How to get out of Debt

Prompted by a recent e-mail from a reader and the opportunity to meet with a family member to discuss personal finance and how to get one’s budget on track, got me thinking of the overall steps on how to get out of debt. It made me realize in my close to year and a half blogging I’ve never really posted an overview of how one might get started to climb their way out of debt or getting their money to work better for themselves. Sure I’ve covered parts of our plan on our journey to pay off $109,000 worth of debt, but never the step by step. So here it is my best advice for someone looking to kick-start debt repayment, or get the old budget back on the rails.

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Debt Freedom Steps

I’ve tried to list the steps in chronological order; the one that could be placed anywhere and everywhere is communicate. As you read my advice I think you will see why.

My overall knowledge of personal finance began over five years ago. I knew we were in trouble months before we got our act together in June of 2010, I just never admitted before that time that it was a real issue. That’s the first step in my opinion, realizing you need help and will to accept help from others.

Realize you need Help – Once you accept this, it is easy to move on to the next steps. Once I accepted we needed to make a change I began to read everything and anything I could get my hands on about personal finance, including many blogs and books. Dave Ramsey’s “The Total Money Makeover” remains my favorite and it’s a book I have gifted to people over 30 times.

Build a Plan – Now that you’ve mentally and emotionally ready for the change you need to build a plan. The best way is in a form of a budget. I stared mine on an excel spreadsheet and still use it today. You can jot it down on paper, use an app or software like Personal Capital, but whichever way you choose you need to get your total income, debt and expenses down in some format.

A budget could take time to evolve, you may want to track your spending for 30, 60, 90 days saving all receipts to see where your money is going. You may be surprised at some of the dollar amounts of some categories, they could be much higher or lower than you originally estimated. This is why tracking all spending over a period of time is helpful.

Communicate and agree on the Plan – It’s so important to be on the same page with your spouse, partner, children, etc. when making changes like this. I was the one who initiated the plan for us, but before we started anything I reviewed it with my wife. We compromised on some things, but came away with an agreement on our money and budget that we were both in sync with. Then, we looped in our three children so they were aware of the changes and to help start to educate them about all things personal finance related. Communication is not just a one-time thing, it’s ongoing every day. Our family talks about money and budgets all the time. It’s the way we’ve stayed on track for over four plus years.

Stop building New Debt –Once you know you’re overall numbers you can begin to move forward on taking action. If you have debt, the next step is to stop accumulating any new debt, not tomorrow, not next week, but today! You don’t want to dig yourself further into a hole, you want to begin climbing out immediately. We did this by cutting up our credit cards and only using cash.

Wants versus Needs – Once you have a clear understanding of the budget and all expenses, it’s time to priority the expenses into two buckets either a want or a need. Food and shelter are clearly needs, the new 60 inch television or pair of shoes is wants.

We were able to cut a number of wants out of our expenses things like satellite radio, eating out, and entertainment to help cut spending. These cuts become extra money now in your budget that can be used to pay down your debt.

Emergency Fund – Or the peace of mind fund. You need to have some type of cash saving for when life happens or Murphy come to visit you. We never had an e-fund before 2010, and when an appliance broke or we got a flat tire it was stressful. We didn’t have a plan for these things and we had to scramble to find the money to pay for it or use a credit card. A $1000 saving will cover must events and reduces so much stress and avoid money fights you’ll have no idea until you have the e-fund in place.

Debt Snowball – The debt snowball is the method we chose to pay off our debt. The debt snowball is a debt reduction method where one owes on more than one account and pays off the accounts starting with the smallest balances first while paying the minimum on larger debts. After the smallest balance is paid off, the payment is snowballed to the next smallest debt. This method helps build momentum. This worked best for us. Others use the Debt Avalanche method where you pay off the balance with the highest interest rates first. Anyway you choose to pay off your debt is fine, as long as you are not adding any new debt along the way and adding as much additional money as possible to your repayment is the key.

One piece of information I found interesting is that most banks and credit unions offer free credit counseling. Check with yours, they can supply you with additional advice and information that you may find helpful. You can always speak with you creditors yourself and request an interest rate reduction. The best approach is to be honest and be diligent. Don’t give up after the first “no.”

Build Wealth – Once you have completed your debt repayment, you will now have a surplus of income each month to do what you want with. I would recommend building wealth, by increasing emergency fund saving to cover you for when bigger life events happen. Could you survive a job loss? Build retirement saving, by investing. Save money for college, a house, a vacation, a car, etc. The possibilities are endless once you free your income up to spend on your priorities and not minimum payments.

Now these steps that I’ve outlined will not be easy. They will take sacrifice. We averaged a $2180 a month debt payment for 50 months in order to achieve our goal of becoming debt free. It was tough to do at first. We cut corners, we took on extra work, we often had to tell our three children “no” when they wanted to go do things. In the end the short-term sacrifice was worth the long-term goal of being debt free. Now having a surplus of over $2k per month we can do just about anything we want. If not, we just save our money for a few months and the possibilities are endless.

I hope this information is helpful, it’s been a blessing for my family. Please comment or contact me if I can help you or your family in any way.

31 thoughts on “How to get out of Debt”

  1. Awesome and thorough post, Brian. Love your tip about reading stuff – it’s something I still do to this day, even though we’ve got our plan down well. Never stop learning, as it motivates one to keep going.

    1. Thanks Laurie! Agreed, reading some many different points of view on personal finance keeps me sharp and helps me stay motivated too,

  2. Great tips on getting out of debt! More people need to read this.

    A person definitely needs to realize that they need help. If they do not, it would be hard to fix the problem.

  3. I have also given Ramsey’s book as a gift – but not 30 times over! I really admire you for doing that. The trick is to know when someone sincerely wants to do what it takes to get out of debt. Right now, a man at our church is reading our copy of The Total Money Makeover – and he’s SO excited about it! The only problem he has with the borrowed copy is that he can’t write on it. He’s got notes all over his desk. I’d say he is a very good candidate for the book as a gift : )

    1. Thanks Prudence. I gave it to my staff and co-workers 2 years ago as Christmas gifts and I always keep a few copies on hand when people ask how did you get out of debt.

      1. I told my husband about the fact that you had given 30 copies of the book as gifts, and he said that he’s been thinking he’d like to buy some – both print and CD versions – to give away. So thanks for the inspiration!

  4. I think the biggest key to this is understanding that you are in debt and realizing you need help or a change. I have worked with people in the past who have debt and continue to make the same decisions over and over again. Until you are truly ready for change and help, you are going to stay in debt.

  5. Something that goes along the line of building wealth is trying to earn more than what you are already making. I do get frustrated when I see people who are already in debt and say they want to be out of debt “so bad” but they continue with their super spendy ways, sometimes going into further debt. My guess is they haven’t reached their true rock bottom yet. 🙁

    1. I’ve seen co-workers complain over having no money, but continue to make bad choices, eating out everyday, spending money on fantasy sports, etc. Unless you are will to help yourself and make a change, there’s not much I can do for you.

  6. Like all life changes, you have to be ready to change in order to make it happen.

    I think it’s awesome you’ve given Dave Ramsey’s book away so many times!

  7. That’s a really thorough breakdown of how paying down debt goes – I love that you mentioned getting in the right mindset and educating yourself. I can’t imagine having to get an entire family onboard with a debt payoff plan.

  8. I really should pick up Dave Ramsey’s book — it sounds like it was incredibly helpful to you! Something that I have been trying to implement with my husband is a monthly money checkup. We have been pretty bad about it lately, but getting together once a month to really review all that we have spent, saved and put toward our debt is sometimes a wakeup call, and sometimes a cause for celebration! Either way, it keeps us on track.

  9. Hi Brian, you have an awesome post here. I like the idea of “wants versus needs”. In order to get out of debt, we should prioritize our needs not wants. Such a practical and easy ti understand example you have in this post. A well-written guide on how to get out of debt. Credit cards are also one of the greatest enemy of a man who wish to get out of debt.

  10. Congratulations on being debt free! You guys really stuck with it and I know that it was worth it in the long run. Thanks for linking up a Financially Savvy Saturdays!

  11. Brian, it sure seems like you know very well about debt and how to get out of it. For my wife and I it’s been somewhat of a challenge because of all the debt that the collections services have been calling us about. So far, we’ve been in contact with them in dealing with the credit cards that we are so in debt with.

  12. I love Dave Ramsay’s method! I budget every month, but too bad now all my budget consist of paying debts and bills. I barely have any penny left. Fortunately, I’m still a free loader at my parents house. So right now I’m hanging on a thread waiting until I can pay off some of my debts so I can budget properly again.

    1. Good luck Kiara. Let me know if I can help in anyway. Focus on cleaning up the debts first and things we begin to get easier.

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