zen habits : breathe

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:

  1. Stop acquiring new debt.
  2. Establish an emergency fund.
  3. 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 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:

  1. List your debts from lowest balance to highest.
  2. Designate a certain amount of money to pay toward debts each month.
  3. Pay the minimum payment on all debts except for the one with the lowest balance.
  4. Throw every other penny you possibly can at the debt with the lowest balance.
  5. 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).

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