When you find yourself in a hole, it’s best to put down the shovel and stop digging.
Many times I thought, “Maybe, if I could just dig a little faster, I could dig my way out.”
It didn’t work and I just went deeper.
One day I woke up to the reality of being about $70,000 in debt, above my mortgage. At first, I felt nauseated. Then I felt betrayed. After that, I didn’t really know what to feel. The emotion that I finally settled on, the one that has been the key in getting out of this hole, was anger.
I wasn’t angry at the creditors that happily bent over backwards to give me everything I wanted.
I wasn’t angry at the mountain of debt that I was staring at.
I was angry at me.
I was angry at the guy that kept staring back at me in the mirror every morning.
The only person that was responsible for signing the dotted line on every transaction, document, and receipt that landed me and my family in this hole. Each signature was just another shovel full of firm ground being removed out from under my feet.
Here are the steps Kim and I took to get out of that deep, dark hole and back on track. I hope you can find them helpful if you find yourself in a similar situation:
Stop Digging
Stop using your credit cards immediately. Cut them up, shred them, shoot holes in them, send them through a wood chipper, or any other creative way you can render them inaccessible (I would love to hear how you creatively give yourself a plastectomy). Also stop taking other loans, either from banks or finance companies or friends or family.
Stop getting into more debt.
Build a Emergency Fund
Scrimp, save, clip coupons, sell some junk, work some overtime, and anything else you have to do to get an emergency fund of $1000 in the bank. This should take 2-4 weeks to put into place. Then don’t touch it. It is for emergencies. No, a new ipad is not an emergency.
Seal the leaks
If you can’t find at least $100-200 to save each month, then you need to cut some things from your spending. This is where the dreaded budget that we will talk about in a minute will come in handy. We all have those areas we like to spend a little here and there on — coffee, snacks, candy, desserts, eating out, magazines, shopping for clothes or gadgets or toys or shoes, books, going out, cigarettes … You get the idea. I’m not saying you need to cut everything out, but if you can cut a few of them, or maybe just one at a time, that can add up. Then, take the money you didn’t spend on those discretionary items, and put it on the debt snowball.
Start a debt snowball
Now let’s get that debt snowball rolling. What is a debt snowball?
It is a simple, yet powerful technique for building momentum for dumping your debt. List out all of your debts and put them in order from smallest balance at the top to largest at the bottom. Then focus on the debt at the top, the smallest one, putting as much extra money as you can into it, even if it’s just an extra $50 a month to start (more would be better). When you knock that first debt out, celebrate! Then take the total amount you were paying (say $70 minimum payment plus the $50 extra for a total of $120) and add that to the minimum payment of the next largest debt. Continue this process, with your extra amount snowballing as you go along, until you pay off all your debts. This could take several years, depending on the amount of debt you have incurred, but it’s a very rewarding process, and very necessary.
Make a budget
You need a written detailed budget. Everything you spend, written down on paper. On purpose.
I know. I know. I hated budgets too for a really long time, until I actually did a couple and started finding a lot of money that I didn’t know we had.
I understand that budget is a dreaded word for most of us. But it’s not that hard, and if you set it up right, it’s fairly simple. I recommend using a simple spreadsheet. I have a simple spreadsheet template that I have set and have used for a couple of year and would be happy to share it with you for free. Just click here and it will take you to the page where you can download the file that you can customize to fit your family’s specific budget needs.
If you want to write out your own, just list all your regular expenses (rent, car, utilities, internet, etc.) and their amounts, and then your variable expenses (groceries, gas, eating out, etc.), and then your irregular expenses (things like car maintenance or medical that might not come up every month, but break them into estimated monthly expenses — if you spend $600 a year on car maintenance, budget a $50 monthly expense). Now match that up against your income. The expenses should be less.
Set up automatic drafts for your bills
As much as possible, try to get your bills to be paid through automatic deduction. For those that you can’t, if your bank has online banking options, use that feature. This way, all of your regular expenses in your budget are taken care of.
Save for your upcoming larger yearly expenses in your budget. You know, those expenses that roll around each year and take us by surprise. Things like insurance, car maintenance or repairs, tags, gifts (think Christmas!), medical and other such things. List them out, estimate your annual spending, and begin saving for them each month. Again, if you spend $600 on car repairs, budget $50 a month for that expense, and put that amount in savings.
Set up and envelope system
Use the envelope system where you pay cash for your variable expenses such as food and gas.
Don’t use a debit card for this, but pay for all these items (they are marked with an asterisk on my budget so I will know how much cash to take from the bank for the month). This is optional, but it’s a good tool to use. I can tell you from personal experience, it hurts more to pay with cash, and therefore helps you spend less.
We have been using the envelope system for several years now, and it works like a charm.
Let’s say you set aside three amounts in your budget each payday — one for gas, one for groceries, one for entertainment. Withdraw those amounts on payday, and put them in three separate envelopes. That way, you can easily track how much you have left for each of these expenses, and when you run out of money, you know it immediately. You don’t overspend in these categories. If you regularly run out too fast, you may need to rethink your budget.
Build a long term game plan
Start thinking about your goals, and planning for them. When and how would you like to retire? Is travel something you would like to do? How about that dream house? Think about what you want in life, and start planning to save for those things,