Good Debt. Bad debt.
The best is No Debt. Regardless of how we accumulate it or why, getting out of it is the best thing that we can do for ourselves.
With the ease of access to credit cards and short and long-term financing for pretty much everything, it’s no wonder that many Americans have accepted debt as a normal way of life. Even if something is normal, it doesn’t necessarily make it smart.
I really try to make smart decisions, not perfect, but smart. Getting out and staying out of debt is one of the smartest decisions you or I could ever make.
Let’s consider friends: Sallie and Kelly
Sallie has a car payment, 2 credit cards, and a small student loan.
Her minimum payments on these four debts each month total $660.
If she continues to make the minimum payments, all four debts will be paid off in 5 years.
Depending on Sallie’s income level, some people would say, not bad.
Now let’s consider Kelly.
She has no car payment, no credit cards and used grants, scholarships, and work-study to pay for college.
Kelly uses the same amount of $660 and contributes it monthly to her job’s 401K.
After 5 years, Kelly’s contributions plus interest at a modest 6% return a year becomes $44,660!
I can already hear the arguments…No one would make $660 in monthly contributions to a 401K!
You’re slightly right—but consider how quick we are to accept $660 in monthly payments towards debt!
By a lot of normal standards, $660 in monthly debt is “not all that bad” but this is the mindset that prevents us from building wealth. There are two sides to the word interest. You can either pay it, or you can either earn it.
Paying interest = Debt
Earning interest = Compounding
In simple terms, Compounding means interest earning interest. Just know that it grows, increases, and become more.
While I have been like Sallie, Kelly is my role model. If you also want to be more like Kelly, here are 5 things you can do now to follow her lead.
5 Steps to Get Out of Debt
1. Stop purchasing anything and everything on credit.
Statistics show that credit card debt is one of the worst forms of debt
and women are more likely to have credit debt than men, incurred mostly for daily necessities.
Now in some small defense, women lead most households and carry the responsibility of shopping (toiletries, cleaning supplies, food, etc.) for the family. But these stores also accept cash so we have to move beyond the familiar and immediately stop all and any spending with the use of credit!
2. Get organized.
You must have a system for handling your finances. If the monthly budget is chaotic or does not exist, getting out of debt is like a cat chasing its tail. Round and round you go, and goals are seldom accomplished or are short-lived.
Here are 3 quick tips to organize your monthly finances.
• Manage all checking accounts and saving accounts from one online portal or tool. Several online websites such as Mint.com allows users to view all accounts, regardless if located at different institutions, under one login. This is helpful because you always want an aerial view of your money. Depending on where you bank, you might have the same capability through your primary bank’s online tools. This is what I use and I personally love it! I can see our banking, savings and investment accounts all in one place.
• Pay most, if not all bills through online banking. This saves me so much time and money. Your bank’s Bill Pay services should be flexible and easy to use. For instance, the ability to receive e-Bills and to set payment dates and amounts help make paying the bills a little more convenient. No more hunting down statements or researching past due bills, everything is stored in one central location. For as much as possible, limit creditors from drafting payments from your account. Instead, you should control when and the amounts of each payment from your account. So many things can wrong when creditors have access and agreements with you to auto draft your account. Stay in control of access to your account.
• Once all of the bills are paid, shop in cash. Yes, ATMs still exist and are updated with slick features—deposit checks, email receipts, etc! Once a week, I make a trip to the ATM to withdraw enough cash to cover our normal weekly spending—pocket money, gas, general house supplies and groceries. Using the cash envelop system, we allot a specific amount for each category and spend from there. I like the control that this gives us. Free will spending with our debit cards diminishes and we spend cash differently because it’s so real!
3. Make a list of all outstanding debt.
I remember a time when I didn’t know who we owed nor how much! Once you can list all of your debts out and come up with a total outstanding balance, then you will know where to start. For some people, the amount maybe large but it’s really about the dedication. If you are dedicated enough, the dollar amount won’t matter as much. Fight the battle one step at a time by at least figuring out where you need to begin.
4. How much money can you realistically throw at your total debt each month?
This is where your budget makes all of the difference. Your budget is more than what you can’t do. It’s what you can do! Most people discover that once they have met their basic needs, food and shelter, there is a lot of discretionary income leftover but because it’s not properly managed, it leaves! Again, get in control and make your discretionary income behave. Tell it what to do every day, every month.
5. Look for additional income to throw at your debt total.
This is what I love! It’s time to get creative and find new opportunities to make more money. However discipline will matter because you don’t want to extend yourself and make extra money and then throw it away by eating out or shopping for new things! Here are some tips for finding more money to throw at your debt.
• Sell old books • Pet sit • Ride the bus to work, save gas • Go on a spending freeze • Shop for a lower car insurance policy • Sell unused clothes • Sell the kid’s old toys • Pack lunch for 2 months • Take surveys online & get paid • Go to the Dollar Store first • Start a blog • Stash any refunds • Cut cable for 3 months • Hold a garage sale for friends • Become a personal shopper • Pick up a Part Time job • Get a roommate • Ask for a raise at work • Cut the house phone, no landlines • Become a Virtual Assistant
Are you ready for the challenge? I know that you can do it and that you will enjoy growing wealth a lot better than making payments.
Leave a comment and tell me how you have made or are making decisions now to get out of debt.