People get out of debt all the time. The real challenge is to stay out of debt.
Just like yo-yo dieting where you knuckle down, stick to a diet for 4-6 weeks and lose a lot of weight only to gain it all back, most people who work to get out of debt eventually end up with an even heavier load of debt. Again.
But it doesn’t have to be that way. Here are 8 Steps that outline how you can “save your way out of debt” and stay out of debt forever.
Step 1: Avoid Deprivation
Most people assume that getting out of debt requires living without all the things they enjoy the most. Not so. In fact, you have to create a spending plan that allows you to feel comfortable and satisfied, rather than deprived. Any feeling of deprivation will eventually lead to overspending. And overspending only leads to more debt.
Step 2: Stop the Leaks by Stabilizing Debt
If you try to pay down your debt while you’re still using your credit cards, you will stay stuck in the debt cycle. It’s like sitting in a boat with a grapefruit-sized hole in the side while you try to bail out the gushing water with a thimble. To free yourself from debt, you must stop adding to it. This is called debt stabilization.
Step 3: Build a Firm Foundation with Periodic Savings
One common myth is that we can’t begin saving money until we are debt free. But if you want to break free of debt, you need to start saving immediately by building “periodic savings.” This is the money you use to meet periodic, non-monthly expenses, such as car insurance, taxes, and family vacations. Yes, that’s right. It covers both the obligations and the fun stuff. Periodic savings is essential to making your financial life work for without it, you will likely resort to credit cards for those “unexpected expenses.” Then you’re back bailing water from that leaky boat again.
Step 4: Reduce Debt with a Proven Strategy
Once debt is stabilized and you’re building your periodic savings, you’re ready to start reducing your debt. Designate whatever amount above the minimum that you can pay toward just one targeted debt. When that one debt is paid off, roll that amount to the next debt target. Over time, you’ll have no more debt.
Of course, the higher your debt, the slower the process of debt reduction. But please know this: going slowly in the right direction is enormously better than going in the wrong direction at any speed.
Step 5: Build Your Safety Net
It’s vital to plan for the possibility of an interruption in income. A Safety-Net Savings account is designed to cover your living expenses if your income is interrupted for any reason.
Start to slowly build this Safety-Net Savings account. Once you’re no longer paying any debt, you can roll that money right into this savings without changing your monthly spending plan.
Step 6: Celebrate Being Debt Free!
Living debt free may seem like a fantasy, but I have celebrated this reality hundreds of times with people who have used the Saving Your Way Out of Debt plan. Clients have literally danced in my office after they made their last debt payment. I’ve danced with them too! Celebrate your accomplishment. You deserve it.
Step 7: Resist the Seduction of a Zero Balance
Once you’ve eliminated debt, those big zeros on your balance sheet can tempt you. Instead of succumbing, use your periodic savings as a way to make important, non-monthly purchases.
By leveraging the power of savings, you can free yourself from debt once and for all and experience financial serenity.
If you’d like more information on how you (or someone you know) can get out of debt, stay out of debt and develop a healthy relationship with money, I invite you to read my newest book, Financial Recovery: Developing a Healthy Relationship With Money (see sidebar). This book offers a straightforward system for eliminating self-defeating money behaviors and building lifelong financial stability.