Getting out of debt

getting out of debt

76% of American’s are living paycheck to paycheck

Think about it! 76% of people in US have no financial safety net, no emergency funds, nothing tucked away for a rainy day. And when it rains, it pours! God forbid they lose their job. One missed paycheck and they are further in debt. In fact, people use credit cards as their safety net. It’s downright scary.

But there is hope, you don’t have to live paycheck to paycheck. It all starts with the following these 10 simple steps. I do have to warn you though – simple does not mean easy. You will have to make tough sacrifices especially in the short term and take radical actions to start getting out of debt and get on the path to wealth, success, and happiness.

The following plan is inspired by the snowball method from Dave Ramsey’s book on “The Total Make Over”.

Getting out of Debt Plan:

Step 1: Do you keep a monthly budget? No? Go to mint.com and set it up as dashboard to view all of your finances in a single spot (they have a great mobile app too BTW)

Step wealth2: Make more than you spend! It’s that simple (I didn’t say it was easy. Simple – yes, easy – no). You need to cut your expenses (more on that to come in subsequent posts), AND increase your income (look for a second job, or a higher paying job … put your mind to it and get it done).

Step 3: Downsize & Liquidate. Desperate times call for desperate measures. Consider selling your house, downgrade your cars, have a garage sale, sell everything that’s not bolted down, and then sell everything that is bolted down.

Step 4: Create a buffer, a safety net using proceeds from the previous two steps . Start with something simple. How about starting with a $1000 as an emergency fund. Then bump it up to one month of living expenses. Remember it’s an emergency fund, not a shoe budget!

Step 5: Make a list of of all of your debts, starting with the smallest one going upto your largest one (probably your mortgage). Doesn’t matter what tools you use for that (paper and pencil are fine, excel is better) you can note the APRs and group them together (i.e. multiple student loans together, multiple Credit Cards, Auto loans, etc.)

Now you have a starting point, a foundation, and here is the path forward…

Step 6: Look into ways to consolidate your debts of the same type. You can save a lot on the APRs. I also encourage you to call CCs and negotiate with them directly. More on that later. Once you have a consolidated list of your debts sorted in ascending order (smallest to largest) start paying them off on at a time.

Step 7: As you pay off each individual debt cross it off your list and pat yourself on the back because you’re one step closer to your goal.passive_income

Step 8: Once you get through the initial (smaller) debts. Take a short breather and increase your buffer to 3 months of living expenses and repeat the process

Step 9: Continue chipping away at your list until the only debt that’s left is your mortgage. Remember to make a plan and stick to it and don’t get discouraged. It can take you years, but in the long run it will be worth it.

Step 10: And lastly, reflect back on what you’ve accomplished. Learn from your prior mistakes, but don’t dwell on them. At this step, you should have no other debt except for possibly your mortgage (if you “own” a home). I recommend to bump up your cash buffer to 6+ months of living expenses. Just use your best judgement and consider your personal situation, for example someone with double income and low expense ratio could get away with a smaller buffer than someone with a single income and high expense ration. Either way, I would err on the side of caution and go for more cash in the bank.

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