You’ve acknowledged your debt problem, honestly assessed where you are and tracked where your money is going, and now you’re ready to make a concrete plan to get out of debt.
The first thing to keep in mind is that debt is not erased overnight –the process has more in common with a marathon than a sprint. The next is that you cannot put everything into getting out of debt. You need to build up a little bit of cushion first and you still have bills to pay in the meantime.
Just like a runner preparing for a marathon, you need a concrete plan. Here are a few steps to get you started.
Step 1: A Spending Plan
This is also called a budget. A budget is crucial for keeping yourself on track. You need to have a plan, as getting out of debt is not something that typically “just happens.” You might not like planning and budgeting may sound terrible, but having a concrete plan will help you achieve your goals and help free you from debt.
When budgeting, list all your fixed costs and bills first. Then budget for the non-fixed items. Look at your bills again. Is there any way to lower some of those costs? Any features you can cut out, or fixed costs you can cut out completely for a while?
Figure how much you can squeeze into paying off your debts, and cut out most of your “discretionary” spending. Take a hard look at how much you are spending in the “non-fixed” cost areas, such as food, clothing, entertainment, etc. Get creative about how you can cut those areas. Maybe you eat out often– challenge yourself to cook most meals, which is much less expensive.
I do recommend leaving a small amount in your budget for fun, but the key here is small. Try $10 a month. In the same way it is difficult to maintain a drastic diet change, it is also difficult to maintain a drastic budget change without an occasional break. Just make sure your occasional treat is small so you will not get too far off track. We do not have bottomless stores of willpower, so an occasional treat to savor may help you stay focused on your goal.
You are trying to train yourself to live on less and to make smarter choices, not to forgo treats for the rest of your life.
The good news for budgeting is that in the last step, you tracked your spending, so you can use that as a template for your budget. Make note of any unusual spending patterns or things you will need to pay for this month that you may not have needed to pay last month. Tracking your spending should also show you where you have a tendency to over-spend.
Step 2: An Emergency Cushion
Before you put a bundle of money into paying down your debt, you need an emergency cushion fund. For many people, unexpected large expenses are what pushed them into debt in the first place or at least made the problem worse.
I have seen various suggestions for how much to save as an emergency cushion. Some suggest saving $1,000 and some suggest saving the amount of your medical deductible. I suggest saving a few thousand dollars in case something unexpected happens, like your refrigerator dying or your car needing an expensive repair.
Whatever you decide to save for this cushion, you may need to save aggressively before you pay off your debt aggressively. Continue paying the minimums on your debt and save a little before you kick the debt payments into high gear. This will keep you from going further into debt if you are hit with unexpected bills.
Step 3: Plan Your Attack
Decide ahead of time what debt you will start to pay down first. If you have a lot of debt or you think that cutting down to a bare bones budget will still not help enough (this may be the case if you are behind on a large debt, such as a mortgage), you may want to meet with your creditors to work out a repayment plan. Negotiate for a better interest rate and let them know you are serious about paying off your debt.
Do some research to see if you can consolidate your debt at the lowest possible interest rate. Be sure to read the fine print on any deals you find. You want to know what you are getting into before you take any action.
Once you have done all your research, made a budget, and saved an emergency cushion, you will be ready to implement your plan.
Photo used under Flickr Creative Commons license.