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Getting into debt is easy. Figuring out how to get out of debt, not so much.
I should know, it didn’t take me long to get myself into the red after starting my first job.
I can’t even say for sure how it happened, but I do know why it happened, however.
It boiled down to a lack of money smarts. In school they were all about memorising the times tables and honing our algebra skills.
I failed miserably on both counts.
Had they focused instead on life skills like, say, budgeting, saving and investing, I might have been in a better position financially today.
My Nana —who lived like a queen on her meagre pension— tried to teach me the basics of money management. If only I’d listened.
It’s as clever as it is simple. I’ll share it with you in case you’re in the mood to learn a valuable lesson from a wise old lady.
She shuffled off more than 20 years ago, but I’m sure she’ll be pleased to know her financial know-how is benefiting someone.
It’s so simple you don’t even need to write it down. Ready?
Divide your money into three. Allocate a third for your living expenses, a third for saving and a third for spending.
In other words: Live within your means.
Easy peasy, right?
Okay, so let’s look at how to get out of debt so you can start applying my Nana’s logic to your finances.
Step1: Ruthlessly Budget Every Dollar
You’ll never get a handle on your finances without a budget. And chances are, if you’re in debt you’re not budgeting anything.
I know. Sporty and I have been there done that so many times we have a wardrobe full of t-shirts.
It was only when we finally made a proper budget and stuck to it ruthlessly that we were finally able to get out of debt.
If you don’t know the basics (how much you have to spend, what your debts and expenses are, etc.), you’re bound to overspend.
For the Americans and Canadians among you, I’d suggest using Dave Ramsey’s EveryDollar budgeting platform. Available online and as an app (iStore and Android), it’s the easiest way to manage your money in one place.
There’ is a paid option, but the free version is more than adequate for our purposes. The setup walks you through your money goals, looks at your life circumstances and has you plug in everything from your income and debt to how much you’d like to donate to your favorite causes.
If you live elsewhere in the world, you’re welcome to use Sporty’s kick-ass budget template. There’s no app (yet), but it is beautifully designed in spreadsheet format and comes with easy to follow instructions.
And no, I’m not biased.
We’ve been using it ever since we first made the decision to get out of debt for good. It’s gone through a number of iterations, each one better than the last.
Feel free to get in touch if you have any questions. We’re more than happy to help.
Step 2: The Debt Snowball Effect
In his New York Times bestselling book The Total Money Makeover, Dave Ramsey suggests using the debt snowball technique to pay off your credit cards and other debt.
Our accountant advised us to pay off our debt according to the interest rate we were paying. That approach definitely has merit, but the advantage of the debt snowball technique is that it gives you a quick win.
The idea is that you start with the smallest amount you owe and pay it off first. And then you move onto the next amount and so on. Incurring these small wins in a fairly short space of time will motivate you to keep going.
Step 3: Change Your Money Mindset
As I mentioned earlier, getting into debt is easy. Figuring out how to get out of debt, on the other hand, is more of a challenge.
Knowing that, it’s vitally important to avoid getting back into debt again. Sporty and I ran this rodeo (I’m mixing metaphors, I know) at least five times before we realised we needed to work on changing our money mindset.
Becoming minimalist definitely helped in this regard. When you stop buying stuff you don’t really need, your money stays in your bank account.
More than simply not buying stuff you don’t need, you must stop desiring stuff you don’t need. We buy stuff for different reasons. It can be the high you get from acquiring something new or it can serve as a distraction for when you’re feeling down.
The other problem is that we tend to view our purchases only in terms of their dollar value. A coffee costs us $3, a new pair of jeans is $50, for example.
But the reality is, we don’t buy things with money, we buy them with hours from our life. We can pay off debt, we can earn more money, but we can’t get back lost time.
Think about that the next time you’re feeling the urge to whip out your credit card and make a purchase you’ll later regret.
The Benefits of Living a Debt-Free Lifestyle
By now you’ll have realised that learning how to get out of debt is the easy part. The challenge comes in sticking to your plan even when temptation shows up and all you want to do is spend, spend, spend.
When that happens, you need to make sure you have a really strong ‘why’ in place to help you stay the course when things get tough. Because they will.
Thinking about the benefits of living a debt-free lifestyle is a great way to keep you on track with your money goals. I’ve outlined a few below, but make sure you come up with some of your own as well.
The more personal your ‘why’ is, the better your chances of success. And if you’re not sure what I mean with ‘why’ then watch Simon Sinek’s TED talk for a primer.
1. Retire Early (or, Earlier)
By far the biggest carrot for paying off your debt is the prospect of retiring early. I mean, why remain stuck in your cubicle any longer than you have to?
If you love what you do then by all means, keep working. But if you’re most people, I’m guessing you’d much rather spend your time optimizing your life.
Whether that’s focusing on your personal growth, improving your health, traveling or being a seva warrior.
2. Embark on a Second Career
A lot of people dream of a career change after 50, but don’t have the means to make it happen. Financial freedom brings with it other freedoms, too. Like the freedom to study further or expand or your current skill set in order to move in a different direction.
This woman became a teacher at 58 and she’s encouraging others to do the same. You can only entertain an idea like that when you have the means to do so. If you’re in debt and living pay cheque to pay cheque, you can’t even consider doing something like that.
3. Avoid Credit Card Fraud and Identity Theft
The less you shop online, the less chance there is for someone to steal your stuff. In an ideal world we wouldn’t have to worry about things like credit card fraud or identity theft. Annoyingly, cybercrime is alive and well.
Staying safe online is possible so long as you’re vigilant e.g. making sure your internet connection is secure, choosing strong passwords and making online purchases from secure sites.
Individuals aren’t the only ones at risk. Companies are also targets in these situations. Thanks to data breaches, cyber criminals, and compliance mandates, it’s never been harder or more important to establish trust online.
If you run your own business, you can verify your customers’ identities through mobile web and in the process protect them and you from falling victim to cybercrime.
Technically, that last part doesn’t really have anything to do with getting out of debt, but it is cybercrime-related and we’re all about sharing useful information.
Next (Baby) Steps
Becoming debt-free is only the start of your new financial journey. Now it’s time to take your fiscal prowess to the next level. How do you do that? One step at a time, that’s how.
I came across Dave Ramsey’s 7 Baby Steps while researching this post and I’ll admit I’m a little green that Sporty and I didn’t know about them when we first adopted this debt-free lifestyle.
Dave has put together a practical, step by step plan for you to change your life. In seven steps he shows you how to save for emergencies, pay off all your debt for good, and build wealth.
Financial freedom isn’t just a nice story for someone else. It can be your reality, too!