Several years ago, I had a mass of debt that I just couldn’t shake free.
This might sound familiar if you’ve ever struggled with debt yourself. I’d gain a little ground and pay some of it off, and then a couple months later I was right back where I started. Whenever I worked out a plan to get out of debt, the numbers always told me it would take a few years to pay off.
But it only took me one year.
This is a 3 part series on how you can get out of debt.
You Have to Stop the Bleeding First
Just like running a business, your personal finances have 2 components; income and expenses. When your expenses are greater than your income, you’re digging yourself deeper into debt. And this can happen gradually over time, or it can happen after a catastrophic event in your life.
You have to deal with these expenses before anything else. Just like a trauma surgeon, you have to stop the bleeding first.
Make Two Lists
The first list, we’ll call Fixed Overhead. These are the regular bills you have every month, including your minimum debt payments. Things like the mortgage, the electric bill, cellphone contract, car payments. Make a list of everything.
The second list, we’ll call Variable Costs. These are things that you buy all the time where the costs change depending on what you’re doing, and how much of it you’re doing. This is everything from buying coffee on the way to work, to food, to entertainment, to buying a big screen tv.
Between these two lists you should account for every single dollar that you spend on a monthly basis.
Now Use these 3 Simple Rules
To get out of debt and get your life back requires change. To make that change happen, you have to change the rules. There are 3 rules and you have to apply at least one of them to every single thing on both your lists.
Rule #1: Simplify
Simplifying your life is the simplest way to cut your expenses. There are things you have that you just don’t need. If you get the newspaper delivered, have an internet connection and 300 cable news channels, it’s time to simplify. Pick one.
A friend of mine got rid of her house phone and just kept her cellphone. Get creative.
Rule #2: Downsize
Downsizing means getting rid of things you have that are a big drain on your cashflow and replacing them with cheaper options. And downsizing usually works best with big things like where you live and what you drive.
It means getting rid of that massive $600 a month SUV lease payment. Sell the truck or find someone to take over the lease. Get yourself into a vehicle that’s half the price. Or take it a step further and start commuting. Take it another step and you might buy yourself an old bicycle at a garage sale.
Whatever it takes.
And when you downsize something you own (an asset), you’ll lower your monthly costs, and end up with some extra cash in your pocket too.
Rule #3: Replace Old Habits
Some things are not easy to simplify. If you’ll absolutely die without your morning coffee, then instead of cutting it out all together, start brewing yourself a cup and taking it with you. You’ll save an enormous amount of money over paying 5 bucks a day for capo grando whatever-o.
And even if you have to buy a coffee-maker to replace the habit, the money you save will pay for it in a week or two. That’s a killer return on investment.
Replacing old habits also works great for cutting back your entertainment budget. Spend more time with your friends and family instead of going out to costly events. Or find a new passion or hobby that can fill your time without emptying your wallet.
It’s Time to Get Started
Even if you’ve already cut everything you think you can, make your lists and apply the rules. It’s a very powerful exercise and you’ll find things you don’t need, things you need less of, and things you can replace.
In Get Out of Debt, Part 2, I’ll give you some action items to help wrestle your debt down to the ground and build up the income side of your finances.