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Get Out of Debt

Having debt seems like a way of life these days. Some things seem unavoidable, house or car.. but sometimes its all little things that have piled up. It has become the adult version of the monster under the bed. There will be a point that you decide it is time to fight the monster, and get out of debt. I wish this was an article going over the highlights of finding the right armor, practicing swordplay and becoming the ultimate monster slaying hero. It is not, but for your inner child’s sake, lets tell everyone else that is what we are reading!

Get Out of Debt Resources

There are actually a lot of resources around talking about debt reducing / eliminating strategies. Truthfully, as far as the word strategy by definition goes, there are very few. There are a lot of ‘things’ or ‘actions’ to do that can help. I am going to primarily reference credit cards here as they are very easy for everyone to resonate with, but this goes for debt of any kind. However, as credit cards typically have the highest interest amounts, they are commonly the first one(s) that need to be paid off first.

Simply Budget

I think the very first one, in order of importance, is simply going to be budget (I say simply, yet it is a big broad subject). If you are acknowledging that your debt is large enough you need to be doing research online to help you figure out how to get out from under it.  I am going to venture to say that your budget is off, it could be a little, odds are that it is a lot. This is not a place to pull any punches or sugar coat anything, you are at the toughen up and get it done stage. You can’t wear every cool looking weapon and armor piece that exists. You have to carefully choose exactly what you need and are able to wear while fighting the monster.

Step One: Determine Needs

In a budget, that is being brutally honest with yourself about what you can and cannot live without. Common things to suggest are eating out, morning coffee, cable tv, entertainment events like golf, making good use of coupons for groceries, and or buy ONLY what is on the grocery list when at the store. There are lots of free options out there, library instead of renting movies and cable, running around a park instead of gym membership, free public entertainment events, etc. We offer personal and family finance consultations, one time or ongoing, . Doing it yourself is very possible, but sometimes having someone else help hold you accountable gets the job done when it otherwise wouldn’t get done.

Paying the Minimum Won’t Cut It

Budget is the biggest and the first one because directly connected to your debt is your ability to pay the debt. Paying the minimum on your debt is not going to cut it. If you have big debt, minimum payments will take a decade or more to pay. You need to pay more than the monthly payment to get ahead. This should not be a new or novel idea. How do I pay my debt off faster is really simple. Pay $100 a month for 12 months and you have ‘paid’ $1200 (ignore interest for sake of simplicity) or pay $150 a month for 12 months and have ‘paid $1800.

If you can pay $1800 a year or $1200 a year, which one is going to help you pay your debt faster? If you did not answer $1800 a year, then no one can help you because you refuse to use your brain in its most basic capacity. I am not writing this to be insulting. I am writing this because you need to toughen up and put serious effort into making this happen, or it won’t. It is NOT going to magically go away.

Increasing Your Budget

There are 2 ways to increase your budget. One is finding things you can cut out of your spending (like some things I stated earlier), thus creating more ‘extra’. The other is to find ways to increase your earnings, thus also creating ‘extra’. Many websites and strategies are going to suggest getting a second job, or finding side gig work to increase your income. Either, or both are effective ways of giving you the ability to pay more every month, and making real progress on eliminating the debt. Any job raise, tax refund, bonus, etc should at least be 80% extra above what you already have month to month.

The Snowball Method

An iconic method to ‘how to strategies making your payments’ is taught by Dave Ramsey,. no promoting or anything. He has done an incredible job branding and many commonly know who you are talking about when you reference him.  In particular I am referencing the snowball method. Say you have 5 credit cards all with big balances. You can very much pay extra on each card, you will pay off your debt faster this is true. However. there is a way to do it and earn mini victories along the way. Having victories and encouragement makes the march towards ultimate victory that much better. Pay the minimum on 4 credit cards and pour ALL of the ‘extra’ in your budget to the 5th card and pay it off at a rapid pace.

Once it is paid off, you now have more ‘extra’ because you don’t have a minimum payment on that card anymore. Take your new larger amount of ‘extra’ and add that to the next credit card  and repeat the process until they are all paid for. Whether or not to shred the cards and cancel them is up to you, personally I would shred most of them (keeping 2) However, credit score does reference total available credit to you, so having the cards still active yet unused does have some merit. Please be brutally honest with yourself though to determine what is best for you in the long run.

Pick Up the Phone

Another common strategy out there is to call around to the places that hold your debt and ask for a small amount of interest. It doesn’t hurt to ask – and if you consistently make minimum or more than minimum payments, they may in fact lower the interest being charged. If successful you are adding less and less to the balance each month and will in turn pay it off sooner.

The balance of your debt is the next very important bit. That is to minimize or stop how much you are adding to the debt each month. If you maintain the same spending habits, you are directly responsible for making the process of paying your debt take longer. I hope this is redundant as the first part of this blog talked about budget. Hopefully you have already decided to do things to reduce your spending. Which by nature has already helped reduce how much you are accumulating on your cards. Needless to say, we are human and often need to hear things in different ways for it to make sense. Why does my debt keep going up!! … while getting amazon deliveries on your doorstep every other day should not be a ‘lightbulb above your head’ revelation.

Ultimate Last Resort

There are some sources that recommend cutting retirement contributions. This is dangerous territory as the more you can invest early on, the more it can compound and make a big difference later in life. I would suggest that cutting retirement contributions is an ultimate last resort option when discovering ways to modify your budget and create ‘extra’.

Cash Cash Cash

Lastly, a strategy that I have seen used many times is the cash envelope method. Spending cash physically watching it leave your wallet or purse has a strong psychological connection to it. It is very different than swiping a card. Consider breaking out your budget into literal cash, separating a stack of cash into separate envelopes to pay for even regular things like utilities, rent, cellphone, gas, etc. It helps you see the limits of your budget in a very different light.

In conclusion, it will not be a rapid rise to fame.  It takes time to go from being a fighter to being a hero and paying a large debt will (by no surprise to anyone) take years. However, by wearing the armor consistently, every month without fail, and diligent sword practice, you will evolve into a well honed monster slaying hero, nay, a legend.

Charles Steinmetz
Senior Tax Advisor

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