Run for Your Life! The Right Way to Get Out of Debt

Run for your Life!!

It seems that every January, the most common question I get is, “How do I get out of debt?”
My short answer is, “As fast as you can – Run for your Life!!”
But you need a plan… so here it is.
  1. The first is that the person should set up a small (around $1,000) emergency fund to cover any true emergencies – that is any unforeseen expense that is NECESSARY, like a car repair. That way they don’t go further into debt.
  2. The second is that they have a written budget. There are a number of on-line applications like EVERYDOLLAR , YNAB (You Need a Budget), or Mint that can be of great help in creating a zero-based budget that gives each dollar a name and a destination. The challenge with getting people to budget is helping them change their mindset to understand that a budget is not a prison. Rather, the budget is their permission slip to spend! There’s a reason we call money “Currency;” it flows. The budget serves as the financial aqueduct of our lives and channels the money where we need it to go.
What Else Should They Do?
  1. Get a side job, use that money to pay off the debt as quickly as possible.
  2. Create a debt snowball. That means that they should pay off the smallest debt first, paying extra on it while paying only the minimum on the other cards.
  3. There is a website that offers free or low cost visual aids that will help people track their progress. It’s called Debt Free Charts – They have some great stuff.
  4. The way to get out of debt is to be direct and intense. The degree to which they pursue their debt directly corresponds to the amount of time

    spent in debt. So, if they really want to get out quickly, there will have to be a lot of, “No’s” in their life – or at least a lot alternative, low-cost spending options.

    • Cut out eating out… it costs 3x what cooking does
    • Buy a coffee pot, you can make a whole pot for less than what a cup costs at Dunkin
    • Shop at places like Aldi instead of Whole Foods
    • Instead of hosting a dinner party, host a pot-luck
    • Don’t let your car idle
    • Plan trips so that you do all your driving at once instead of running one or two places, going home and doing it again.
There are scads of other ideas, but these are a few…its things like this that a coach can help with too.
What NOT to do
So, let me suggest at this point, that the one thing people who are in significant credit card debt (and other consumer debt too) should not do. Do not consolidate debts. The reason for this is that first comes a sense of relief at having put off the payment and reduced it. There are several reasons why NOT to do this:
  1. The truth is that they are swapping a series of smaller debts with several minimum payments for one larger debt.
  2. In the short term they may have a smaller payment, that lower payment actually lengthens the amount of time they stay in debt.
  3. Most consolidations may offer a low or 0% APR but there’s almost always a trap… a transfer of balance fee that is a percentage of the debt that is now being serviced by the transferred company… which means that the actual amount of debt goes UP to begin with.
  4. Moreover, because there is a sense of relief, those with poor credit card behavior tend to see this relief as a permission to charge again, and they end up with even more debt.
Another big “No” is Debt Relief Services. These companies pray on the desperation of unsuspecting people and get them to pay for a service that they can, and should to themselves. Here’s what happens, usually.
  1. A debt relief company will tell you they will take care of your debt and help cure your credit rating. The only way to cure your credit rating is to pay your bills. So don’t believe that one. The only Whopper to swallow is the one from Burger King.
  2. They will tell you that if you pay them $X per month (usually in the $100’s), they will manage your debt. They also tell you to stop paying the companies directly…
  3. They manage your debt by collecting the money you send and keeping it. Then they don’t pay your bills.
  4. They wait until your debt has gotten so bad and your credit is so trashed that the people you owe money to are willing to settle your debt for pennies on the dollar. All while the people you owe money too are still writing and calling you because they need you to pay them.
  5. And what have you learned in the process about getting out of debt and staying there? Not a blessed thing… most people who go that route go back in debt and deeper.
So, what should they do? In short:
  1. Set up an emergency fund
  2. Go on a budget
  3. Cut Costs
  4. Pay non-mortgage debt off rapidly using a debt snowball – paying smallest to largest (with extra only on the smallest, and then rolling that amount to the next, etc.)

Getting started can be challenging. That’s where a financial coach comes into play. We’re here to help you move beyond debt to start reaching for your dreams… To raise hope for you!

Give me a call or schedule your complimentary consultation!

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