I used to suck at money. I had student loan debt, credit card debt, and shiny new red Jeep with a rocking $2,000 stereo debt. But I made some changes and went from money moron to money master.
There are people just like you who are getting out of debt every single day. Not only that but they are getting out of debt in a short period.
Do any of these statements sound familiar?
Most of us spend far, far too much time on our problems – I wish I didn’t do this, why did I do that, what if I had done this, what did I spend that money on again?
Forget all that. The day will look a little brighter when you focus on the solution. The solution will get you back on your feet. Above water. On the road to being debt free and building wealth.
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Step #1: Determine your cash flow to get out of debt
You spending plan will help you determine where the extra money is going to come from to pay down your debts. You need to have enough income to meet your necessities like your groceries, utilities, mortgage, and minimum credit card payments. Plus you need to prioritize your spending to find enough extra money to accelerate paying off your debts.
Step #2: Hide your plastic to get out of debt
If you really have a burning desire to get out of debt you have to start with one simple act: stop using your credit cards.
You can’t get out debt while you continue to accumulate more debt.
Does this make sense?
You have to stop creating debt. For most people, that means ditching the credit cards, so you’re not tempted to create more debt. Some people freeze them into a block of ice so they can’t be used easily.
Get on the cash budget using the envelope system.
Please don’t fool yourself into thinking you should keep one in your wallet or in the desk drawer for emergencies. The pizza delivery man showing up with a $15 pizza and you only have $14 cash suddenly becomes an emergency, and you’re right back where you started – with more debt.
Cut up all of your credit cards right now. Just go. Stop reading, press pause, take a break. Cut them up then sit down and start breathing again.
I know this will be hard for most of you. I’ve done it before and hated it. But I stuck with it and watched as the cash piled up. Credit cards seem like a security blanket. What they do is cause us to overspend on stuff we don’t need and go into debt.
Let me ask you this – if you had never gotten a credit card – ever – how much credit card debt would you have right now?
Step #3: Prioritize your debts
Snowballing is the term used for paying off your debts in the correct order.
There are two methods of snowballing debt given by financial experts.
First there is the debt snowball first introduced by personal finance pioneer Larry Burkett in the 1990’s and now championed by Dave Ramsey. This system has you paying your debts smallest to largest no matter what the interest rate (balance order).
Then there is the debt snowball that is recommended by every other personal finance expert. This system has you paying your debts from the one with the highest interest rate to the lowest interest rate (interest order).
I don’t care what debt snowball you choose to use. I only care about you getting out of debt.
Step #4: Make your payments
Pay the minimum on everything except for the debt you listed in the previous step with the highest priority.
For the debt with the highest priority pay more than the minimum.
Once the highest priority debt is paid off, take the total you were paying towards the paid off debt and apply it to your next highest priority debt.
Continue the cycle until all the debts are paid off.
Example get out of debt plan
Let’s illustrate that here to make it really, really clear. Let’s say you have the following debts:
- $300 Gap store credit card debt ($20 a month minimum payment)
- $700 medical bill ($50 a month minimum payment)
- $3,000 Visa credit card debt ($75 a month minimum payment)
- $10,000 car loan ($250 a month minimum payment)
- $15,000 student loan ($100 a month payment)
First you continue to pay all of your minimums for each of the debts. For example, you don’t skip a car payment so that you can put the $250 towards the Gap card. You continue to pay the $250 for the car during this process and all of the minimums for each debt.
Second, you throw any extra money at the lowest debt as fast as you can. Let’s say you’ve slashed your spending, done a few other things to cut your expenses, and picked up a few extra hours of overtime each week. You’ve got an extra $500 a month to pay down debt.
So how long will it take to pay off the Gap card with an extra $500 left over from this month’s spending plan?
About 60 seconds I guess. Plus you’ll have an extra $200 this month towards your next lowest debt payment – the medical bill. That feels pretty good doesn’t it?
Next up is the medical bill in the second month of our plan. Our balance is $500, and that’s what we’ve allocated towards paying down debt each month. DONE.
Month three is where things get interesting in this example. Remember we are paying the minimum balances each month on all of these debts.
The Gap debt is paid-off.
The medical bill debt is paid-off.
You no longer have to make minimum payments on those debts. There was a $20 minimum for the Gap card and a $50 minimum for the medical bill you were already paying in addition to the extra $500 a month.
You now have $570 a month to pay towards the Visa card with the first two debts gone. Are you with me? If not, go back and review that again.
Throwing that $570 towards the Visa will get it paid off in another 5 months. Sweet! In just seven months, you have wiped out $4,000 of debt, and you only have a car loan and a student loan to go. Let’s keep going…
With the Visa paid-off, you can now apply the $570 and the additional $75 minimum you were paying to Visa towards the car loan. You’ll be paying $645 plus the $250 car loan towards the car, or $895 a month.
WOW – in 11 more months your car loan will be paid-off. When was the last time you had a car without a car loan?
Next, and LAST is the student loan. Take the $895 you were paying towards the car loan and the $100 minimum you pay towards the student loan and you can throw $995 a month towards your college debt. 12 more months and you are out of debt!
What was the total time it took to pay off everything?
- $300 Gap Card – 1 month
- $700 medical bill – 2nd month
- $3,000 Visa credit card – 4 months
- $10,000 car loan – 11 months
- $12,000 student loans – 12 months
30 months to get out from under all of your debt and pay off $26,000.
Some of you are thinking right now – 30 months! That’s a really long time!
This is just an example of a typical household. Your numbers may be higher, or they may be lower. Until you write out your spending plan to see where your money is going and your get out of debt plan to see how long its going to take, you don’t know how long its going to take.
If it takes longer to pay off your debt than you like the solution is to come up with more money to throw at the situation.
How long will this take?
How long did it take you to accumulate the debt you have, anyway? 30 days? 90 days? More likely it was several years.
The average time it takes people to get out of debt 18 months to two years. That’s really quick compared to the rest of your life!
Warning: Don’t believe anyone who tells you they can fix your debt in 30 days. Or 90 days. They are just a bunch of thieves looking to steal more of your money.
Will this work for my situation?
To quote a line from Pride and Prejudice (one of my favorite movies):
Yes! A thousand times Yes!!!
When you are not living paycheck to paycheck anymore, when you have freedom from debt, when you follow this plan, you aren’t going to wake up one morning and say ‘Dang, I wish I were broke again!’
You don’t have to cut that much spending to get out of debt quickly. All that’s necessary is to stop spending on unnecessary things, making debt a priority, and staying consistent and focused.
Millions of people have used this strategy to get out of debt, and it will work for you too.
Please don’t miss this – just getting started will give you some momentum to keep going. Don’t delay.
- Write down a list of your debts.
- Write down when your goal is to get them paid off by.
- Write down how much extra money each month you are going to put towards your debts.
Questions on this plan? Please leave a comment below.