Debt is an embezzler that silently steals your security for the future while dramatically diminishing your quality of life right now. If you’re in debt, or if you’ve ever been in debt, you know how agonizing and destructive it can be.
But the answer is not to simply get out of debt. It’s to stay out of debt.
People get out of debt all the time. Similar to yo-yo dieting, they go on a money diet, slim down what they owe and feel tremendous relief only to find themselves carrying an even heavier debt in a few months time.
But the good news is, there is a way to get out, and stay out, of debt. 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.
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.
Identify your essential needs and build a spending plan that meets them so you can enjoy your life throughout the process of eliminating debt.
Step 2: Stop the Leaks!
The first step to freeing yourself from the debt cycle is “debt stabilization”… which means, stop adding to it. You have to stop using credit cards while stabilizing your debt. This is the foundation for eventually living completely debt-free.
You may be tempted to skip debt stabilization and rush to try to reduce or eliminate your debt. But prematurely paying down your debt while you’re still using your credit cards (or in danger of using them) keeps you stuck in the debt cycle for decades.
This is like sitting in a boat with a grapefruit-sized hole in the side and bailing out the gushing water with a thimble.
I know the ideal of not using credit cards may feel scary, even overwhelming. But if you want to get out of debt and stay that way, you have to do it.
Step 3: Build a Firm Foundation with Periodic Savings
One commonly held myth is that we can’t begin saving money until we’re free of debt. But the truth is, saving right now, even while you’re paying down debt, 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.”
Another 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 in order to add to savings?
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.
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 during the course of your future 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:
- Arrange all of your credit card debts from the lowest balance to the highest.
- Plan to pay minimum payments on all but one targeted debt.
- Designate whatever amount above the minimum you can pay toward just this one card.
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. Meanwhile, share your thoughts or questions about these first 5 steps by leaving a comment below.
Karen McCall revolutionized the financial counseling industry with her highly -acclaimed Financial Recovery process, which liberates people from the beliefs, attitudes, and behaviors that keep them stuck in a self-defeating relationship with money. Founder of the Financial Recovery Institute, she shares her passion for her work by training counselors and money coaches to build their own successful practices. She is also the creator of the MoneyMinder system (and co-founder of MoneyMinderOnline.com), a nationally-recognized financial expert, and author of several books, including “Financial Recovery: Developing a Healthy Relationship with Money” (New World Library). She lives in San Francisco, CA, with her smart, funny, loving, and supportive husband John. In her spare time, she does her best to spoil her grandchildren rotten.