The quote from Suze Orman that “Debt is bondage” is so true. Debt not only holds you in bondage, it steals from you in the form of finance charges.
Do you find yourself avoiding answering the phone because you are tired of the bill collectors calling? I can remember being so broke that I had to spend extra money overnighting my house payment to the mortgage company. That was before the days of online bill payments. You have got it so much easier than ever before.
I have discussed debt and relayed my story about how I got into and out of nearly $100,000 of debt in earlier post Who is Responsible to Provide Basic Needs of Americans?
In today’s post, I want to help you create a plan of action and milestones. A good plan will lead you directly from where you are today to the point of complete freedom from debt. I will give you practical and actionable steps that you can follow to do what I did that got me out of debt.
Philosophy – The How and Why
Vale le Pena! Translation – It’s Worth It! Financial freedom is worth the sacrifice that it takes to get there. There will be some discomfort between where you are and where you want to be, but by enduring it you will reap the reward.Financial freedom is worth the sacrifice that it takes to get there Click To Tweet
When you are financially free, more of what you earn is yours to keep. You can buy and actually own more if you are not sharing a portion of your income with your creditors.
In the future, when you need to borrow money for big purchases like home or car, less money will go to finance charges allowing you to have nicer things.
Maybe you are in a place now where you are forfeiting too much of your hard earned income to finance charges. Perhaps you are not able to get the financing for a new car you want. Is your FICO score where you want it to be?
Pitfalls to Avoid
Setting the target unrealistically high
When you take account of how much you owe and how long it will take to get out of debt, the timetable of the goal could cause you to quit before you succeed.
Attempting to go too fast
Impatience could get hold of you and make you go too aggressively at an unsustainable pace. It took you a while to accumulate the level of debt you currently have, so it will take some time to climb out. That is OK.
Losing focus on the Goal
It is not how fast you go or that you take some setbacks that cause you to fail. Not getting back up and moving forward again is the only way you can fail. If you start a plan but don’t follow it, you will find yourself right back where you are again. You’ve got to see this through.Not getting back up and moving forward again is the only way you can fail Click To Tweet
In the steps that follow, we will set achievable goals as milestones along the way. We will look just a few months down the road for the first milestone so as not to have the goal beyond reasonable sight for a celebration.
Chicken and the Egg
Maybe you think that you don’t have the money to pay down the debt so you choose to put it off. Will that course of action make your situation better or worse?
If you want to start an egg farm, do you start by getting some chickens or some eggs? Either way, you have started.
If you don’t have money to pay down debt it is because you didn’t pay down debt. If you don’t start paying down debt, you will not have money to pay down debt.
Just like eggs come from chickens and chickens come from eggs; Paying down debt enables you to pay down debt.
We will get real specific with how to do it in this post.
Get Out of Debt Plan
Let’s put together a plan that resolves these issues for you. It is a new year. You can make this year your year to adjust course so that the rest of your life heads in the direction you choose.
Disclaimer: These steps are based on personal experience. Your situation and results may vary from mine.
1. Determine your personal Why
Write out your answer to the question, what will it mean for you to have freedom from debt?
Your why will be unique to you. Everyone has their own reason to begin the journey toward financial freedom. One person’s reason to get out of debt might be another person’s reason for being in debt.
Someone says, “I must get out of debt for my kids’ sake.” Another says “My kids are the reason I am in debt. If not for these kids, I would not be in debt.”
2. Identify your own personal starting point for this journey.
You have got to know how much debt you have. Not an estimate or ballpark figure.
You need to look at all those account balances that you hate to see. While you have the statement or are looking at the account online, write down the balance, minimum payment due, and the interest rate that you are paying on each account.
We will need those details later for upcoming steps. Might as well get it all at once. It is painful enough facing the debt monster, let’s not have to look at each one more than necessary.
Just remember that it will be getting better from here on in!
3. Organize your Data
If you are accustomed to using spreadsheets and have access to MS Excel, Google docs or some other spreadsheet software, you can use that to help organize your data and make calculations. Come back soon and you will be able to download a template in multiple formats here. You can choose a printable blank form and use a pencil in the most basic form.
Review Goals Fundamentals
Now, we can turn our focus from tasks to Goals and Objectives. Before we set specific goals for your get out of debt plan, let’s review some background about goals. Go back to
and read about setting SMART Goals
4. Estimate Timeline
Welcome back. Armed with that knowledge you are now ready to write your overall goal for getting out of debt. This part is personal and unique to your situation. You might have a ton of debt and living on low income. If that is your situation, your goal will be distinctly different from someone who just landed a six-figure job and has a small outstanding debt. In either case, the step is the same.
Do the math with a rough estimate of how much you can contribute per pay period against your overall debt and establish a realistic date of when it will all be gone. Don’t be discouraged that it is a date in the way off future.
The point of the exercise was to get a feel for what is realistic for your unique situation. Better to swallow the bitter pill now than to set an unrealistic goal and end up disappointed when you fail to meet it. The goal of being completely debt free is a long term goal for most people. Some never get there.
5. Lay out the path
Reward yourself for driving the big painful marker into the ground. Now that you know where you are today from step 2 starting point for this journey and where you intend to end up from the step 4 Estimate, we can mark out the path from here to there.
Now we can apply what you learned from the review by writing out your next milestone. This is where the rubber meets the road. You will decide now what you will do each payday for the next quarter of a year.
a. Arrange the accounts
Arrange the debt accounts that you collected in step 3 Organize your Data by interest rate, putting the highest interest rate acct on top. Stack them from highest to lowest interest rate.
b. Add up all the minimum payment amounts.
Note that if you continually only pay the minimum on all these bills, it will take something like 18 years to pay them all off. That’s because the minimum amount due decreases as the balance decreases. The finance companies have no interest in you getting them paid off in full. They will be happy for you to keep charging and paying the minimum amount due.
For this to work, you will have to pay more than the minimum due. But not haphazardly, you want to apply the extra to the account with the highest interest rate. You will want to pay as much as your budget will allow toward eliminating that debt.
A good rule of thumb is to add at least 20% to the minimum amount due. Another hack you can use is to pay the monthly minimum each payday.
c. Lock these payment amounts into your budget until the highest rate account is paid off.
Once the first account is paid in full, apply the amount that was being applied to the number one account to the next account in your list. Apply the sum of the amounts that you were paying to number one and number two toward number two.
It will go down a lot faster than the first one did. There are two main reasons for this. 1) the finance charge in terms of dollar amount decreases every month!!! 2) The amount going toward the principle on account number two has increased.
d. Each time you pay off another account, reward yourself!
You might do this by going out for a special meal or buying yourself a trinket that you can see and be reminded that you are achieving your goals!
6. Go for lower rates
When you can, reduce the interest rate. Do this by finding offers to transfer loan balances or consolidating to a lower rate account. Always make sure you don’t increase the balance or pay fees to do this.
7. Improve your FICO score.
Keep the credit line open when you pay off each account. This helps your FICO score. Just lock the card away in a safe place. This step is different than the strategy I followed. I got rid of unused cards, but then learned that having available credit that you were not using is good for your score. See Suze Orman for more on this tip. Again, don’t pay a fee to keep an account open that you are not using.
8. Celebrate Small Victories!
By celebrating each milestone you reach, you will fuel the motivation that drives you toward the next milestone up to the final objective. When you set measurable milestones, put each one close enough so that you will be able to see it and track your progress toward it. By having them well defined, you will know you have arrived and where to go next, once you have reached it.Celebrate Small Victories! Click To Tweet
Reach out to me on Social media below and share your progress along the way! I would love to be able to encourage you along your journey. You can meet up with like-minded folks in the Citadel of Paladin Facebook Group.