Spend Or SaveDid 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.

Debt has become a way of life for way for most Americans. Our economy thrives on it. 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

Everybody needs a safety net. Whether you’re self-employed or work for someone else, you need a way to stay safe and secure when and if 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 the nature of the work you do, your income, 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 and follow through 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 does more than just protect you from the possibility of 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!

Can you imagine being debt free? 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.

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

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 becomes 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 is 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 whatever your 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.

If you want to dive a little deeper into what it takes to liberate yourself and others from money problems, I invite you to join me on my upcoming free webinar: “Money Disorders: How to Identify and Change Self-Sabotaging Money Behaviors.” Join me live on Wednesday, February 19. Register for free here.

Karen McCallKaren 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.

January 20th, 2016 by Karen McCall