How to get out of debt
Dear friends,
Are you struggling with paying your bills? Is it hard to make ends meet at the end of the month? Are you looking forward to your next paycheck already on the 5th of the month?
This post is for you! So let’s dive into it!
- First things first, admit you want to change the situation and define a precise goal (get out of debt or save x dollars per month). For some, it will involve going through a radical change in mindset, a total change of spending habits and lots of courage but let me comfort you : The more efforts you will put in, the better the results! (see it as dieting but with dollars instead of calories)
- Reality check : Write down your revenues and all your expenses down, yes even that night out for your brother’s birthday or impulse purchased pair of socks . This analysis should give you some clues on where the issue is : It will either be a problematic spending pattern or an insufficient income, it might as well be both. Feel free to use the template available here, if you do not know where to start.
- If the problem is the spending pattern : Go through your expenses and select which items you can get rid of or reduce. The message here is “cut, cut, cut!” I actually went through the exercise myself and reduced my expenses on taxis (no, I did not only reduce it by switching to Uber), take-away food, subscriptions, clothing,… What one needs to achieve is to try to live more simply and to embrace frugality. Here are a few pointers :
- Do you actually go to the gym or could you exercise in the park instead?
- Do you actually use the premium features of your subscriptions or could you use the basic version as well? (cable, internet, phone,…)
- Only spend cash or use your direct debit card.
- Do you need that take-away cup o’ Joe every single morning?
- I personally tried one year without buying clothes in 2015, it was a great experiment and I felt it in my wallet.
- Cook and invite friends at home instead of restaurants.
- ….
- Why not make it a game against yourself? Decrease your expenses for a month or two and see results! You will be able to gauge where your limit is.
- About your limit, there will be only so much you can cut back on of course. So, if with the above tips you still do not manage to keep your head above water, it is time to increase your income :
- Are there job opportunities out there that match your profile? Can you work overtime at your current job? Can you take some tasks over from colleagues? You could try to work your way up the corporate ladder by showing dedication and bringing value to the company but we are looking at short-term income increases. If this is not possible, you can as well try to find a side job next to your regular job. (I personally had a side part-time job for one year in a Technical Stock Analysis company, I was not broke as such but the non-financial benefits were great)
- Why not use some of your skills for freelance work or finding a side activity? Think of translating articles, proofread CVs, teaching music, be a personal trainer, dog-sitter,…
- Sell stuff you do not need or use anymore, if you really can’t, just give it away and make someone happy. Getting rid of useless stuff is a good practice anyway.
- Now you have found a financially manageable way to live from month to month with a small “breathing room”, let us move on to the next step! However before you do so, you will be faced with a dilemma : Should you prioritize repaying your debts or building up your emergency fund? Opinions are varying, some will say focus on your emergency fund in case something unplanned happens : washing machine broke down, car accident and related repairs,… and some will advise you to first pay off your debts.
- The emergency fund : specialists will recommend you to typically have a safety cushion of 3-6 month worth of monthly expenses (including mortgage), this should give you the time to find a new job or recover from a serious illness. I definitely vouch for that. Now putting aside 3-6 months worth of expenses is not done overnight and…
- Debt in almost every case has a higher interest rate than money saved in your emergency fund : Picture this, you have 1000 USD available, putting it on a savings account will give you 2% annually or you could use it to pay down your credit card debt which costs 15% annually. What are you going to do?
- Saving 1000 USD, interest rate 2% the interest earned is 20 USD
- Debt 1000 USD, interest rate 15% the interest cost is 150 USD
- If you pay the debt off with your savings you are 130 USD better off per year.
- My 2 cents on the subject would be to have a mix of repaying debt and building an emergency fund :
- a short-term goal of saving for 1-2 months for the emergency fund, so you have something at hand immediately even if it costs you more in interest rates
- a long-term goal to get rid of your debt and slowly building up that 3-6 months cushion.
- I will develop in the snowball and the avalanche method in another post
- Congratulations you are officially debt free and can start to work on your financial goals!
Getting out of debt sure is very demanding and exhausting, endurance will be a key asset in the process. Make it a tradition to reward yourself along the way to keep you motivated! Go out to dinner to celebrate the repayment of a credit card, take your kids to an amusement park,… Once you are debt free you will
- start to live more freely
- have acquired more frugal spending habits
- you will be able to enjoy life more
- worry less and….
…never have to say : “I need a dollar, dollar a dollar is what I need”
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