How to Get Out of Debt Once and For All

Get-Out-of-debtI have been in debt for over 20 years.  I have been on a mission to get rid of debt once and for all for the past 2 years.  I am almost done with this mess, and I am proud of my method.

Here is how I got out of debt once and for all.

My method is stolen, of course;  I did not make this up.  There are a ton of experts who I have paid attention to over the years, and they shaped my method. If you feel like you just don’t know how to begin, this program is designed to give you a guide of sorts.  Of course you should tailor it to fit your needs.

This is not so much for people who have a couple of cards and are lazy about paying them off. It’s for those of you who have trouble finding any extra money to pay off debts, who seem to find themselves getting deeper and deeper into debt, and don’t know how to stop it. It’s for those of you who have reached bottom like I did.

Try one of these steps per week.  Focus on each step intensely before moving on to the next.

How to Get Out of Debt:

  1. Face the truth.  Admit you have a problem. Now set aside just 30-60 minutes a week to deal with your finances — make it a set day and time, and don’t let yourself miss this appointment.  Start to educate yourself about debt management on the internet with free resources, such as ones at Baines and Ernst.
  2. List your expenditures.  Make a list of what you spend.  Take out some statements and write down the stuff you charge. If you have a major problem with credit cards, cut them up NOW.  You know what’s essential; your bills, housing, auto, gas, groceries, etc. Non-essential? Clothing, CDs, DVDs, books, magazines, gadgets … the list may go on. For the next 30 days, you are going to try and go without this stuff.  Just try..
  3. Start an emergency fund. Save this for week three: set up a savings account for an emergency fund. If you have one, skip this step. Chuck every cent you can toward this emergency fund savings account until you get to $1000.  It’s important that before you start paying off debt, you have at least a small emergency fund. Aim for $1,000 at first, and you can grow that later. The reason: if unexpected expenses come up (and they will), and you don’t have an emergency fund, you will skip your debt payments to pay for the unexpected expenses. Create this fund with all your might as quickly as you can.
  4. List your debts. This is the most humbling of exercises, but you must do it.  Set up a simple spreadsheet. In one column, list all of your debts — credit cards, medical bills, auto loan, etc. You can leave out your mortgage, but put everything else. In the second column, put the amounts you owe for each debt. In the third, put the minimum monthly payment, and put the percentage interest in the fourth column. Total up the second and third columns to see your total debt owed and how much you have to pay, at a minimum, towards debt each month.  There are many apps you can use for this as well.
  5. Create a budget. This can be a rough step as well, but it’s not as bad as you think. Set up another simple spreadsheet. In one column, list your monthly bills (rent or mortgage, auto payment, utilities, cable, etc.) — everything that is a regular monthly expense. Then list variable expenses (things that change every month) like groceries, gas, eating out, etc. Later you should add irregular expenses (stuff that comes up once in awhile — less than once a month) such as auto and house maintenance, clothing, insurance, etc. But we won’t get into that now, as we want to keep it simple. In the second column, put down the amounts for each. Be sure to put enough for things like gas and groceries, as you don’t want to be short. Be sure to also include your minimum debt payments and your emergency fund deposit. Now, list your income sources and monthly amounts. There. You’ve got a temporary spending plan (you’ll want to add the irregular expenses later). Now, if the expenses are greater than the income, you’ll need to make adjustments until the expenses are equal to or less than the income.
  6. Use a cash only envelope system.  You may find it hard to keep track of your spending and ensure that you’re sticking to your spending plan. Here’s the key: first do the emergency fund deposit. Then do the debt payments. Then do your monthly bills. Then withdraw the variable amounts in cash, and put them into separate envelopes. When your envelope is empty, you can’t spend anymore. Continue to cut back on non-essential spending as much as you can at this point, so you’re able to stick within your spending plan.
  7. Start a debt snowball. Check out my post about the debt snowball method here.
  8. Grow your income. Explore ways to make more money. Take 30 minutes to brainstorm. Are there ways you can start a small business online?  Sell your stuff on eBay? Start freelancing on the side? Get a part-time job?  This only has to be temporary, but the more money you make, the faster you’ll get out of debt. Be sure to apply every cent of your new income to your debt snowball.
  9. Track your progress. Use an app like Debt Payoff Pro to track your progress and keep you motivated.
  10. Celebrate! It’s important to celebrate, not only when you’re out of debt, but along the way as you eliminate each debt. Have fun! Make this a game. It feels so incredible to stop spending and gain control of your finances instead. Find free entertainment, make it a challenge to be frugal and save money and find cheap used stuff. Celebrate along the way (just don’t spend money doing it!).

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