Saving Your Way Out of Debt Part 2

 

Did you know that

  • 43% of American families spend more money than they make every year?
  • And 45 million Americans carry a debt of over $10,000.
  • Americans are paying over $113 billion in credit card interest and fees, up 48% from 5 years ago.

Those stats are staggering!

Sadly, according to a new CreditCards.com poll “Many Americans don’t know when or if they’ll ever get out of debt. That includes 25 percent of people who have debt and think they’ll die before paying it off.”

I certainly don’t want you to spend the rest of your life trying to pay off your debts!

It’s obvious that debt has become a way of life.

But if you’re in debt, you know how this “way of life” can weigh heavily on your peace of mind, diminish your sense of possibility, and darken almost every aspect of your life.

Last week, I shared the first 5 steps of my 10-step formula for getting out of debt and staying out of debt. Now, let’s jump into the final 5 steps of how to “Save Your Way Out of Debt.”

These steps are consecutive, so if you missed the first 5 steps, you’ll want to read those first.

Step 6: Build Your Safety-Net

Whether you’re self-employed or work for someone else, you need a way to stay safe and secure when you’re faced with a possible reduction or loss of income.

The solution is a Safety-Net Savings account. This type of savings, which is separate from your periodic savings account, is designed to cover your living expenses should your income be interrupted for any reason. The amount you need for your safety-net will depend on your expenses and how vulnerable you are to having your income interrupted.

Start small. Begin by trying to save enough just to cover groceries for a month. Over time, you’ll build enough to cover a month’s rent or mortgage payment.

Commit to building your safety-net savings by depositing into it every month. Sooner than you think, the savings will be enough to bridge the gap if your income is disrupted.

Your Safety-net Savings do more than just protect you during an employment disaster or health crisis. It also gives you the freedom to explore new career possibilities rather than stay trapped in a job you hate.

That’s why I think of this account as a “freedom fund.”

Step 7: Celebrate Being Debt Free!

Be sure to celebrate your accomplishments. Fully acknowledge and congratulate yourself for doing what it takes to live debt free forever.

Right now, it may feel like a far-off fantasy. But if you follow these steps, you will be free. And like my clients and trainees who’ve successfully used the Save Your Way Out of Debt plan, you will be doing a big “happy dance” on the day you make that last debt payment.

Step 8: Plan for the Future with Long-term and Investment Savings

If your only savings is in the form of long-term investments and retirement accounts, you’re ripe and ready to fall right back into the debt cycle. This is why it’s critical to create a Periodic Savings (to keep you from going back into debt) and a Safety-Net Savings (to protect you against loss of income). Once you have these two savings in place, long-term investment savings become possible, sensible, and so much more secure.

All too often, people will tap into their investment or retirement accounts to pay for periodic expenses. Sometimes, they end up cashing out their IRAs or 401(k)s and incur enormous taxes and penalties. Both their self-esteem and their assets take a huge hit.

However, when you have a Periodic and a Safety-net Savings in place, your long-term savings are truly secure.

Step 9: Resist the Seduction of a Zero Balance

There’s only one problem with eliminating debt. Those big zeros on your balance sheet can call to you, tempting you with promises of immediate gratification.

Instead of succumbing to temptation, use your Periodic Savings as a way to make important, non-monthly purchases. Plan for special purchases and give your savings time to grow in order to make them.

Just imagine how good it will feel to make that special purchase without incurring one nickel of debt.

Step 10: Enjoy Real Financial Freedom

Leverage the power of savings, and free yourself from debt once and for all. Once you are debt-free and secure, you will experience true financial peace of mind. Both your present and your future will be protected.

Financial freedom is not only about the amount of money you have. It’s about having a healthy, secure relationship with money at any income level. By saving your way out of debt, you take a giant leap towards healing your relationship with money and establishing financial well-being for the rest of your life.

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