Photo courtesy of Unhindered by Talent How I Paid Off $35,000 in Debt, and How You Can Too
Editor’s note: This is a guest post from J.D. Roth, who writes about saving and investing at Get Rich Slowly.
Last December, after twenty years of owing money, I finally paid off all of my debt (except the mortgage — and I’m working on that). Co-incidentally, Leo paid off his debt at the exact same time. I didn’t pay off my debt overnight. It took many years, and I made plenty of mistakes. But with patience and perseverance, I met my goal.
Along the way, I learned that for many people (including me), debt elimination involves three main steps:
- Stop acquiring new debt.
- Establish an emergency fund.
- Attack existing debt.
Based on my experience and the experience of many of my readers, I’ve compiled a brief guide to getting out of debt. The hints and tips below worked for me. They should work for most others in similar situations.
Stop acquiring new debt
This may seem obvious, but if your debt is out of control, it’s because you keep adding to it. The first step on the path to debt freedom is to stop using credit. Don’t finance anything. Cut up your credit cards.
That last tip can be tough. But don’t make excuses — destroy your credit cards. Stop rationalizing that you need them.
- You don’t need credit cards for a safety net.
- You don’t need credit cards for convenience.
- You don’t need credit cards for cash-back bonuses.
You don’t need credit cards at all. If you’re in debt, credit cards are a trap. They only put you deeper in debt. Later, when your debts are gone and your finances are under control, then you can get a credit card. (I lived without a personal credit card for ten years — it was easy.)
After you destroy your cards, halt any recurring payments. If you have a gym membership, cancel it. If you automatically renew your World of Warcraft account, cancel it. Cancel anything that automatically charges your credit card. Stop using credit.
Once you’ve done this, call each credit card company in turn. Do not cancel your credit cards (except for those with a zero balance). Instead, ask for a better deal. Find an offer online and use it as a bargaining wedge. (Check Credit Addict for competitive offers.) Your bank may not agree to match the terms, but it probably will. It never hurts to ask.
If your debt is a result of student loans and you don’t have a spending problem, you may not need to take some of these drastic steps. But if your debt is growing, then take this advice to heart.
Establish an emergency fund
Next, take the time to sock away some savings. This may seem counter-intuitive, but if you don’t save before you begin paying down debt, you’ll struggle to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies. Destroy your credit cards; save cash for emergencies.
How much should you save? Ideally, you’d have $1,000 to start. If your expenses are low, you may be able to get by with $500. This money is for emergencies only. It is not for beer. It is not for clothes. It is not for a Nintendo Wii. It’s to be used when the dishwasher dies or you break your arm or you lose your job.
Keep this money liquid, but not immediately accessible. Don’t tie your emergency fund to a debit card. Don’t sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening a high-interest savings account at an online bank like ING Direct or HSBC Direct. When an emergency arises, you can easily transfer the money to your regular checking account. It’ll be there when you need it, but you won’t be able to spend it spontaneously.
Attack existing debt
After you’ve stopped using credit, and after you’ve saved an emergency fund, then go after your existing debt. Attack it with vigor. Throw whatever you can at it.
Many experts advise paying your high interest debts first. Obviously, this makes the most sense mathematically. But if money were all about math, you wouldn’t have debt in the first place. Debt is as much about emotion and psychology as it is about math.
There are at least three approaches to debt elimination. Psychologically, using a debt snowball offers big payoffs, payoffs that can spur you to further debt reduction. Here’s the short version of how this works:
- List your debts from lowest balance to highest.
- Designate a certain amount of money to pay toward debts each month.
- Pay the minimum payment on all debts except for the one with the lowest balance.
- Throw every other penny you possibly can at the debt with the lowest balance.
- When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.
I love the debt snowball. Until I discovered it, I thought I’d never get out of debt. Though it still takes time to pay off your debts, you begin to see results almost immediately.
A third method to approach debt elimination is to first target the debts that cause you the greatest headache. Do you have a loan from your sister and her husband? Do you hate the fact that you borrowed money for a new computer? Whichever loan bugs you most, pay it off first.
Regardless which method you choose for attacking your debt, put as much money as possible toward this goal. Apply raises and windfalls (like tax refunds) directly to your bills. Sure, you’d rather spend that birthday check from grandma for a night out with your friends, but it’ll do you more good if you use it to pay off that last night on the town. You’ll have plenty of time to spend future windfalls. For now, use the money to get that debt off your back.
Other tips and tricks
You can do other things to improve your money situation while you’re working on these three steps. A year ago, Leo shared 73 debt elimination tips from Zen Habits readers. All of these are based around one simple fact: to pay off debt, or to save money, or to accumulate wealth, you must spend less than you earn.
To begin, curb your spending. Develop frugal habits. Leo has shared some excellent tips for frugal living in the past, and you can discover more at sites like Frugal for Life. Some people think that frugal living is equivalent to being “cheap”. That’s not the case. Frugality and thrift used to be core values in our society, but we lost touch with these ideals during the age of easy credit. Thrift can be a fun way to stretch your hard-earned dollars.
While you learn to spend less, do what you can to increase your income. If possible, sell some of the stuff you bought when you got into debt. This can be painful, but ask yourself: Do you really use that weight bench? Is your DVD collection really doing you any good? Use eBay or Craigslist or the Amazon marketplace to get some cash from the things you own. Consider taking an extra job or working longer hours.
Finally, go to your local public library and borrow Dave Ramsey’s The Total Money Makeover. This is a fantastic guide to getting out of debt and developing good money habits. I rave about this book because it did a lot to help me take control of my own personal finances. After you’ve finished, return it and borrow another book about money.
The most important thing is to start now. Don’t start tomorrow. Don’t start next week. Start tackling your debt now. Have patience at the beginning. Don’t get discouraged. Your efforts may seem small and insignificant. Trust me: most of us started paying off our debts that way. In time, your efforts will bear fruit. If you’re willing to persevere, you’ll have your debt paid off sooner than you believe is possible.
The longer you wait to begin, though, the longer the process will take. I wish I’d started sooner. Maybe if I had, I wouldn’t have been in debt for twenty years!
For more from J.D. Roth, check out his excellent personal finance blog, Get Rich Slowly (or subscribe to his feed).
- Spewed into the world on 22 June 2008 in Finance & Family |
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Brilliant comments (103)
Clay Collins | The Growing Life Says:
June 22nd, 2008, 20:05 pm
I like the debt snowball and have never heard of it before. I like that it gives you positive feedback through instant gratification. Interesting idea.
Marshall Says:
June 22nd, 2008, 20:09 pm
Great advice. Much of what you’ve said here is an echo of the principles Dave Ramsey offers in his books. Dave’s books have helped me as well, so it’s encouraging to see others who are using the same principles.
Hats off to Christian financial advice!
Ramesh | The Geek Stuff Says:
June 22nd, 2008, 20:34 pm
Congrats on your debt free life. I hope to reach there one day with your valuable advice.
I can’t imagine a life without credit card. Credit card’s are very convenient way of paying for stuff’s that you really need to buy. I have one credit card and I make sure to pay the full amount due every month without delay,
Ramesh
The Geek Stuff
Jonathan B. Says:
June 22nd, 2008, 20:52 pm
I read a lot of Dave’s book while hanging out at Barnes & Noble and I really thought he had some great advice. I’m trying hard to keep myself out of debt. I pay full cash for my cars and only buy things that I truly want and enjoy. I have about $5,000 in debt right now, but it’s all student loans. I consider that an investment in myself.
Sean Says:
June 22nd, 2008, 21:02 pm
Just a thought…
In your annihalation of your credit cards, unless there is an annual fee it might not be a terrible idea to not cancel them, just destroy them.
One of the biggest factors in a credit score is capacity. If you lower your capacity you can lower your score. So, check out those Terms of Service agreements and make sure that there are no hidden or annual fees, then get out the scissors.
Adam Sicinski - Study Matrix Art Says:
June 22nd, 2008, 21:07 pm
Frugal living very much depends on our upbringing and the ongoing habits and behaviors that our parents, siblings and reference groups instilled within our character. It is difficult to break out of old patterns of behavior if we continue to move through life unconsciously living out the conditioning we received throughout our childhood years.
The first step to break out of this pattern is to simply recognize that the pattern exists. The second step is to decide on a new pattern of behavior that will help us to manage our finances effectively. The third step is to associate pain to the old patterns of bahavior and associate pleasure to the new frugal habits that we will now be living out on a consistent basis. From here on, it is all about taking consistent action and moving forward through our days in a conscious manner.
If anyone is interested, I have created a Mind Map about Money Management and Getting Out of Debt. It points out some effective frugal habits and methods for getting out of debt.
Michael Moniz Says:
June 22nd, 2008, 21:13 pm
Wonderful points made here. I have seen and been in the debt snowball. It is funny but once you pay off your debt you can do the opposite. I find myself in a snowball of saving. It is keeps growing and growing and I am addicted to adding more and more.
I think when you learn to create new habits, healthier ones you can still be addicted but in better ways giving you better results.
I know longer get the thrill from spending, I get it from saving.
Shanel Yang Says:
June 22nd, 2008, 21:55 pm
All very solid advice. I did my own soul searching and got rid of $50,000 worth of debt in one year: http://shanelyang.com/2008/04/23/how-i-paid-off-50000-of-debt-in-one-year/
I’d also like to add that getting rid of an equity line of credit is just as important as getting rid of credit card debt. Too many people (myself included) are tempted to use this as yet another credit card!
Marelisa Says:
June 22nd, 2008, 22:26 pm
I think people would stop using credit if they sat down to calculate how much things bought on credit really cost. If you buy a $50.00 sweater with your credit card and don’t pay the balance in full, you have to pay interests on those $50.00 over and over again until you final pay it off. On the other hand, if you invest those $50.00 you earn interest on that amount and it grows and grows and grows. So do you want the miracle of compound interest working for you, or against you? Great article.
Putta Says:
June 22nd, 2008, 22:42 pm
Hello:
Couldn’t agree more!!! After being in debt for years, one day, I sat down and calculated bit by bit how much interest I had paid. It dawned on my how stupid I had been… The interest surely outgrew the amount I’d owed. I decided to set my personal goal of counting down my days of being in debt. Yes, I did. By saving more money to be able to pay off my debt day in day out, I could count down my days… What a blessing!!!
Vered - MomGrind Says:
June 22nd, 2008, 22:48 pm
The concept of establishing an emergency fund even though you are still in debt IS counter-intuitive, but I agree that it’s essential. I would also like to add that if your employer matches your 401(k) contributions, you should contribute to your 401(k) as well, or you will be throwing away free money.
Rick Says:
June 22nd, 2008, 22:56 pm
Tackling debt was my number one priority a few years back. While I still have a house payment I have managed to remain virtually debt free due to some of the practices JD mentions. It’s great advice.
PS - Leo, The link in the “Editor’s Note” to JD’s site is incorrectly pointed to “.orb”.
Melanie Says:
June 22nd, 2008, 23:40 pm
I cut up my credit cards a few days ago and started to “snowball” my debt, so this is incredibly timely. I think it’s going to take a total mindset-switch to get my emergency fund going, though. Thank you for posting this!
Vern at AimforAwesome Says:
June 23rd, 2008, 0:03 am
Awesome post! I don’t usually use a whole post at my blog to talk about an article I like online, however this post is well crafted and the topic is always timely. Most of the people in the USA are in debt to some degree, yes? I’ve posted a series on “How Little do you NEED?” that is very relevant to those trying to keep out of debt. Moving to Thailand and living here over the past 4 years has taught me a lot about how little I really need to not only survive, but to thrive and be happy! It seems the less I have now - the happier I am. Not joking! Keep up the great posts. Grabbing your feed now. Vern (AimforAwesome).
Matthew Says:
June 23rd, 2008, 0:13 am
That was an excellent post. I think the snowball strategy is perfect, and very sensible. I’ll have to see if I can’t employ that myself.
sdk Says:
June 23rd, 2008, 0:26 am
awesome post and advice
I’m going to follow it and work my way out of my 30k student loan asap
ps. you forgot the word “how” in the sentence “here’s the short version of this works”
thank again!
Laurie Says:
June 23rd, 2008, 1:00 am
I use a credit card for everything BUT it is one the gives cash back and I pay it off each month!
We did just refinance the house to get some cash for my business start up and to live on a bit since I have quit my funeral job. No I didn’t work for a funeral home. My old job was going to send me to the funeral home because it was killing me! :O)
SJ Says:
June 23rd, 2008, 2:38 am
Wow, really good post. Its very helpful for my problems. I must follow all these tips to close my debts.
Thanks
SJ
Andrew Scotchmer Says:
June 23rd, 2008, 3:37 am
My wife and I haven’t had a credit card for years. Do we feel we’ve missed out? Definately not.
This is the type of post I really enjoy reading. Many people think that improvement has to come all at once, in one BIG change. In fact the most lasting and beneficial changes happen slowly over long periods. It’s about developing a long term strategy and then every day, keep chipping away until you reach your goal.
For that reason I started blogging at http://www.completekaizen.com. Kaizen is a Japanese philosophy that uses the small step approach. It focuses on making small tweaks to your life so that over time you make some big improvements.
Emma Says:
June 23rd, 2008, 6:27 am
I need to cut up my credit card. Thankfully I’m not in debt (apart from the mortgage which I’m working on). But I’ve got into a situation where I pay off the card as soon as I get paid, then cant afford to buy anything for the rest of the month - so it has to go on the card again! It’s so frustrating.
Eugene (Editor, Varsity Blah) Says:
June 23rd, 2008, 6:40 am
“A man is rich in proportion to the number of things he can afford to let alone.” – Henry David Thoreau
Stephen Smith Says:
June 23rd, 2008, 7:12 am
>>JDK and Rick, thanks for the heads-up, I have make the corrections.
Tosin Matti Says:
June 23rd, 2008, 7:56 am
Really good post. Its very helpful advice to use to get rid of my debt. I will use the snowball effect to pay off my debt.Thanks for the great article.
Marc and Angel Hack Life Says:
June 23rd, 2008, 9:09 am
STOP SPENDING money on stuff you don’t need!!! In my opinion, this is the prime key to saving and erasing debt.
Mike Sporer Says:
June 23rd, 2008, 9:29 am
Great post! These are common sense things that are easy to understand but hard to implement. It takes discipline.
One thing I really love for a savings plan is Wachovia’s Way to Save. $1 goes to a savings account each time you use a debit card or automatic bill pay. I never liked large banks until I dealt with them….
Jeff@My Super-Charged Life Says:
June 23rd, 2008, 10:07 am
I made off my last debt except the mortgage back in Feb. We used Dave Ramsey’s plan from the book mentioned here. It really works! We paid off about $28k in debt in 20 months. It feels good to be debt free!
Chris Says:
June 23rd, 2008, 10:21 am
“Do not cancel your credit cards (except for those with a zero balance).”
This is poor advice in terms of credit rating. If you have cards open, keep them open, but don’t use them. Closing cards, even with $0 balance, can lower your credit score.
Shelly Says:
June 23rd, 2008, 11:15 am
I agree with others who have mentioned that keeping cards is worthwhile to improve your credit score.
For those with recurring debt issues and credit card habits, avoiding credit cards altogether may be beneficial. However, if they are used responsibly, they are useful to keep around, especially when some places, like gas stations, are credit-only now.
My husband and I keep a very tight budget so that our credit cards are paid off every month, with only emergency exceptions (which we pay off within an extra month — only happens once a year at most, because we have emergency savings, too). Our credit is good enough that even in an emergency, our rates are below 10%, so it’s not hurting us too severely. By using our credit cards, we are earning hundreds of dollars in free gift cards for home improvements or dinners out that we usually couldn’t fit into the budget, and my husband’s card earns us money toward our next vehicle. We get far more in rewards than we pay in interest for our rare emergencies.
Meanwhile, our tight budget allows us to pay more toward our long-term debts, too — we’ll have our 30-year mortgage for our house paid off in 12 years at the rate we’re going.
Really, budgeting is more key than cutting up those credit cards. If you view the credit card as just another way to pay using money you have, not free access to money you don’t have, it’s not a big deal.
J.D. Says:
June 23rd, 2008, 12:06 pm
Hey, everyone. Thanks for the comments.
I want to address one point in particular. Many of you have correctly noted that closing credit card accounts will hurt your credit score. This is true, but the damage is not significant. From my understanding, closing a credit card account will cause a small, temporary ding. I was able to close all my credit card accounts and still maintain an excellent credit score.
The important point is this: If you have trouble with debt and compulsive spending, it is FAR FAR better to cancel the accounts than to leave them open and succumb again to temptation. Millions of people have decent credit scores without credit cards.
However, the best option is to destroy the credit cards, but leave the accounts open. If you can do this without finding ways to accumulate more debt, then do it. It’s the best choice. If you continue to have problems with debt, cancel those cards, and don’t let any worries about your credit score keep you from doing so.
Leo Says:
June 23rd, 2008, 12:29 pm
Hi guys! I’m still on my honeymoon … this is my first time checking in (and I’m having a great time here in Bangkok!) … and I thought I would chime in …
JD is right … closing a credit card will have a small ding on your credit rating, but for me that hasn’t been a problem either. I’ve closed all my credit cards and am doing fine. What is more important, at least for my finances, is being completely debt-free. It’s really made a major difference … I don’t owe anyone anything, and instead of paying interest I’m being paid interest. That’s a huge difference.
Jonathan B. Says:
June 23rd, 2008, 12:36 pm
Dave Ramsey also explains how you really don’t even need a credit score, depending on your lifestyle. Mortgages can be made using a manual underwriting instead of the standard FICO.
As for me, I currently have a secured credit card to help build up my credit. I will soon be moving to a no-annual-fee credit card. I use my card to buy gas and pay it off the very next day online. I’ll probably always hang onto one credit card, but I rarely ever use it.
Saganist Says:
June 23rd, 2008, 12:42 pm
My wife and I also discovered Dave Ramsey about a year ago, and we’ve paid off $36,000 in debt so far. Only about $7,000 more and we’ll be debt free except our home. It feels great, and the change has been so worth it. I honestly can’t imagine going back to how we were living before. We just weren’t paying much attention to what we were doing. Credit cards make it way too easy to spend without thinking.
M Says:
June 23rd, 2008, 12:52 pm
Excellent post. Another resource for those with compulsive spending problems - debtor’s anonymous. They have a web site that lists meetings.
Miles Says:
June 23rd, 2008, 13:10 pm
Paying off the debts with the lowest balance is a purely emotional thing and has nothing based in logic or reason. Pay the debts off with the highest interest rates first, anything else is simply ass backwards and rooted in the emotional reason that landed you in your current position in the first place. Also equity lines of credits are excellent tools to help you get out from under your mortgage much quicker than just bending over and making standard payments which just makes banks smile.
Miles Says:
June 23rd, 2008, 13:18 pm
The other interesting thing is the writer suggests that he is working to pay off his mortgage. A mortgage is one of the best financial tools the US government gives you in finance, you never want to get rid of it. Of course that doesn’t mean you put the money you would be putting toward your mortgage into jelly donuts, but come on do a little homework before you write a post for the uninformed by the uninformed. Start with the word arbitrage.
Matt S Says:
June 23rd, 2008, 13:33 pm
My grandmother always gives me the same advice regarding money: ‘if you can’t afford it, you can’t have it’. She grew up on the border of poverty and so she more than anyone else has experience in this.
If you stick to this rule (though it can be hard with so much peer pressure and temptation in the modern world), you’ll be fine.
think Says:
June 23rd, 2008, 13:45 pm
Leo, As always a very useful post.
I believe Step 3 below should be step 2.
1. Stop acquiring new debt.
2. Establish an emergency fund.
3. Attack existing debt.
You can start an emergency fund inverse to your existing debt. As your debt is getting cleared, you can funnel the money you used to pay to interests into the emergency fund.
Jessica Says:
June 23rd, 2008, 13:46 pm
One point that I hadn’t seen on this post is how expensive credit cards are for businesses, as well. I work at a small business, and credit card companies charge a certain percentage every dollar that is charged at that business. I try to always pay cash at small businesses, that way I’m helping myself to keep my balance low, but also to help my local economy.
Also-since everyone has been addressing the credit card/credit score issue: most credit cards (notably store issued credit cards) close after they have not been used for a period of time (usually 1-3 years). One of my favorite ways of using this is to open a card when I have a large purchase at that store, then never use that card again, until I have another large purchase. And by that time, the account has been closed and I have to reapply. It might make a small ding in my credit rating, but I’m saving a lot of money on my large purchase.
Also, at age 23, even with 60k of student loans, my credit score is excellent, so I must be doing something right.
Matthew Says:
June 23rd, 2008, 15:50 pm
Here’s my situation.
I take home roughly $1500 every two weeks.
My rent is $725
Electric $90
Car is paid off, fuel cost around $120/month. My car runs OK but I’d like be driving something better.
I owe around $42,000 in student loans.
I own about $7000 in credit card debt.
I often help my Mother out with her bills because she’s on a fixed-income.
What to do?
Ian Says:
June 23rd, 2008, 17:12 pm
There has been a lot of talk recently about credit score and whether or not it really matters. I believe Dave Ramsey may have made the point in a recent radio show that the credit score doesn’t matter if you can pay for things with cash. Of course, for many, that’s a long road, but the important thing is to address debt and get rid of it.
I think the hardest part of debt is not having that safety net and the ease of falling into using cards. I have a couple credit cards, but if I actually use one, I charge myself the same amount to add to my savings. This means that whatever I consider buying on credit will cost me twice as much. The bonus is that I will be paying myself half, but it makes me pause to consider purchases, and in practice prevents me from purchasing anything that I cannot purchase outright with cash.
Mo Says:
June 23rd, 2008, 17:37 pm
Erm, but what about renting cars, reserving accomodation or health appointments, or opening movie rental accounts?
There are ways that credit cards are irreplaceable.
I’ve heard a more practical tip re: credit cards — freeze them in a block of ice. Then you can’t use them without a lot of thinking and planning.
Good luck to everyone seeking financial and personal freedom!
Rose Garden Says:
June 23rd, 2008, 17:42 pm
Nice post… here are a couple of lessons learned of my own:
Trigger-Happy. Learn to be aware of your own spending triggers (your emotional relationship to money), or you’ll find yourself paying off everything then racking up debt all over again. One of mine is food. When things get “tight” I unconciously recall the days when I didn’t have enough $$ to buy food, and start stocking up at the grocery store. Worse - then I eat it.
Beware of Pent-Up Demand. If you get too frugal in your quest to pay off the debt, hidden expenses will mount - things will need to be replaced at a more rapid rate than they wore out (and weren’t replaced).
Maura Says:
June 23rd, 2008, 17:44 pm
I have found it very difficult to travel without a credit card - even my VISA debit cards have been rejected by major car rental companies regardless of funding behind the card. Any tips for those trying to break the plastic habit without staying home all the time?
Tony | Spark Victory Says:
June 23rd, 2008, 17:50 pm
The debt snowball is a great way of having an action plan to effectively attack debts. I have used this method before.
By attacking the lower amount debt first, you can help ease the feeling of being overwhelmed. It helped me get into the process of paying off the debt. Once that momentum is built, its so much easier to follow through and gain a great sense of accomplishment. This helped me take a more positive outlook that eliminating debt can be a less daunting task.
Anil Says:
June 23rd, 2008, 21:38 pm
“You don’t need any credit cards at all” - so true. But look at this: You want to buy a phone, electricity connection, car, house etc. and everyone wants to look at your credit history. You make credit history by using credit cards. The point is - if you are rich enough, you don’t need any credit cards (because you have all the cash and can pay everything in full rather than month-to-month) as a measure of splitting payments. The economy in most western countries has been set up with credit as a central theme, so everyone is forced to use it because you need to “build” a good credit history. Kinda economical shame, I wonder why no one thinks like the author of this article.
Math Says:
June 23rd, 2008, 21:45 pm
This all sounds like great advice, except the part about the emergency fund. The reason you got into credit card debt is you didn’t pay attention to the math. Building up an emergency fund also doesn’t pay attention to the math. That money in the emergency fund would be better spent paying off the debt at the higher interest rate, assuming emergency means a rare event.
jamEs Says:
June 23rd, 2008, 21:45 pm
I’ve found I’ve tried to eliminate the credit card from my life. I like to buy stuff online, so I’m to the point I try to use PayPal sites only, which allows me to spend money I have in my bank account instead of credit. A lot of times I save money on things because I don’t need them right now and avoid spending on my credit card.
Rich Says:
June 23rd, 2008, 21:53 pm
I don’t really agree with paying off debts with the lowest balance first.
Some student loans, for example, have very low interest rates and it’s more wise to pay off higher-interest debts first.
Stephen Says:
June 23rd, 2008, 22:05 pm
The reason you need an emergency fund before you start attacking the debt is so that you don’t create more debt in an emergency. @math is right, you don’t want to start investing lots of money when you have debt, but you MUST have an emergency fund or you will go right to the credit card when your car breaks down.
Anyway, I second the suggestion: debtors anonymous. Its a great program and its helped me get my finances under control. These three steps are a part of the DA program and they work.
Anonymous.joe86 Says:
June 23rd, 2008, 22:19 pm
Heh, and I thought I was the only one that thought of the “snowball” method. Great article, I just started paying off my debt a couple years ago, got rid of the credit cards and finally working on my student loans + car loan.
tzuriel Says:
June 23rd, 2008, 22:25 pm
This is great stuff! Thank you
sdfdf Says:
June 23rd, 2008, 22:28 pm
You forgot to mention… GET A JOB!!!!!
Jimmy DoNone Says:
June 23rd, 2008, 22:32 pm
LOL, best way to get out of debt is to never get in debt in the first place. If you can’t pay cash for it, you shouldnt have it. Period. Any questions?
Jennifer Says:
June 23rd, 2008, 22:44 pm
Congratulations!
I would like to offer a tip on frugal living for movie lovers: The public library is an underused resource, the DVD collections in particular. Libraries have tons of DVDs, including new releases, and you can usually check them out for a week at a time. The best way to do this is to reserve them online as the selection on the shelf tends to be hit or miss. In the days before Netflix, I spent a shameful amount of money on movie rentals and, even more shamefully, on late fees. It was not until I became a librarian that I discovered the extensive DVD collection at my library. Netflix is still a good deal, but libraries are free.
Lisa Says:
June 23rd, 2008, 22:52 pm
I love this post, but have one problem. I would do it if I HAD a job and income. And as soon as I do I will be doing these things, but right now debt is all I have. I wound be in a better position if I hadn’t HAD to live off my credit cards because I used my emergency fund, 401K, IRA and every other penny I had to live for the past year. So tell me how I go from being almost 100K in debt and unemployed to being in the red and employed again?
jonson roth Says:
June 23rd, 2008, 23:16 pm
An excellent article, but “you don’t need a credit card” is not really true in today’s society. It hasn’t been true for a couple of decades.
The fact is, there are some things you simply cannot get without a credit card, and that can severely affect your life, especially when your financial state is in disrepair.
It’s even harder if you are a contractor/ freelancer, because not having a credit card restricts you from things such as hotels, flights, and more. Heck, you can’t even rent movies without a credit card in many places. (Though the library might do in a pinch.)
inboulder Says:
June 23rd, 2008, 23:20 pm
What are you on about, most people are hundreds of thousands of dollars in debt and they pay it off over a period of 30 years?
inboulder Says:
June 23rd, 2008, 23:22 pm
@Lisa
“So tell me how I go from being almost 100K in debt and unemployed to being in the red and employed again?”
If you’re in the US, one good first step might be to familiarize yourself with common English expressions so you can use them correctly.
Anonymous Says:
June 23rd, 2008, 23:25 pm
This is bullshit. I’m $100,000 in debt and this is not going to help, simply because there is “no more me” left. This assumes you are in great physical and mental condition with some source of income and job history.
I have no source of income, am physically, emotionally, and mental exhausted after being tortured for 2 years in an American prison. Quite simply, its a chore even pay the bills on time and feed myself.
With no job, and no chance for a job, there is no income to destroy the debt with. If I was capable of work, and had a job, there would be no debt in the first place. I would of thrown all the money at it in the first place until it was gone.
amanda Says:
June 23rd, 2008, 23:58 pm
other little things I’ve done when I didn’t want to curb spending and start saving…
I’ve started making a game with myself… any unexpected income goes straight into my sock drawer (sounds funny, but that is a small percentage of my emergency fund, and 99% of the time, that “non-existent” money kept me from digging into my emergency fund at all!). and when I wasn’t ready to quit extra spending cold turkey? I did it in baby steps: when I was tempted to cab it home I’d make myself take the subway ($12 into savings). when I needed a caffeine fix, I’d get a 75 cent cup of coffee from a deli and skip the Starbucks latte ($4 into savings). I’d keep track of the savings and for every $50 I saved, I’d reward myself with a little $10 present. sound silly to you? M, but hey, I’ve got an extra $40 in the bank or toward my card! Plus, it works for me. This, coupled with your strategies I was already doing, will have me debt free by year’s end!
Jim Says:
June 24th, 2008, 0:06 am
B.S. Credit is not bad your spending habits were out of whack. Don’t blame the credit you chose to use it! How about some ideas on increasing your income instead!
zontar Says:
June 24th, 2008, 0:09 am
Now a days it’s next to impossible to get travel tickets, reservations or rentals without a MaserCard/Visa guarantee of money that can pay. USE A DEBIT CARD (Masterard/Visa) from your bank/credit union for your checking account.
There is no monthly dues or interest debt. Like a checking account just remember your account balance and use it in situations needing a creditcard and/or signature.
I got a Western Union Prepaid Mastercard to hold money for needed situations to reserve or rent for shortterm needs, just a small monthly maintenance of 4.95 same amount for upload. This in turn gave me a verified creditcard to receive a more valid no cost debit/creditcard from Paypal, which I use to save and sock away money for non-bills or daily spending.
Ry Says:
June 24th, 2008, 0:12 am
Very good, except for the advice to cancel your gym membership. $400 a year isn’t much for most people if they use it.
Victor Says:
June 24th, 2008, 1:21 am
I disagree that you should pay the lowest balance card first. What you need to do is pay off the card with the highest interest rate first. Everything else gets minimum payments. To do otherwise simply extends the time you take to get out of debt. Furthermore, assuming there are no balance transfer fees, you should transfer the balance from high rate cards to lower rate cards.
One strategy I haven’t seen advocated before, but worked out well for me, is to sign up for cards that have a zero interest introductory rate with free balance transfers. Keep signing up for these. Keep track of when a card’s introductory rate expires, move the balance to a fresh card, and cancel the other one. In this way, you are constantly moving balances to new zero-rate cards as you continue to pay down the debt. It takes more attention to make sure that you are moving the balances at the right time, but I challenge anyone to find a quicker way to pay off the debt.
jonson roth Says:
June 24th, 2008, 1:46 am
Yeah, Victor is right. You always pay off the highest rate card first and work down from there. Not the highest nor lowest balance.
However, getting zero-interest cards is hard if your credit sucks. Usually you need very good credit to get these. Though many people make the huge mistake of accepting several at once, spending the credit, and finding they can’t pay any of them off before the 28% rate (or whatever) kicks in. Then they’re royally f88ked.
mk Says:
June 24th, 2008, 2:32 am
Do not use a debit card to buy reservations or rentals, there are articles on the web that explain this in greater detail but basically your bank puts a block on the money it expects you to spend, not what you actually will spend. Gas stations can do this also, but I’ve personally never had a problem at a gas pump.
Anyway, I love people who can’t manage their money. Really, I’m serious. I look like a superstar when I need credit for something. Whenever I need a loan or want to take advantage of the various “6 months free interest” deals, the person running the credit check is always amazed at my high credit score compared to my age. You know why, I DON’T BUY CRAP I CAN’T AFFORD!
so, THANKS for making my life that much easier.
Dan - Gtdagenda Says:
June 24th, 2008, 2:57 am
Great tips,
However I would have put “Increase your income” higher on the list, then “Make sure that the extra is used to pay off your debt, and not to increase your lifestyle”
Then the other tips would be much easier to apply.
Empty Pockets Joe Says:
June 24th, 2008, 5:59 am
I agree this is a good guide, but with respect to the debt snowball, I think we should point out that the snowball method may be good for credit card debt in most circumstances, but cannot be applied to HIGH interest loans. More on that below.
As for lowest debt amount first for the snowball idea… I agree it makes you feel better than any other method, and from that perspective will keep you motivated, etc., but I prefer the “Any Monthly Fee + (Any Annual Fee/12) + Fee to make payment” approach. I’d rather pay off the card first that’s taking me for a ride with the $60 annual fee, a further $5 monthly ‘maintenance’ fee, and $7 monthly ‘courtesy’ fee for online payment. I may not reduce the number of sources of debt as fast, but I’ll prevent myself from paying more interest to the credit card companies that ‘behave’ the worst. If their tactics continue to be so profitable, why should they change (assuming that have no moral or ethical code)?
High Interest Loans / Debt Snowball. If you have a Cash Call loan, at their typical rate of interest, using the snow ball idea with your credit cards before getting to such loans would cost you a bundle. For each $1 paid of additional principal paid to Cash Call above your ordinary payment, you save an additional (approximate) $1.50 from cumulative interest payments over the life of the loan. Considering Cash Call’s offered loan amounts, it should always be the #1 debt to pay off (unless you have higher APR loans! eek), while ‘ignoring’ (maintaining the level of) other debt until Cash Call is gone.
Just my $0.02 :)
ZenSaver Says:
June 24th, 2008, 7:15 am
I have started using a service called Geezeo.com. That automagically tracks and categorizes my spending so that I can see where it is all going, banks, credit cards… etc. I log into it everyday so that i know where I am at and it gives me motivation to spend less.
Austin Bonds Says:
June 24th, 2008, 8:26 am
Good article-thanks. One thought I hear in terms of reducing debt balances is to focus on the one with the highest interest rate (which may or may not be the highest balance).
amanda Says:
June 24th, 2008, 8:46 am
it’s great that everyone wants to chime in on this important topic, but I wish people would READ the other comments before logging in and leaving a comment that 5 or more people have already left making the exact same point.
Unfortunately, I opted for responses to come to my inbox… :(
Jonathan B. Says:
June 24th, 2008, 9:45 am
@Jonson, who wrote: “but ‘you don’t need a credit card’ is not really true in today’s society.”
Don’t forget about debit cards with the Visa logo. They can be used anywhere credit cards are accepted, and the money comes straight out of your banking account. I lived without a credit card for years.
Linda Says:
June 24th, 2008, 10:20 am
To those that say “no, you should always pay off the higher interest debt first”, I say: that depends.
If someone managed to get themselves deep into debt via unwise spending habits, then there is one thing that’s more important than getting rid of the debt: changing the mindset that caused the debt in the first place.
Changing that mind-set is going to be much, much easier if you can see progress made over shorter time periods: if the debt someone is trying to pay off first is taking “forever”, then they might start wondering what the point is, and feeling like they’re just throwing their money in a black hole when they pay the bill every month, so they may as well spend it.
But if they focus on a smaller debt, and see actual progress being made, that can be very encouraging, and help reinforce the new mindset they are trying to develop.
No human being on this planet is a purely rational creature. No such animal exists. We all have to find ways to work with our quirks and weaknesses in order to get the results we want in areas that aren’t our greatest strength.
Someone who has the discipline to pay the highest balance off first, consistently, without getting discouraged when it seems to be taking forever doesn’t need to be reading advice on how to get out of debt. Either they never got into debt in the first place, or else they got into debt due to a crisis outside of their control, and already know how to get out of debt as they get back on their feet. Hence why the snowball method is so much more helpful to people struggling with debt.
Still, I will concede that there are exceptions. If you have a Payday loan, or any other loan with truly stratospheric loan shark interest rates, then that almost always needs to get paid off first.
Linda Says:
June 24th, 2008, 10:23 am
Arrrg! The first sentence of the second-to-last paragraph of my last post SHOULD read “Someone who has the discipline to pay the balance with the highest INTEREST RATE off first, consistently, without getting discouraged…”
SJ Says:
June 24th, 2008, 11:01 am
Great post with some interesting tips. Your readers may be interested in some of our technical debt advice articles at:
JF Says:
June 24th, 2008, 11:11 am
What about debt consolidation services? Which ones can be trusted? Can’t they negotiate with your debtors and lower your total debt?
Joe Green Says:
June 24th, 2008, 12:53 pm
I enjoy these articles a lot more when they aren’t so obviously peppered with keywords to game Google: World of Warcraft, Nintendo Wii, etc. etc.
Jonathan B. Says:
June 24th, 2008, 15:33 pm
Or maybe J.D. was just talking about things that are relevant and popular in today’s world. But hey, let’s just assume the negative! :)
Jonathan B. Says:
June 24th, 2008, 16:23 pm
@Matthew,
You’re bringing home at least $2,800 a month, and your bills are under $1,300 it sounds like? How much are you giving your mother every month?
You asked us what to do. I’d say to follow J.D.’s advice. Without knowing your details, it sounds like you have enough income.
amanda Says:
June 24th, 2008, 17:49 pm
help! I made a big mistake and opted for all responses to this blog be sent to my inbox. I would very much like to change that but can’t figure out how. clicking “Manage your subscriptions” below simply takes me to an error page. I can not find any other links. nor can I find how to email anyone associated with this blog to request they remove me from the response list. I hate to post this in this way, but does anyone know how to help me?
Tanya Says:
June 24th, 2008, 17:57 pm
This article is very helpful. I am going to take the snowball approach to pay off my bills. I am also getting a second job too! :)
Austin Scott Says:
June 24th, 2008, 21:58 pm
Dave Ramsey ftw! I’m a huge fan and live in his home city.
You can listen to his radio show every day from 1-4 central standard time at http://www.daveramsey.com or 997wtn.com.
Sertaç Says:
June 25th, 2008, 6:11 am
İf you spend less than you earn and if you are aware of while using your credit card if you don’t buy anything that you really don’t need to I think it won’t be any problem
Matthew Says:
June 25th, 2008, 11:45 am
I think my problem is that I want the debt gone now instead of a few years from now.
Moneymonk Says:
June 26th, 2008, 17:22 pm
Don’t get discouraged!!!!!! I think that’s the main issue people struggle with
My 2 cents Says:
June 27th, 2008, 1:01 am
Lots of good advice here, both in the article and the comments.
Someone earlier commented about kaizen. I JUST learned about this concept and I am trying to apply it to an area of my life not directly related to money (at this point anyway).
Using those 0% BT offers CAN be useful. However, those with poor credit will probably NOT qualify; the credit line you need may not be approved ($1000 v. $5000); the 0% is not for the lifetime of the balance (meaning another BT later) and BTs usually have transactions fees (some banks do not even have a maximum fee).
So for someone playing musical credit cards to get the best BT offer, what is the true cost to the debt repayment plan when all those transaction fees are added up?
I am not saying this approach can’t work, but it should not be overlooked. Also for those who may be compulsive spenders opening up NEW accounts may not be the best route, especially if they have not addressed their spending habits.
Linda best addressed the “logic” of the lowest-highest balance approach: Paying off a smaller bill (or bills) first is rewarding psychologically (personal finance is personal after all), hence a person is more likely to remain committed to paying off the debt.
If a person is discouraged early on, they are less likely to stick with it and may just end up adding new debt to the pile.
The only “perfect” debt repayment plan is the one that a person can commit to and stick with, while not taking on new debt. The details? Not that important.
Stephan Miller Says:
June 27th, 2008, 23:26 pm
I used to work in a shop and overhear Dave Ramsey’s radio show every day. A lot of his financial advice seeped in. It works. It’s hard to stick to when you like having credit handy. Paying the lowest credit card off first really does have a great psychological effect. It’s a great feeling when each one gets paid off.
shirley Says:
July 1st, 2008, 3:54 am
well.. good stuff.. but its a problem if not enough cash to survive..
Finja Says:
July 1st, 2008, 18:42 pm
thanks for this post… after reading it I decided to take some action, and just yesterday I paid off my debt!
what a great feeling! and next week I’ll set up a emergency fund so that I won’t have to get into debt again.
(at least not until I buy a home or something…)
ArrGee Says:
July 2nd, 2008, 13:09 pm
I like the way you say that the emergency fund is not for beer, clothes….but for times such as when ‘the dishwasher dies’!
Shock horror! Just marry another one!
BillinDetroit Says:
July 2nd, 2008, 23:04 pm
@Matthew … if you want your debt gone now, -right now-, start a few years ago. See, it’s simple. -)
Hey JD … I just stumbled in here.
Folks, JD’s blog is a DOFOLLOW. That is, smart people do follow it! ;-)
Frederic Premji Says:
July 4th, 2008, 19:25 pm
I paid off some major debts too, although I did not use the snowball method. I paid the highest interest credit first, and went down the line to the lowest interest credit. This way, you end up paying the least amount of interest.
And yes, you gotta be very very frugal during that time. It’s not fun at all, but it is necessary :)
Good post!
PeteMc Says:
July 11th, 2008, 20:45 pm
I was way into debt anyway and then my wife suffered a major stroke - that wiped 13,000 UK sterling from our annual budget overnight in lost income . Some things you can’t plan for but JD’s basic advice is sound - I’ve managed to make my debt manageable (another 7.5 years to go) and I’m working on an emergency fund of 3 times my monthly outgoings.
From my experience the first thing to do is face up to your debt. I knew I had major credit card debts but carried on paying a fixed amout each month and the debt (and interest payments) just carried on increasing.
Do’t ignore it - do it NOW!
Zeljko Prsa Says:
July 19th, 2008, 6:50 am
A great and sound advice but to really benefit from your idea one must start EARNING more. It is the only way to get out of debt, spend less wisely and earn more.
Thanks for sharing your story.
Steven Williams Says:
December 6th, 2008, 21:07 pm
There are many options out there that one can run to for a quick fix method of paying off their debt. 99.9% of the will end up putting you in a worse place than you were before.
The only proven way to pay off your debt is to directly pay off your debt. There are no loop holes and quick fixes.
There are discounts and interest rate cuts, but these options only come about when you have show that you can pay your debt down and save some money to make lump sum payments.
Here’s an interesting website with some valuable information about paying off your debt and some of the nightmare’s of debt consolidation companies.
Dale Says:
January 17th, 2009, 23:56 pm
Ever tried to rent a car without a credit card?
Mike Turner Says:
January 27th, 2009, 20:32 pm
I was in debt for years. I finally had enough got on a program and worked through it. Debt can be tackled its hard work but well worth the effort. Thanks for sharing your story.
-Mike
ervien Says:
April 16th, 2009, 12:33 pm
Yes, this is great post about debt. I would like to say congratulation. I think, the best way to get of debt is make your payment on time regularly.
Ways To Pay Off Debt Says:
April 20th, 2009, 20:17 pm
Thanks for this quick tips,about debt,btw you should check your site in Opera.
anonym. Says:
May 13th, 2009, 0:36 am
You mention to pay off the lowest balance first. Actually, what you should be doing is paying off the debt w/ the highest INTEREST RATE, not the lowest balance.
Other than that, this is common sense people. Learn to live within your means.
Save/Invest/and quit looking at your tax “refund” as a refund, and instead look at it as a 0% interest rate loan to Uncle Sam.
Discipline.
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