Tuesday, March 19, 2013

How to get out (or stay out) of debt

Want the TL;DR version of this tutorial? OK, here it is:

Don't buy things you can't afford.

That's it. Sounds simple, right?

Unfortunately, for a lot of people it isn't quite that simple. Maybe you're one of them and you've already gotten yourself in hock up to the eyeballs. Consider this a rope to pull you out of the debt quicksand. I can throw it to you, but you've got to grab hold and pull yourself out.

Look your debt straight in the eye, and you're on the road to killing it dead.

When you're deep in debt and can't see a way out, it's tempting to just stop answering the door and the phone and ignore everything you get in the mail. But that's the way a small child responds to fear -- covering her eyes and waiting for the scary thing to go away. Grown-ups face their fears, and in so doing, vanquish them. So the first thing you're going to do is take a clear-eyed look at your debt.

Pull out all your debt indicators -- that is, your latest credit card bill(s), your latest car payments, your student loan payment coupons, your latest mortgage bill, and anything else you're currently paying on time. Look at the current balance for each item. Add them up. This is your base debt, the amount you would pay if your fairy godmother rained magical gold ducats on you and you could pay off all your debts RIGHT NOW. Needless to say, that's not going to happen, so figure on paying additional interest on each loan as well.

If you're currently looking at a number that's making your wisdom teeth fall out in shock, don't beat yourself up about it. It's almost criminally easy to get into debt. Let's look at some exit strategies.

Don't get a debt consolidation loan.

You might think debt consolidation will make it easy to pay down your debts. WRONG. More often than not, a debt consolidation loan just digs you in worse. Why? Because once you have the money wiped off your credit cards and stuck into one big loan, you may start thinking about those lovely, convenient, useful little credit cards with nooooo charges on them -- and put yourself into deeper debt than you were before. DUMB! You don't need a debt consolidation loan -- just take care of it yourself.

Get help from your debtors.

It sounds totally counterintuitive, especially if you've been getting threatening phone calls and letters, but if you contact the people to whom you owe money and tell them you need help, at least some of them will be reasonable. And it's in their best interest to do so -- after all, getting their money back slowly is better than getting no money at all, which is what happens when people file for bankruptcy.

Call your credit card company. Identify yourself and explain that you're having trouble paying down your debt, and ask for a lower interest rate to help you achieve your goal. (You'll still have to pay back what you owe them, but the interest rate you'll have to pay on the amount will be lower.) Emphasize that you do not want to default on payments, and that you have a plan in place to get out of debt. This tactic will probably work best with credit card companies, but other debtors may also be willing to cut you some slack, so call and ask. If the representative says no, try calling and asking another day or at another time, or ask to talk to a supervisor. Your annoying persistence should eventually pay off.


If you're like most people, a big part of the reason you're currently in debt was that you bought things on credit and then forgot to set aside the money to pay for them later. So the first thing you're going to do now is make your debt obligations a critical part of your spending plan. In fact, after paying for your rent and utilities, it's going to be your first priority. Yes, that means ahead of your groceries.

This is going to require some focus. You will have to make some temporary sacrifices. But sacrifice means giving up something you want now to get something you want more. In this case the thing you want more is to get out from under crushing debt, so your life (not to mention your money) feels like your own again. You should also keep in mind that word "temporary." No one expects you to live like this for good -- just until your debt is paid off. So cowboy up, pardner!

Stop using your credit card(s).

This tactic seems boneheadedly obvious, but it can be surprisingly difficult to do -- especially if you've gotten used to buying lots of things on credit. And if you're really deep in debt, you may be using your credit card to buy groceries because you don't have enough cash. (Been there.) Still, this is the first step to being free of debt -- stop using it. You can cut up your credit card (this won't magically make your remaining debt go away, but it will keep you from charging anything else) or remove it from your wallet and put it where you can't get hold of it easily, but in any case, STOP.

This may be the hardest part of getting out of debt for you. You may have to tell your friends, "Sorry, not tonight. I've got debts." You may have to avoid going places and doing things that you know will tempt you to spend more than you can afford. It will probably make you feel like crap for a while. So go do some free or cheap things that make you happy -- if you're addicted to charging things on your card, you will need to fill the empty spaces where your crazy shopping sprees used to be, anyway. If you don't know of any free local attractions, get Googling. Go to the public library. Play on the swings in a local park. Visit a local museum. Take a long soak in a bubble bath. Write goofy letters to a friend. Finish some of your unfinished projects. Read all the back articles of Remedial Adulthood. But DO NOT go window shopping. You may think you have the fortitude to browse and not buy. Know what? You're wrong or you wouldn't be here. Next topic.

Raise, sell, cut.

"But I don't have enough money!" I hear you cry. That's what you think, Mac. Money is hiding in unusual places in your life, and you're going to root it out and use it. Much like Sporkcrist, the Legendary Spork of Justice, Raise, Sell, Cut is the three-pronged implement you're going to use to attack and defeat your problem.

You can raise extra money by working extra hours at your job or taking on another job. (Flipping burgers for the masses is noble work as long as it helps get you out of debt, so don't even try to suggest to me that working at McD's is beneath you!) And if any windfall money comes your way, you don't even have to think about how you'll spend it -- that sucker's going right to your debt.

You can sell things you own and use the profits to pay down your debt. This could be just about anything from your old CDs (you probably have them all digitized anyway) to those collectible salt and pepper shakers your Aunt Enid gave you (why?) to your car. No matter what it is, somebody on eBay probably wants to buy it. (No takers on eBay? Yard sale!) If you're fortunate enough to have stock options from your job, liquidate them for cash. In fact, the only thing I recommend that you not liquidate is retirement funds, if you have any. They may be tempting, but you should leave them alone. Learn from my fail.

Finally, you can cut all the fat out of your life. Turn off your cable service, disconnect your cell phone, shutter your Netflix account, get rid of your gym membership, look for a place to live with lower rent, take the bus to work, stop buying lottery tickets (really, people?), buy minimal groceries, get cheap haircuts, nix the fancy coffee drinks, stop eating out at restaurants, turn off lights and unplug things you're not actively using, and hold off buying new clothes for a while. Get rid of anything you spend money on that you do not ABSOLUTELY NEED. (Despite my husband's claims to the contrary, MMORPGs are not an ABSOLUTE NEED.)

Remember, TEMPORARY. FOCUS. You can get these things back later, when you're in better shape to afford them.

Pay it off, snowball style.

There are two major schools of thought about paying down debt. One says you should pay off the smallest debt first and work your way up to the big debts; one says you should pay off the debt with the biggest penalty first (e.g., if you owe $500 to the Mafia and $200 to Visa, you should pay off the $500 first to avoid having your legs broken. The last time I checked, Visa didn't employ thugs, so they're marginally safer). Either method works, and you should choose the one that appeals most to you.

Here's how you do it. Choose the debt you want to pay down first. Find out what the minimum payments are for all your debts, and make those minimum payments for each one -- except the debt you're focusing on. That one gets whomped with as much money as you can possibly squeeze out of your resources. If your bank gives you the option (and most banks do), you can do this through online bill paying and actually pay the debt down more often than once a month when the bill comes due. This should wipe out that particular debt even faster, which is exactly what you want.

The minute you've cleared out one debt, it should free up some of your money. Continue to keep your living expenses as lean as possible and whomp as much money as you can at the second debt -- again, always maintaining minimum payments on all your other debt sources. Repeat this process with each debt (whomp, whomp) until you've wiped them all out.

This debt-reduction strategy is sometimes called the snowball method, because as you continue to pay off your debts your ability to do so gains momentum (and money), the way a snowball grows as it rolls downhill. It will take some real time and real effort -- this isn't a 60-second training montage from a feel-good movie. You might actually have to live on ramen and peas for a while, or learn how to cook basic meals instead of haunting the Taco Bell drive-thru, but as you start killing your debts, it will give you a tremendous feeling of accomplishment and greater confidence in your ability to slay the debt monster. And probably less indigestion to boot.

Stay out.

Once your debts are paid off, you can slowly start adding grace notes back to your life again, with the added benefit of being able to pay for them with your own money. You may decide not to add everything back, depending on how much you really missed it while it was out of your life.

The best way to stay out of debt is, as mentioned above, not to buy things you can't afford. So what if you don't have a brand-new everything -- is shiny stuff really what makes you happy? Focus on the things you truly enjoy and spend your money on them, not on status symbols you don't really want or need.

If your crazy spending habits put you into debt in the first place, you need to figure out what compels you to spend more than you make. Do you need purpose in your life? Could you fill that need by helping other people, volunteering with your church or club, or otherwise taking up a cause for good in the world? What can you do with your free time that doesn't involve shopping?

Leave your credit card at home for a while after you're debt-free. Try paying cash (or debit card) for everything you buy. If you really want something you can't quite afford, do without it for a while and save up your money until you have enough to buy it. (Hey, this method worked for generations before credit cards came along.) If you decide just to buy it with a credit card so you can have it NOW NOW NOW, you'll end up paying multiple times what the item was worth in interest payments, which is DUMB DUMB DUMB. If you do have the willpower to keep a credit card, try using it like a debit card -- pay it off completely every month, so you don't get charged interest. Oh, and for heaven's sake, shop around for a credit card with no annual fee and a low interest rate!

And there you have it, kiddywinkies! I speak from personal experience, having gotten out from under massive credit card debt in 2008. The only debt we've carried since was for a new car, which we paid off early to avoid extra interest charges.

If I can do it, so can you. So go out there and spork your debt!


  1. Awesome post, Sooz! Thanks so much for sharing this. -Rachel

  2. I was thinking about this post and remembered a debt elimination calendar I created on my previous website (it's still there) which visually shows the snowball effect you explain above. I thought others might find it useful:

    Also, I have some budget worksheets that can be downloaded:

    There's a link in those articles to an amazing booklet called, "One for the Money: Guide to Family Finance" which I'm sure you're already aware of.

    Just thought I'd share for the benefit of site visitors who find this page. :)

  3. I completely agree. And if the money is coming in, save what you can for emergencies.

    1. Very true, Thomas. Maybe we need another article on why and how to accrue a rainy-day fund.