HOW TO GET OUT OF DEBT
STEP ONE: Accept Your Fault
While some people get into debt through no fault of their own, most (like me) are in debt because of bad money practices. While a good portion of my debt comes from law school, the other portion comes from being bad with money. Admittedly, I used to believe that I was good with money because I never made a late payment.
Once I wrote out the number of bills I paid a month and determine how much of that was debt, I learned that I spent over $1,000 dollars a month on my debt alone. That is a lot of money I could have saved up right now instead of giving it away. After tracking my spending for a whole month, I was able to determine that my spending habits were atrocious; basically, if I wanted it I bought it.
“The definition of insanity is doing the same thing over and over, but expecting different results.”
Once I accepted my fault in my debt situation I knew I was ready to make a change.
STEP TWO: Access Your Financial Situation
You cannot successfully become debt free if you do not know your financial situation. First, determine your net income. Net income is money you actually bring home after taxes. This money will be your shovel. It is your most powerful tool for paying off debt.
Once you have determined your net income. It is now time to gather all your monthly expenses, whether it is fixed or variable. Your monthly expenses should include everything to rent, food, transportation to reoccurring bills, subscriptions and debt.
STEP THREE: Create a Budget
Once you have access your financial situation it is time to create a budget. You can check out this post where I dive all into how to create a budget.
STEP FOUR: Emergency Fund
Before you start paying down any debt, it is best that you save up some money for when Murphy hits. An emergency fund is different than a savings account and is for emergencies only.
So how much should you save? That depends on your income and household. Dave Ramsey suggests that if you make under $20,000 a year to save $500. If you make more than $20,000 a good safety net is $1000. Of course, if you also have children you should think about saving more to cover their emergencies. I personally do not feel comfortable with only $1, 000 as my emergency fund and therefore I up that number to something I feel more comfortable and safe with.
You can save for your emergency fund fast by doing some of the following:
- Get a part-time job
- Create a monthly budget
- Start looking for ways to instantly save money
STEP FIVE: Debt Snowball Effect
Now, this is the step that will actually get your debt payoff rolling. While the first few months may feel like you are not putting a dent in your debt. Once the snowball effect kicks in you will start to see how quickly you are paying off debt.
What is the Debt Snowball Method? The Debt Snowball Effect Method requires you to list all your debts starting from the lowest to the highest and pay the minimum balance of each debt. Once you have paid off your first debt, you then roll the minimum balance of your first debt over to your second. Then you continue the process until you are debt free. Any extra money you make goes to paying off your debt faster. I paid off my first debt in one month using this month.
How high the interest is not of importance. The idea behind attacking your small debts first is that it will give you a sense of victory when you pay it off. In return, it will motivate you to continue going.
STEP SIX: No New Debts
The goal is to be debt free. That means you should never create any new debts. Anything you want to purchase you should be able to pay for it in cash. I good rule of thumb when determining whether or not you can afford something is can you purchase the items three times.
These are my four steps on how to get out of debt before you turn 30. Remember that this is a marathon and not a race.