Financial Fridays: 5 Basic Steps to Getting Out of Debt

There is a perception that managing personal finances is a complex process. You have to be super-smart with a degree in accounting in order to keep your bank account balanced. And so, people use this as an excuse as to why they are in debt, or why they constantly overdraft, or why they don’t have retirement savings or a college fund for their kids.

That is totally lame. And I can say that in complete charity because I used to be one of those lame people. I always hated math and have never been a whiz at it either. (I can still picture my light green kindergarten math book with the Jesus lambs on it. I love Jesus and lambs are cute – but no. Not combined with those horrible, impersonal numbers.) I overdrafted on my checking account many times during college. I even opened up a credit card because you know, that’s how a young adult should learn how to handle money properly.

But despite my poor track record with math, I’ve learned that handling my own money successfully is actually a very simple process. That doesn’t mean it’s always EASY – getting out of debt is HARD WORK! But it’s not rocket science. (I was trying to avoid that cliche but I just couldn’t help myself.) I’ve listed five simple steps that have been helpful in my journey towards being debt-free:

Pre-Step: Get on a budget! Your money can’t be flying around willy-nilly. Make it go where you need it to go. My money controlled me until I took this step.

1) Admit you have a problem and stop it. Yes, debt is a HUGE problem! Debt is a disease. According to the American Student Assistance, there is between $902 billion and $1 trillion in outstanding student loans in the United States. This is even more than our credit card debt, which totals about $848 billion. So admit you’ve dug yourself into a hole and resolve that you will QUIT NOW.

2) Gather information about all your debts and bank accounts. In order to solve a problem, you have to be informed about the problem. You know you have student loans, but could you tell me if they’re private or federal? What are their interest rates? Are they in deferment or the grace period? How much do you have in savings?

3) List out your debts from the smallest balance to the largest balance and their minimum payments. This is a point of controversy – wouldn’t it make sense to pay off the highest interest rate loans first? Yes, mathematically-speaking. But as Dave Ramsey likes to say, if we were doing math correctly we wouldn’t have gotten into debt in the first place! And actually, research done by marketing professors at Northwestern University’s Kellogg School of Management has shown that people who pay off the smallest balances first “are more likely to be successful at eliminating all of their outstanding balances.” Personal finance is mostly about behavior, and the psychology of “quick wins” works in the long run. http://business.time.com/2012/08/16/the-verdict-is-in-tackle-smaller-debts-first/

4) Examine your budget and put all extra money on the smallest debt. If you don’t have any obvious extra money, see which spending categories you could tighten up, even if it’s by just a few dollars. Or perhaps it’s an income problem – delivering pizzas in the evenings or doing freelance work on the weekends could be the answer.

5) As each debt gets paid off, transfer the money you were paying on that one to the next debt in line. You will be so excited to feel the traction, and your quick wins will propel your “debt snowball” into something massive! Celebrate your victories and keep pushing toward the finish line! Even if you start out with a mountain of debt (as I did with about $140,000), there IS an end.

The question is, how much are you willing to sacrifice to get there?

~Malori~

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The real, gold-plated rose The Warrior presented me with after I paid off half my debt! It was a wonderful surprise and now sits on my desk as a reminder of how far I’ve come and how much closer I am to being debt-free.

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