that’s fun or pleasurable until the whole amount is paid off. But this just sets them up for failure… or relapse. Why? Well, because if you deprive yourself of your most important emotional and physical needs, you will most likely "fall off the wagon" into overspending.
And overspending leads to more debt.
The Key to Understanding Your Needs, Wants, and Deepest Desires
Taking care of needs is not a simple checklist: Food, check. Safety, check. Self-esteem, check. Rather, you must begin to determine the difference between needs and wants. This will help you understand your evolving physical, emotional, intellectual, social, spiritual, and creative needs, and how to meet them. Getting in touch with your subtler needs is a natural part of the progression of Financial Recovery and follows logically behind understanding and meeting your more basic needs.
The bottom line here is, all of your needs are just as essential as your basic ones.
Step 2: Stop the Leaks!
The next step to free yourself from the debt cycle is "debt stabilization." This requires you to stop adding to it. This means you have to stop using credit cards while stabilizing your debt. This challenging step is really the foundation for eventually living completely debt-free.
It’s tempting to skip debt stabilization or to think that you can continue to use your credit cards while paying down your debt each month. But paying down your debt while you’re still using your credit cards will keep you stuck in the debt cycle for decades.
The thought of not using credit cards may feel scary, even impossible. After all, we use our cards for everything. But if you want to get out of debt and stay that way, you have to do it.
Step 3: Start saving right now!
One commonly held myth is that we can’t begin saving money until we’re free of debt. The truth is, the way to build a firm foundation for the future is to save as you pay down the debt. This is the key that will free you from the debt cycle forever.
Your instinct may be to use every available dollar you have toward paying off your debt quickly. Don’t.
Instead, create what I call "Periodic Savings."
Periodic Savings is the money you use to meet periodic, non-monthly expenses, such as car insurance, taxes, and even family vacations (That’s right, it covers obligations and the fun stuff).
Periodic savings is one of the keys to making your entire financial life work over time.
One place to find money to fund your savings is your monthly debt payments. If you’re paying more than the minimums on your credit card bills but saving nothing, then you’re setting yourself up for inevitable problems down the road.
For a short time, reduce your credit card payments to "minimums only" and put the extra money into periodic savings. For example, if you regularly pay $1,000 in debt payments but your minimum payments add up to $750, consider paying only $750 a month and putting the remaining $250 into your periodic savings account.
"We’re creating a way for you to break the debt cycle and create a healthy relationship with money."
The easiest place to look for money in order to add to your savings is your spending. Are there optional expenses that you can reduce or eliminate?
Lastly, another way to fund your savings is to earn more. Perhaps you’re not marketing your business as aggressively as you can. Or maybe you’re not charging enough for the valuable services you provide. If you are an employee, is there a position to move into that pays more? Can you ask for overtime, find a side job?
Accountants may quibble with the logic of this plan, but remember, we’re dealing with more than math here. We’re creating a way for you to break the debt cycle and create a healthy relationship with money. Making minimum payments for a short while in order to reduce and eliminate debt forever will pay for itself a thousand times over the course of your financial life.
Step 4: Spend Your Savings… Guilt Free!
Do you feel guilty if you spend the money you have in savings? Well, get over it!
The money you set aside for Periodic Savings is meant to be used, guilt-free, for periodic or non-monthly expenses. Remember, you’re spending this money to avoid creating more debt by using your credit card!
Step 5: Reduce Debt with a Proven Strategy
Once your debt is stabilized, which means you’re no longer incurring any new debt, you’re saving monthly for periodic expenses, and you’ve got a livable spending plan, you can then focus on reducing your debt.
I teach a method called "snowballing" for repaying debt. To do this, you:
It is often psychologically easier if you target the card with the lowest balance first. If you have a balance of $7,000 on one card and $500 on another, pay only the minimum on the $7,000 card and target any extra debt payment funds toward the $500. You will feel great when that first debt is gone and you can roll the entire amount you were paying on the smaller balance card into the next larger balance.
This way, you pay the same amount toward debt repayment every month, but that amount "snowballs" until you’re eventually paying the whole amount toward that biggest balance on that last card. This allows you to feel more financially secure before you’ve eliminated debt.
Next week, I’ll share 5 more steps to get out and stay out of debt. During the coming week, if you have debt and feel it’s been impossible to pay off, review the first of my five debt reducing strategies and get started. If doing all five feels overwhelming have a money meeting with yourself and or your significant other if you have shared money.
This isn’t a time to judge or criticize, simply to take stock of where you are. It’s the first step on your journey to a solid financial future.