Get Rid of Debt - on your own
If you'd like to get rid of debt, raise your hand. One, two, three...I see almost everyone agrees that this is a good thing. Does anyone want more debt? Just as I thought, no one raised their hand.
We've all been there. We've all had some debt at one time or other in our life, no matter how successful we are at frugal living. Some of our debt was manageable and desirable, and some was neither manageable nor desirable.
All but the absolute worst cases are manageable.
Irrespective of the nature of our debt, there is one thing for certain - we are responsible, either directly or indirectly, for getting ourselves into it.
There are exceptions, but they are rare.
Regardless, we are the only ones that can get ourselves out of debt. It's likely that no one else is going to lend us a hand, because they're busy getting themselves out of their own troubles.
Jessica, one of my readers, suggested that I get specific about getting out of debt, so she is the inspiration for this and other articles. I'm hesitant to tell people how to do it simply because one size does not fit all, but she convinced me to press forward with more specifics, so I decided to write several pages about how to get rid of debt.
This page provides a debt reduction plan for those with credit card debt – the most common problem that we have. I’ve also written a page that explains my personal story of how to reduce debt that seemed insurmountable. I've also put together a page about how to become debt free, and I've composed two pages as suggested by Jessica’s note to me – one is a general approach on how to reduce debt and another addresses a popular structured approach to debt reduction.
For now, let’s focus on how to get rid of debt with the idea that credit card debt is what we have plenty of, and we’d like to be done with that nonsense.
My philosophy is simple - debt be damned! With the exception of a mortgage, you might want to have this as your philosophy too.
I'll not discuss the burden of being enslaved by debt, nor the peace of mind we get by living debt free. Nor will I rehash the mental toughness that's necessary to overcome debt. I'm assuming that all of that, and all the hard work associated with escaping debt, is in the forefront of our mind. I'll assume that we're ready to be serious and get rid of debt.
Armed with a few assumptions, let's press forward and see how we might get rid of debt from our credit cards the same way we got into it - on our own.
Here are my assumptions:
- Credit card debt is our primary problem.
- There are opportunities to make more money with our current job or land a second job to increase your income.
- We can and will do things to reduce our monthly expenses.
- Our creditors are willing to work with us.
- We have considerable debt, let’s say $24,000.
- Our income is reasonably good, let's say $40,000 per year and our take home pay is about $32,000 per year.
- Our allocation of expenses for day-to-day living is near the percentages that are average for an American household budget.
- We have some cash to fall back on in the event of an emergency. We don’t have to build ourselves an emergency reserve.
Good enough. Let's move on to the plan so we can get this debt off our backs.
What follows is a generic debt reduction plan with specific numbers so we have something to work with. I've put it together as an example of what we might consider doing to extract ourselves from the jaws of debt.
With the foregoing assumptions, that puts us with an example household budget of:
- housing expenses of $800 per month (30% of $32,000/12)
- transportation costs of roughly $430 (16% of $32,000/12)
- food costs of $320 per month (12% of $32,000/12)
- entertainment costs of roughly $110 per month (4% of $32,000/12)
- clothing costs of roughly $110 per month (4% of $32,000/12)
- miscellaneous costs of roughly $110 per month (4% of $32,000/12)
- utility costs of $160 per month (6% of $32,000/12)
- insurance costs of $160 per month (6% of $32,000/12)
- savings of roughly $425 per month (16% of $32,000/12)
- donations of roughly $55 per month (2% of $32,000/12)
So, that’s roughly $2,700 per month in expenses that we’re shouldering, in addition to the debt that we have accumulated.
What we have done here is get everything out in front of us. That’s the best first step. If we’re going to get rid of debt, we need to see what we are spending and what we are earning so we can see our cash flow. We can’t plug a leak unless we know where it’s at.
Once we have everything in front of us, we can make adjustments in spending so we can apply our financial resources to help us get rid of debt.
If we knock off the cost of entertainment, clothes, miscellaneous, donations and savings, that leaves us with roughly an extra $800 per month to use to get rid of debt. And, that's about what we need. At $800 payments each month, we can get rid of debt from the credit cards in roughly 3 and one half years. Not bad.
I used this credit card calculator to figure out the monthly payments required to pay off the debt in about 42 months.
The Real Problem
Well, that seemed easy, didn’t it? Just cut back on everything that we might consider to be discretionary, and we'll have enough money to get rid of debt in less than 4 years. Well, it probably isn't going to be all that easy.
The real problem of course is that if we’re that deep into debt with credit cards, we probably haven’t been good at saving money, so the 16% that we could have put into savings was more likely put into shopping bags. We’re likely to be experts at making discretionary purchases that we really don’t need and can ill afford. And, that means most of the other categories in our household budget are going to be higher as well, so we’re going to need a little help.
If that's the case, then here are the simple steps that I would take, and the order in which I would take them to find more money, make more money, and get a reduction in what is owed – all in a concerted effort to get rid of debt:
- Contact creditors to renegotiate what's owed. If I owe someone money, they'll be happy to get back some of it and delighted to get back most of it. If I can escape my debts through bankruptcy, they typically get none of it, and this is in the back of their mind.
They'll want to know what I can comfortably pay, so I’ll have that information available. I’ll try to get my interest rate lowered or eliminated to reduce what I owe over the long haul and that will make monthly payments more manageable.
I may need to get help with this from professionals who do this for a living, but I’m the one that got myself into it, so I’m at least going to give it a try.
- Offload unnecessary recurring obligations like: more than one phone; unlimited cell phone minutes; cable or satellite TV service; pay per view services; magazine subscriptions, etc. If we're going to get rid of debt, we need to reduce our expenditures, and some of them aren't necessarily gaping holes, but rather small recurring expenses that are draining away our ability to fix the debt problem that's looming overhead.
Perhaps we could save $100 a month.
- Plug the holes. Make an assessment of what I spend money on, and see if I notice anything that could be eliminated. How about manicures, pedicures, time spent at the salon, beers with the boys, tobacco and alcohol, lottery tickets, insurance on vehicles I’m not using, subscriptions or memberships that I’m not using. The list is almost endless, but the idea should be clear – my financial boat is sinking, so I need to plug the holes before I can start bailing water.
It's reasonable to expect that we could save $100 a month.
- Reduce my largest expense - housing. Consider alternative housing arrangements that would significantly reduce my cost of housing – rent instead of own, get a roommate, get a smaller house, get a less expensive house, live with friends or relatives, or move into a mobile home.
It wouldn't be difficult to imagine saving at least $250 each month.
I know the whole idea of relocating or changing the way we live isn't desirable, but if we want to get rid of debt, we have to reduce our largest expense to increase what we have available to pay off that debt.
- Reduce our next largest expenses – transportation and food. These are typically 16% and 12% of our household budget. Can we get rid of the second car? Can we take public transportation, or walk or ride a bicycle to work? I lived in California for more than a year without a car, so I know it can be done.
What about meals out? They aren't really necessary are they? If we're buying packaged meals, we could buy the ingredients and fix it from scratch for less.
We could probably save an additional $100 each month.
- Seek higher income. This means more work, another job, odd jobs, or even a raise at our current employment. We can apply for other jobs in our current company or create our own opportunity outside of our regular work.
- Sell off assets to raise money. We can hold a garage sale, contact friends about things we have for sale, haul our stuff off to the auction house, put an ad in the local trading paper, or simply use word-of-mouth to let people know that we have things to sell.
Even without increasing our income or reducing what we owe, this list suggests that we could save another $550 a month and put that towards our effort to get rid of debt. If you're running dry of ideas for making your money go farther, check out my frugal living tips for a comprehensive set of simple ideas for saving money, and review the money saving "heavy hitters" in my list of money saving ideas.
In any event, good fortune to you, my frugal living friends. May the force be with you to get rid of debt and keep it out of your life. It is truly enslavement to another, and that's just not a comfortable or peaceful way to live.
Done with Get Rid of Debt, take me back to Paying off Debt