How to get out and stay out of debt

A common problem these days is debt. Let’s face it, when someone says you can get a Ferrari now and pay just a little every month until 2055, that’s pretty enticing. The problem is all those bills add up, eventually overwhelming even the best incomes. Debt then becomes an albatross, haunting your dreams or keeping your up at night pacing the floor.

If you want to be free from the burden of debt, there really are only three options, spend less, earn more, or everyones’ favorite, bankruptcy.

To spend less, start by making a budget. Most people don’t have, or don’t want a budget, but that is why they have no idea how much money they spend, or even earn. Start by getting your paychecks for the last year. Average how much you earn per month, so you will know approximately what you have to work with. I like per month because most bills like rent and utilities are by the month.

Next, find out how much you are spending. Most “experts” tell you to cut up your credit cards to get out of debt. I am suggesting the exact opposite, I want you to put ALL your purchases on a credit card (if you have the limit available that is). I don’t care if it is a stick of gum, put it on the card. That is the only true way to know how much you spend. You will get a statement at the end of the month with ALL your expenses itemized, and then you will know what is actually going out. You will be surprised at all the leaks in your financial bucket.

Now, if you are making more than you are spending, great, have fun. But, if like most people you are spending more than you are making, look for places to cut back. 18 Starbucks frap mocha almond delights a week? Try cutting back to 16. Actually, just see my article on frugal living if you are REALLY trying to cut back. The main point is you are going to have to align your spending with your earnings. What is left over can then be used to pare down debt.

Pay off your highest interest credit cards first. Pay off the 20% before the 18% etc. And, if you have savings, use it!

Why some people have $5000 in the bank at 1%, but then pay 20% interest on a $5000 credit card bill is beyond me. Remember, your credit card can be your backup in case of emergency. Also, get an overdraft line at your bank, as they are more likely to give it and less likely to cancel it. This can be used as an emergency fund as well. If some financial “expert” tells you to save 10 months worth of income while you are still paying 20% interest (like Suzy Orman), they are nuts. People never get out of debt that way.

Call your credit card company just to see if they will give you a better rate. It doesn’t cost anything, and it may save you a wad of money. Even lowering from 20% to 15% can save you hundreds a month depending on how much you borrowed. It’s worth the call.

Also, if you have the credit available, transfer your 20% rate to a teaser 0% rate card if possible. Again, if you are just going to rack up more debt, this isn’t going to work. But, if you are intent on paying it off, the interest expense will be much less, allowing you to pay your debt down much quicker.

I don’t recommend debt consolidation in most cases as you will then be paying for that cheeseburger at McDonalds you put on your credit card for the next 30 years. To get out of debt, pay for discretionary purchases by the due date.

Then, simply pay down as much as you can every month, and watch as those financial pounds melt away. Once you get closer to being out of debt, it will often feel like a weight has been lifted off of you emotionally. If you see yourself falling hopelessly back into the debt trap, see a psychologist. There is probably something deeper that needs to be worked on other than your financial skills.

Hopefully, this will encourage you to stay out of debt in the future. It’s really simple, earn more than you spend.

To earn more, think about getting a part time job. Now I know you will say, I already work 40 hours. Well, work 60 or 70. When I was young, I worked a job that was 115 hours a week, and that was one job! Again, how serious are you about getting out of debt? Just stacking groceries or flipping tater tots a few hours a week can give you the extra few hundred dollars needed to pare down your debt. You can also give plasma, or mow lawns for extra money. Think outside of the box if you are really serious.

Now, some people are in so deep that none of that is going to work. So, really the only other solution is bankruptcy. Read my article on bankruptcy for some pointers there. I kind of like bankruptcy because even though I have never used it, I can see how people that aren’t very financially literate can be enticed into debt far beyond their ability to manage it, and bankruptcy may be a solution. Hopefully by learning a little about how to save and invest (read my articles!), you will become financially sound and won’t have to worry about such a thing in the future.