First some legal jargon:
This blog is not intended to provide professional financial advice. You should consult a certified financial professional to support you in your individual needs. The purpose of this blog represents my own experience, and should not be used as professional financial advice.
Now on to our blog…
In true transparency, I know a reader somewhere is going to be kind enough to do the math for me, and my debt is probably going to be even higher than what I am saying here, but for simplicity sake, we will round the number I owed to $175,000. This was a mixture of student loan and credit card debt.
In staring at this massive task before me, I took the first step forward. I made a budget.
1) Make a budget
At this point, it seems cliché with many financial gurus stating this as the first step, but I am going to tell you. This. Is. The. First. Step.
You will not be able to efficiently track your spending unless you actively make a budget that encompasses your financial goals. There are lots of apps out there that can help you with this, but I am a fan of a good old excel spreadsheet. Each column represents a month and you should plan out 12-18 months. Do a top row for monthly income, and then in the first column list out all of your monthly expenses. Go into your bank accounts and credit card statements to get your spending for the last few months to estimate your spending for the upcoming months. Subtract your expenses from your income, and this is the amount you have left over for the month.
Why is this important? That leads us to the next step.
2) Cut your spending
No, I am not telling you to cut out the coffee in the morning from your favorite coffee shop, and live on rice and beans (although, you could do this, and it would probably supercharge your ability to pay down your debt), but you need to take a long, hard look at that leftover money at the end of the month. How much is it? Is it enough to make a significant dent in your debt? If not, what can you reasonably cut from your expenses that can increase that leftover amount? One of the exercises I did at this stage and continue to do on a quarterly basis is to give myself three expenses that I will not sacrifice on: they are books, travel, and takeout 2 nights per week. Everything else, I either cut or find a way to reduce my spending such as shopping with coupon codes. The more you have leftover each month, the quicker you can reduce the debt.
3) Move to cash flow
What does it mean to move to cash flow? Put your credit cards in a box somewhere and lock them up….give someone else the password, and remove them from all of your saved payments. Do not use them. All of your spending needs to come from your bank account. Trust me…this was the hardest for me, but it is necessary. You can’t pay off your debt if you keep spending it.
4) Select the debt you are going to focus on first
Dave Ramsey refers to this as the “snowball” debt method, but for me it was more than taking the smallest debt and paying that first to get the momentum. I felt very strongly that I needed to pay off my student loan debt first, as I knew that this is a debt that would stay with me until death. Typically, even if someone files bankruptcy, student loans will remain as they are difficult to discharge. For me, personally, I selected my student loans as the debt I was going to work on with my leftover money each month, and I selected the student loans first that had the highest interest rate. (Interestingly, selecting the debt with the highest interest rate and paying them down first is called the “avalanche” method).
5) Start paying it off…and don’t stop.
With the leftover money I had each month, subtracting my expenses from my income, I focused on one loan at a time, until eventually, I was left with $22,000 in credit card debt alone. This led me to step 6….
6) Look into refinancing/debt consolidation programs/lowering your interest rate
This is where you should get help, or reach out to a financial professional to evaluate your options.
For me, this is where my story may diverge from what is typical or able to happen for some people, but this blog is sharing how I did it. I was fortunate that we were able to refinance our home when interest rates dropped lower than the interest rate we had on our mortgage, and we also had 10 years of equity in our home. In refinancing, I lowered our monthly payments on the mortgage, and used the cash out to pay off the remaining $22,000 credit card debt. This may not be an option for some, and I do feel fortunate that we had this option. There are debt consolidation programs that may also help you to consolidate loans with lower interest rates, cutting the overall cost of what you would owe on those remaining loans. You could also try to call your credit card company and negotiate a lower interest rate, especially if you have been a customer for a long period of time and have always paid your bills on time. I will say that with the clip I was going, had we not refinanced, I still would have paid off the credit card debt in 8 years rather than seven.
So….this is all fine and good, but what if when you do your budget, and your expenses are more than your income?….and you cut everything you can down to the bare minimum, but it is still not enough to pay down the debt? This is where you will need to “diversify your income stream.” I’ll talk more about this in my next blog!
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