Tip #167 - Don’t Dig Yourself Deeper Into Debt – Part 2. In Part 1 of this series we discussed how to start getting out of consumer debt. In this part of the series we will discuss how to completely get out of debt.
After you have come up with an amount you need to pay off each month (in our example we came up with $333 per month), you must figure out where this $333 is going to come from. This is the harder part. Again, if this debt you are paying back is from a time when you were spending more than you earned (but you aren’t spending more than you earn any more) or from a one-time event in your life then you are in a better position than someone who is currently living above their means. If the debt is from one of the first scenarios, you have two choices – cut down your current expenses or earn more money. If you can get a second job paying $333 per month, then great. Your work towards paying back your debt is pretty much done. (Although there is still more work to do to stay out of debt.)
If you can’t bring in any more income, then you need to cut down on your expenses. Cutting down your expenses means writing up a realistic budget (or a list of your current expenses/spending habits) to see where your money is going. And then you must evaluate what you can cut to make up the $333 per month to pay back. Hopefully, you can find easy ways to cut back to save up that money. Cutting back on cable and trips to the beach for a few years might be enough to cover your debt. Or maybe you need to do something more drastic like finding an apartment with lower rent.
Many people at this point might say that they cannot cut their expenses any more than they already have. I don’t believe this. There is room in almost anyone’s budget to cut expenses. Cut it down to basic needs only if you have to. Getting out of debt should be your top priority. Drink only water; don’t buy new clothes; cut your own hair: or carpool to work. All of these types of things cut expenses out of your budget. And if you truly have no other expenses to cut then go back to the first option, which is to bring in more income. Those are your only choices or you will never be able to pay back your debt.
Now, if your debt was not a one-time occurrence or the result of frivolous spending when you were younger, then you are on your way to being debt free and building up financial security. But if the debt you are paying back is still accumulating because your expenses (or outgo) are greater than your income, then you are still accumulating debt even as you are paying back your old debt. And if that is your case, then you will never pull yourself out of the hole you are digging.
This is why a making a monthly budget is vitally important. You must list out all of your expenses in all of your categories of spending. If the total amount of monthly expenses is greater than your monthly income, then you need to cut down your expense until they are equal or less than your income. And that means including a category for your monthly debt repayment. Again, you figured out back in the goals section of this exercise the amount of debt you needed to pay back on a monthly basis (in our example $333). Figure it out so that it is a reasonable amount that you can afford to pay. And try to do it in the shortest timeline possible so that the goal is attainable (about 5 years or less). Any longer, and the goal starts to seem out of reach, and you will lose interest. Once the full debt is paid back, that money can become your savings. In the last part of this series we will discuss staying out of debt.
In Real Life (IRL) – I mentioned in my first post that I was recently thinking about debt repayment because some people I know who I believe are in debt seem to continue on their wild spending spree. Impromptu vacations, costly clothes, and dinners out seem to be the norm in their everyday expenses. I cringe when I hear them talk about all of the things they are doing, because I am fairly certain they don’t have the money for it, let alone that they already owe money to credit card companies. I think it’s so easy to spin out of control in this regard. Once people already owe a few thousand dollars, what’s a few more dollars for Chinese takeout or a couple hundred dollars for a hotel?
The problem is besides that they are adding to their debt, they are not facing their problem, which is a continual cycle of spending more than they are bringing in. Over time the debts get larger until there is no end in sight to pay it back. Facing reality and suddenly living on less isn’t appealing. But at some point they either need to address the problem or they may need to declare bankruptcy, which should really be the last resort. They really need to figure out a debt repayment plan and then cut back on their expenses or they will never dig their way out of the debt they have created.