Another common New Year’s resolution is getting out of debt. Unfortunately it is also one that most people don’t accomplish. According to the Palm Beach Post, the average credit card debt in the US is $15,519! Paying $200 a month it would take you over 20 years to pay that off if you never charged anything else!
Our government is not an example to follow, the current debt according to http://www.federalbudget.com is 14 trillion dollars, or $14,000,000,000,000.00!
It is no wonder that people are resolving to get rid of their debt.
I have struggled with debt in the past, and I have just about gotten rid of my unsecured debt. In fact, I am only about two months away from having all of my unsecured debt paid off and I started with a bunch due to some unfortunate circumstances. I have learned a few things on this journey, and would like to share some of them here in hopes that it will help. I am also going to include some links to some really great blogs and tools that I have found very useful in my journey to eliminate debt.
How much do you owe?
I am really surprised when I talk to people about debt that most people really have no idea how much they actually owe. The first step in getting rid of the debt is figuring out exactly how much you owe, what you are paying, where it is coming from, and how much the debt is costing you.
First you should gather all of your bills; credit card statements, mortgage statements, car notes, student loans, store credit card statements, installment loan statements, amounts you owe family members, no payment or interest until the year 2130 accounts, and any other places that you must eventually pay a balance off.
Once you have gathered all of these, and make sure you get them all, it might take you a month before they all come in, you need to capture that information somewhere. I use a spreadsheet to keep all my financial information in one place. I have used the same one for years, and I have cleaned it up and you can download it here. Whether you use my spreadsheet or a regular notebook, you need to make sure you capture the information.
You want to capture the total amount owed or payoff amount, minimum monthly payment, interest rate, due date, and credit limit. Once you have all of this information, you want to total it and organize it. This is where the spreadsheet comes in handy. You want a grand total of the amount owed, the monthly payment, and the credit available, and an average of the interest rates.
With this information in hand, you can plan your attack on your debt. Now this is where the “guru’s” are split on which is better, paying off the lowest balance first, or paying off the highest interest rate first. You will probably save more money by paying off the highest interest rate first, but you will get quicker wins by paying off the lowest balance first. That is why I prefer the latter; when you are in a lot of debt, it can be overwhelming, so seeing debt being paid off is a great motivator. Now to paying off your debt right? No, not yet, first we have to establish an…
Emergency Fund
I bet you are saying “But wait, didn’t you say I needed to get out of debt?” This is true, but having an emergency fund is more important. The reason for this is because if you start putting all your extra money towards paying off your debt, what happens when the water heater busts and you have to get a new one? You will pull out the credit card! For this reason, we need to have a small emergency fund built up to cover these types of emergencies. Typically I would say $1,000-$3,000 is all you need for your emergency fund to start off with. I give this range because I don’t know what your lifestyle is, and what you have that might cause an emergency. If you are in a new house with new everything, you can have a smaller emergency fund, if you have two beat down cars and all your appliances are 10 years old, you need a larger fund. You have to be the judge on this based on your situation, but $1,000 is absolutely the minimum.
Now you have to make sure before you dip into your emergency fund that it is an actual emergency. Really cool shoes going on sale, no matter the discount, is NOT an emergency! I am talking about things that will alter your living condition adversely if not remedied. An appliance going out, a car breaking down, sickness, and accidents are all examples of emergencies. Sales, opportunities, shiny objects, vacations, and gifts (yes, no using your fund even for gifts) are all not emergencies.
Paying it off
So how are we going to find the money for all of this? ANY WAY YOU CAN! Your number one priority is to build your emergency fund and start paying off your debt, so do whatever you can to come up with some money. Here are a few ways you can start to get some immediate cash:
- Sell stuff in a garage sale
- Sell stuff on EBay
- Get a second job
- Write articles on sites such as helium.com (for this and other ways to make money online, head on over to Steve’s site here, great stuff!)
- Offer your services as a freelancer
- Take your lunch rather than buying
- Cancel magazine subscriptions
- Cancel unneeded services
- Do your own nails
- Iron your clothes rather than sending them out
There are a ton of things that you can do to free up money or to make extra money on the side, so start researching them and doing them. Get creative, you will be so thankful when you write that last debt check that all the minor inconveniences won’t even matter!
So after you have established your emergency fund, you want to stop paying extra on everything you are currently paying extra on, and send all of your extra money to the debt with the smallest balance. You don’t have to wait until it is time to pay the bill to do this either, if you sell that old Van Halen t-shirt on Ebay, send that money in right away! Any money you get needs to be sent to pay off the debt immediately so the temptation to spend it is not there. An even better solution would be to pay your bills online, not only is it easier to send in a payment, but you are saving money on stamps, envelopes, and checks!
So once you have that first smallest debt paid off, you want to take the minimum payment on the debt you just paid off, plus all of your extra money, and start paying it on the next smallest debt. You will continue to do this until you have all of your debt paid off. This is what is called the debt snowball due to the fact that the amount you are paying to your debt snowballs as debts get paid off.
Something that I haven’t mentioned up until now is the obvious, once you are in a hole, the first thing you must do is stop digging. Take those credit cards and cut them up! You have to stop creating debt if you are ever going to get it paid off, you have to go cold turkey!
So there you are, the best way to get rid of your debt fast! It is not as easy as it looks though, it takes a ton of will power to change your lifestyle so drastically, but believe me, it is all worth it when you end up with a big expense in the future and you just write a check for it rather than pulling out the card!
Below are some resources that might come in handy on your journey to financial freedom. These are all websites and tools I have used myself and have found them to be a great help! Just a note for those who care, none of these links are affiliate links, but even if they were, I never promote anything that I would not use myself!
I will Teach You to Be Rich Ramit does a great job of breaking down personal finance for the average guy.
Dave Ramsey Dave is hard core, but his techniques work!
Mint.com Online personal finance software for tracking your spending and debt
Ebay.com Sell, Sell, Sell!
Craigslist Keep on selling!
Primerica This is a company that sells financial services the MLM way. They actually have a great product called the Financial Needs Analysis, it is worth checking out and its free, just know they will try to sell you some stuff, but it is all good stuff.
Suze Orman Another personal finance expert
Okay, we have hit a lot of information, but I am sure I have missed some, so please leave any of your tips and tricks down in the comments!
Image Credit: graur razvan ionut / FreeDigitalPhotos.net
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Great post, Sean. I tend more towards the Dave Ramsey model, although my wife doesn’t subscribe to the “rice and beans/beans and rice” formula. However, I give her all the credit for the encouragement to hunker down and get out of debt.
The debt snowball works, as I went from about $35,000 in revolving credit debt to $0 in just under 18 months. In the 18 months since Zero Day, it’s amazing how much has accrued in the savings account. Nothing is purchased unless cash is available. I used the lowest balance method and kept piling on any available cash (after the emergency fund was created).
One comment to make as it pertains to the resolutions that come this time of year: BE PATIENT! I had a difficult time during the debt payoff as it “felt” like it was taking too long to pay off. My wife would pat me on the back and show me everything that we had paid off. I still had a few outstanding balances and wanted them gone. But, eventually, they go away. It takes years to dig the debt hole, and getting out in two months or twelve months may not be realistic. Stick to your goals, reaffirm your victories, and keep driving on!
Congrats on your upcoming Zero Day!
Thanks for the great comment! I agree, it can feel like you are going nowhere at times, but I like to do a review each quarter on what has been paid off to stay motivated. You can’t always see the progress being made because you are focusing on that big mountain in front of you, but if you take time to turn around you will see just how far you have come!
Definitely a fan of selling stuff, but I’m not a huge fan of ebay though. With so many policy changes and poor customer service I’ve pretty much stopped using them to sell stuff.
Thanks for the comment Jared!
I use Ebay very infrequently, so the changes haven’t affected me much. I do like your site though, next time I do my spring cleaning, I will stop by!
Thanks a lot Sean, we’re working hard on it. We’ve launched beta recently and are having special discounts for Facebook friends (hint, hint)…
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