This is a guest post written by Erik Folgate, writer and editor for the Money Crashers personal finance blog. Money Crashers provide useful tips and tricks for related topics like investing, credit and debt, financial education, frugality, and more.
Getting and staying out of debt should be your number one goal when you first start getting serious about your finances. So many people in the world are in financial debt that it’s easy to assume that this should be the first step for many people. Many people find the thought of paying off all of their debt a daunting task, but it turns out to be easier than many people think once they set out a plan. The biggest problem many of us face is changing our habits and ways of thinking when it comes to debt. It’s so easy to finance everything in our culture, and going into debt has become a cultural norm. We often find that we continue to stay in debt even when we’re on a plan to pay it off. I am going to point out a few reasons for that to help you reverse the process.
1. You Haven’t Faced Your Own Worst Enemy: You.
Look at yourself in the mirror, because that’s the person that’s hindering your plan to get and stay out of debt. You must have a revelatory change about debt if you ever want to conquer it for good. Treat it like any other goal you’ve ever set out to accomplish, and be willing to make sacrifices to accomplish getting out of debt. You’ll never get and stay out of debt unless you tame the face in the mirror first.
2. You Don’t Have A Written Plan To Get Out Of Debt.
Getting out of debt is serious business, and you need to have a carefully crafted plan for accomplishing the goal. One of the more famous plans for getting out of debt is Dave Ramsey’s plan. Using the Debt Snowball Method, he teaches to list all of your debts from smallest to largest. Then, attack the smallest debt first, and once that’s paid off, put the money you were using to pay off the previous debt towards the next debt. There is some controversy as to whether this is the best way to get out of debt, but Ramsey focuses more on behavior, rather than numbers. He is more concerned with helping you build momentum, which will ultimately motivate you to finish your “get out of debt” plan.
3. You Haven’t Broken The Car Financing Cycle.
The moment you buy a new car or a newer car and you finance it, you’ve begun a vicious cycle of constantly relying on a car payment while owning a car. The average car payment in North America is over $350 a month! I don’t think you should drive a clunker your whole life, but if you can resist the urge to buy a new car, you can gradually move up in car by buying with cash when you have the money saved up and can afford the expense.
4. You Aren’t In Control Of Your Variable Expenses.
A variable expense would be any monthly expense that is controlled by your daily decisions and habits. Eating out, entertainment, dry cleaning, small vacations, gifts, and life’s little luxuries are all variable expenses that you can control. All of these types of expenses should be a part of your written budget, and you should put a reasonable dollar amount value on these expenses. Once you’ve hit the limit for the month, you stop spending in that category.
5. Your Fixed Expenses Are Too High.
It’s really tough to get out of debt if you don’t have any extra income to put towards it after all of your monthly bills are paid. If this is the case, you either have an income problem and you need to brainstorm ways to increase your monthly income, or your fixed expenses are too high. Are you house poor? If you’re monthly mortgage/rent exceeds 30% of your monthly income, then you may need to consider downsizing in house. Utility bills, insurance premiums, and auto expenses are more fixed expenses that can easily drain your monthly income if they are too high.
This article isn’t meant to put you down. It’s meant to help you realize the roadblocks in your financial life that could keep you from getting out of debt and staying out of debt. Getting out of debt is so important to good financial health, because monthly debt payments drain your monthly income, and it keeps you from saving for retirement, children’s education, and large purchases. It’s the first step to building wealth, but it’s also one of the hardest thing to do. Are you ready to start lifting the roadblocks that keep you from getting out of debt?
{ 12 comments… read them below or add one }
This article is right on target. I especially like your advice to break free from car payments. I have seen too many people use financing to purchase cars they cannot afford. What they don’t understand is that they are just setting themselves up for a future of being dependent upon financing. One of my husband’s and my goals is to always pay cash for our cars. Each time we buy a new one, we can get a somewhat better one since our last car’s trade-in value will be greater.
I also think that controlling variable expenses is crucial. Many people do not realize just how quickly these expenses add up. Though it may seem like you are not saving much each week, by the end of the year your savings can be significant.
Nice article!
for me it’s:
1. income is low.
2. everything is so expensive. (the basics- rent, electricity, food, gas, insurance, etc).
3. income has not increased much at all in the last 5 years. expenses have.
4. transmission overhaul and plumbing problems went on a paid for credit card because my emergency fund was only at $1,000. (can’t seem to save anything over that).
I’ve budgeted and cut everything I can. Unless I can figure out how to not eat.
I so agree with your points in this article…and I so wish I had seen this article ten years ago. I have had to apply each guideline and have so far paid off $63K worth of debt since Jan 2008.
When I started looking to get out of debt I looked at where I could find some extra to pay against my debt. I eventually sold my house and moved to an apartment which opened up about $600 extra to pay against my debt. I miss my house sometimes but I am so much happier without the debt and when I buy another house I will enjoy it more.
Rather than paying off the smallest debts first I think you are better off ordering the debts by their cost.
Pay off the debts with the highest interest rates first. These will probably be debts such as credit cards and short term loans. You’ll spend less money in the long run if you get rid of the high interest debts first.
You know me too well.
Hey,
Great post.
When we did our video course that included a host of tips on budgeting, one of your tips above was key.
#4 – You aren’t in control of your variable expenses.
I’ve recently been commenting alot on grocery bills and The List. Mainly because I’ve noticed this is an area where I spend more than anticipated, but also because I’m not shy and often ask people ‘hey are those on sale?’ when I see a lot of something in their cart.
Invariable, they say ‘yeah, I came in for milk and eggs’ or something to that effect. I do the math in my head and estimate $50 or more of groceries of things they obviously hadn’t budgeted for.
Prime example of someone who needs to manage their variable expenses.
You are so right here. I think the variable expenses reason is a big one. Folks don’t account for the non-monthly expenses and they continually break their budgets. Saving and planning for expenses is a must to get real traction against debt. Great post!
For those looking for a more proactive approach to managing finances and budgeting check out the Easy Envelope Budget Aid (EEBA), available at http://www.eebacanhelp.com. It’s based on the envelope budgeting approach of setting aside cash for particular expenses–in advance–and then spending out of those categories on a declining balance basis. Stop before you run out of your balance as opposed to find out after-thefact that you overspent.
EEBA is available online, as an Android app and on mobile Web. EEBA lets you check your envelope balances and record transactions at point of sale allowing you to carry your virtual “envelopes” with you.
We’re in open Beta right now, website at http://www.eebacanhelp.com
The Beta version, which is ready to use right now, is free. Give it a try at http://www.eebacanhelp.com
Cindy
talk@eebacanhelp.com
EEBA is excellent! It has really helped our family stick to our budget over the last year. Best of all, is when we have been frugal and then find that we have “extra” eating out money and can go for an extra unplanned date night. Even though those times are rare, it’s also nice to know when we’re down to just a few bucks and that means “date night” is sticking to the dollar menu or cooking at home.
We started small with just tracking eating out, grocery, and gas, using the free version. Now we’re going all-in using the paid version ($3/mo.) so we can track more items, like a per-person (family of 6) clothing, birthday, and Christmas gift giving.
Just tracking Christmas alone saved us a very large amount of money, as we kept track of how much was spent (and roughly how many items were purchased) and instead of feeling like we’d bought way too much after all the gifts were opened, we felt like everyone had an appropriate amount of gifts, no one was shorted, and we were totally on budget for the first time ever.
This is a great write up. Although you refer to this periperhally, I would add passion for getting out of debt. When I became debt-free two years ago, I left no other alternative.
Great article! I agree with Roshawn, passion for getting out of debt is key. Also I know a lot of people who have settled mounting credit card debt by settling it.