Debt is a scary thing. Unfortunately, many Americans don’t necessarily see it that way. Prior to my finance journey, I was in a similar boat. While I was never on the verge of filing for bankruptcy, I did have a mentality such that, “I can pay it off later.” As long as I didn’t have $30,000 sitting on a credit card, I felt I was doing okay.
But there’s something incredibly liberating knowing that you don’t owe anyone anything. When you get that paycheck, you can literally use it for whatever you want. It’s a feeling that’s hard to describe, but oh-so worth it.
Debt is like quicksand. The deeper you sink, the quicker it sucks you in, and the more you feel helpless. While it’s not impossible to dig yourself out of it, there are a number of things you have to do to prevent yourself from backsliding again.
These are five tips that I’ve used to move forward and and place safeguards to ensure that I never start heading down that all-too-familiar path again.
1. Reduce your expenses
This is easier said than done. Actually, you know what? No! It is that easy. The problem here is that you simply don’t want to.
Cutting your expenses down is hard. But it ultimately comes down to your wants versus your needs. Do you need that big fancy pickup truck? No — it’s costing you hundreds of dollars each month. Can you stop eating out at restaurants and pack a lunch to work each day? Don’t want to? I don’t care. It’s what you need to be doing.
Getting into debt is so incredibly easy, but now comes the hard part. Getting out of debt is magnitudes more difficult that it requires a very conscious, devoted effort.
Sit down and lay out all of your expenses from highest to lowest. Start with the highest expenses and see where you can cut back. Is your rent/mortgage eating up half of your income? It might be time to downsize. Or relocate entirely. Debt doesn’t mess around, but neither do you. You’re going to show it who’s boss.
2. Build an emergency fund
It’s not a matter of if, but when life is going to throw you a curveball. Nothing sends you spiraling into debt worse than an unexpected medical bill, or car repair. People might contend, “Well, when is that going to happen? I could be using my emergency fund to pay off debt.” True. But in my experience, life waits until you’re pile is just about to topple over, and then adds another rock to the top of it.
Having at least $3,000-$4,000 in an emergency fund ensures that should something pop up, you won’t have to reach for your credit card to shelter you through the storm. When you’re adding to your debt balance at the same time you’re trying to pay it off, you’ll never see that number drop, and you’ll get discouraged. Discouragement eventually leads to giving up, if it happens enough.
3. Use the envelope system
Have you heard of the envelope system before?
It’s simple. When you get your paycheck, you go to the bank and cash it out. Yes, you turn it into cash. You then go home and divide it into various envelopes, each envelope representing a different bill, payment, or savings goal. On the front of each envelope, write what the money in it is for. After you divide your cash into each envelope, you shouldn’t be leftover with any money. Every single dollar should have a purpose.
Common categories are “mortgage”, “car”, “gas”, “spending”, and “groceries”. Be sure to have an envelope devoted to “debt” as well.
The benefit of the envelope system is that no cards are used. You physically can’t spend any money that you don’t have. When your envelope is out of money, you’re done spending.
This works best for those who have a problem with impulse buying or putting money on credit.
There’s also a psychological process that goes on when you purchase things with cash. When you use a credit card to buy something, you hand the cashier your card, and then they hand you back both your card and the item your purchasing. To your brain, this looks like a deal. When you pay with cash, you hand them your money, and then the cashier hands back your items, but they also hand back less cash than you handed them initially. This subtly activates the pain receptors in the brain. With a credit card, you can’t see your money slowly diminishing with each purchase. Do this long enough, and you’ll see your spending change.
4. Use a budgeting app
There’s thousands, if not more, budgeting apps out there for iPhone and Android users (but let’s be honest — who doesn’t have a smartphone these days?). If the envelope system doesn’t seem like it’s for you, this is the next best thing.
Find an app that fits your style. Some of my personal favorites are YNAB, EveryDollar, and Mint. With each and every purchase, open the app and enter it in. Your phone is always with you, and soon this will become a habit.
At the end of the month (or every week, or every day, whenever) you can open this app to see a trend for your spending habits. They’ll graph everything for you, showing you where your weaknesses reside. Most of these apps will even offer personalized recommendations, catered to your circumstances.
In this day and age of wonderful technology, you’d be a fool not to be using at least one of these apps.
5. Think, talk, and read about money
“You are what you eat.” Wait…that’s not the quote I was looking for. 😉
“You are what you think about all day long.” ― Robert H. Schuller
There we go.
Did you know that those who think, read, and talk about business are statistically shown to be wealthier and more successful? It’s because, for these people, that’s their focus.
Take the time to talk about your financial goals, with your parents, your friends, but especially your spouse. Discuss priorities and struggles so you can help each other stay on track. Set aside time to stay current and read up on the latest financial news. You can never be too informed. But ultimately, if it’s on your mind constantly, that will set your sails towards the direction you want to head.
What tips have you used to keep yourself on track and out of debt?