“It is going to take forever to get these bills paid off.”
“I tried to pay down my debts but I just ran out of steam.”
“It seems hopeless.”
“I don’t even know where to start.”
Have you heard these before? Have you said them yourself? Yes, debt can be overwhelming, but setting a time goal will help you to not only stay focused but gain momentum.
How do you set a time goal? Follow these five steps:
1. Cash Flow Plan
Yes, that budget is absolutely essential. You must know where your money is going before you can even think about setting a time goal. If your budgeting experience in the past has been less than stellar, read Five Budgeting Pitfalls to Avoid. You can do this. Get started.
2. Calculate how long you will be in debt if you keep doing what you are doing.
Let’s say this is your situation:
You owe $5,000 in credit card debt. Payments are $100 a month at 12% interest.
You owe $11,000 on your Honda. Payments are $480 a month at 7.5% interest.
You owe $20,000 on your Ford. Payments are $470 a month at 8% interest.
At this rate, the Honda will be paid for in 25 months, the Ford in 50 months and your credit card in 70 months. But you will actually get out of debt earlier than 70 months (unless you get car fever) because once your Honda is paid off you will snowball that payment onto other debt. Right? In 25 months you will owe $10,900 on your Ford, and $3600 in your credit card, so you add the $480 you were paying on the Honda to the $100 credit card payment and it will be gone in 7 more months. Still with me? Now you add the $580 to the $470 Ford payment (you will owe $8,000 at that time) and you will be debt free in 8 more months: a total of 25 months + 7 months + 8 months = 40 months.
3. Set your time goal.
Most people, if they aren’t OK with the 40 month time-line, will look first at ways to cut the budget. That is not a bad idea, but I want to challenge you to first set a time goal and then figure out how to accomplish it. Why does setting the time goal work better than examining your budget? Because setting the time goal will force you to think creatively whereas looking at your budget tends to stifle creativity. I recommend trying for two years or less. Why? Because the 24 month time period, psychologically, is “doable.” Any time frame over the 24 months may become so distant that you might lose hope. Did you feel that way when you read “40 months” in the previous paragraph? See what I mean?
4. Figure what you need to do to accomplish the time goal.
Obviously, you are going to need to make bigger payments to get rid of the debt quicker. But how much will it take to do it in 24 months?
In this case, I did the math for you: you will need an additional $600 a month. Did your eyes pop out? Don’t despair. Now is the time to do what we said we were going to do: think outside the box.
5. Time to get creative. These tips will help you find that $600 a month:
- Scrutinize your budget
How much are you spending on eating out? Going to movies? Christmas gifts? This is where you learn just how badly you want to get out of debt. Can’t find an additional $600? How much did you find? $300? OK, we still need another $300. Read on.
- Check your tax refund.
How much refund did you get this year? What did you do with it? If your answer is that you got $4,000 and you don’t know what you did with it, you have just found your additional $300 a month. Change that W-4 and start bringing home your money instead of loaning it to your Uncle Sam. But if that won’t work, read on.
- Use your “extra” paychecks.
If you get paid every two weeks, you are getting three paychecks every sixth month. If you are paid every week, you are receiving five checks every third month. What do you do with those extra checks? If you don’t know, now you do: apply them to debt. Those extra checks equate to an entire month’s take home pay every year. If, for example, you normally bring home $2,400 every month, you just found an additional $200 a month to use on your debt.
- Extra job.
An extra job, just for the 24 month period, could easily bring in the $600 you need. In fact, once you start that extra job and apply every penny of it to debt, you will probably get out of debt in less than your 24 month goal.
- Sell one vehicle.
If you were to sell the Ford for $20,000 and buy a $3,000 car, you have just reduced your debt from $36,000 to $19,000. Continue paying the $1,050 a month you are paying now and you will be out of debt in only 20 months.
- Work overtime
Do you have overtime opportunities? Take them! Every penny going against your debt will help you toward that 24 month goal.
- Cash out your whole life policy.
Do you have any cash value in your whole life policy? If so, consider replacing your whole life with a term policy. I recommend talking to a financial counselor before making this decision, but if term life is right for you, use that cash from your whole life to reduce your debt. A bonus: you could also apply the savings in your monthly premiums to your debt.
- Tap your savings.
How much do you have in savings? I bet it isn’t earning nearly as much interest as you are paying on your debt. Don’t use it all; you need a small emergency fund. But if you have $10,000 in a savings account, you could use $8,000 immediately on debt (pay the credit card off first) and you have reduced your total debt to $28,000.
Conclusion
Getting out of debt requires sacrifice; it is never easy. However, if you can set a time goal and make up your mind that you are going to do whatever it takes to achieve that goal, you will do it.
The key is to get started. Today is a good day. Go for it!
Do you have any tips or stories for getting out of debt?
{ 9 comments… read them below or add one }
Excellent article. I really like the time-goal concept and your examples. I hope it’s not too forward of me to mention that you can find a free debt reduction spreadsheet on my website that can help you run various what-if scenarios.
That was an enjoyable read, Joe. Thanks!
I agree: set the timeline first. It can be so hard to even get started when you can’t see an end in sight. And making it a stretch goal (such as 24 months vs. 40) can provide the needed kick in the pants to really do things differently for a while. No way am I giving up my favorite things permanently, but I might could put them on hold for a while if that’s what it takes to achieve a goal.
I do like the time goal idea. Another option you could throw in is to break it into chunks. I know we talk about getting out of debt as fast as possible and that’s good and all. Another thought, if you really can’t shrink your budget anymore is to finish one and take a break.
Pay off the first thing and then take a break for two months. Maybe use that as a reward for paying the first one off. Then you can start on the second one. I know you’ll be spending more money, but it’s like taking small steps at a time and rewarding yourself responsibly for all of your hard work.
This article certainly covers the strategy to get out of debt. But at the end of the day it depends on your discipline and work ethic. Putting the plan in place is one thing, but sticking to it is another. For example, if you set forth a budget, can you follow it around Christmas time? Also, I like the idea of getting a second a job, that can often be the key here. With that you can be a little less conventional – like mowing yards, or working on weekends.
Only thing I would add is to get an accountability and encouragement partner. Telling a trusted friend how much debt you have and that you’re committed to getting and staying out of debt is very powerful. Ask them to pray for you, encourage you, and celebrate your progress with you.
@Vertex,
Thanks for the encouraging words. About being forward, I see no problem in offering a free and helpful product.
@David,
You get it! The time goal will stretch us to think outside the box and motivate us to actually do things differently…for a set time frame. I love your term “stretch goal”.
@basic,
Good point…there is a big difference between developing a strategy and having the discipline to stick with it. But with a time goal, one can start counting off the months and be encouraged by the progress. Many people can maintain that discipline if they know there is an end in sight. Good point about Christmas, but I suggest home made gifts, lawn mowing certificates, baby sitting certificates, etc. People CAN stay with their commitments, even at Christmas, if they set their minds to it.
@Matt,
Great point about the accountability partner. It is especially imperative for a single person. And this trusted friend must be willing to demonstrate his or her friendship by being involved, asking for progress reports, giving encouragement when appropriate and getting tough when needed. Of course praying regularly is the best thing any friend can do. Thanks for the great suggestion.
@Clayton,
Breaking it into chunks. Hmmm. My concern is that the positive momentum would stop when you take this break and then, two months later, after rewarding yourself, you would have difficulty getting geared up to start again. Have you or anyone you know successfully used this plan?
Great Article and Helpful Tips.
Effective budgeting is really very important in controlling your expenses and saving money. The better you manage your budget, the lesser the chance you accumulate debt concerns.
@Debt,
Thanks for the encouragement. Yes, it is better to avoid the debt in the first place. But reality being what it is, many do not. And once they work through their messes, they are often the very best money managers; they are highly motivated to never go back!