How to get out of debt (without gimmicks or games)

How to get out of debt (without gimmicks or games)

As part of back to basics month, let's use today to explore how you can get out of debt without gimmicks or games.

How to get out of debt without gimmicks or games

After twelve years of reading and writing about money, I've come to believe that debt reduction ought to be a side effect and not a goal. Getting out of debt is a target, not a habit. And, as we've been discussing recently, good goals are built around actions instead of numbers. If you restructure your life so that you're spending less than you earn, you will get out of debt. It's a natural side effect.

Having said that, I realize that a lot of GRS readers are struggling to get to square one. Getting out of debt is their goal and primary obsession. That's okay.

Before you can begin repaying your debt, you must be earning a profit. Unless your income exceeds your expenses, your debt is actually increasing. If you’re continuing to add debt, or if you’re only able to make minimum payments, you must first find ways to spend less and earn more until you have a positive “saving rate”. (Both businesses and people earn profits. But when individuals earn a personal profit, we call it “savings”.)

After you're earning a personal profit, you can (and should) make debt elimination a priority.

Why You Should Pay Off Your Debt

Debt repayment can improve your credit score, meaning you'll pay less on everything from rent to car insurance to future borrowing needs. Plus, debt reduction is one of the best returns you can earn on your money.

Investing in the stock market provides an average annual return of about 10% — but that return isn’t guaranteed. Some years the market is up 30%, but other years it drops by 40%. When you pay down a credit card, you earn a guaranteed return of 20% (or whatever your interest rate is). That’s tough to beat.

There are also non-financial benefits to paying off debt, including:

  • Simplicity. The more debt you have, the more bills you have. It's easier to manage your money when you have a simple, efficient financial infrastructure. Each time you pay off a debt, you move one step closer to this ideal.
  • Cash flow. Whenever you eliminate a debt, the money formerly used for that monthly payment becomes available to pursue other goals – including fun stuff like ski trips and knitting supplies.
  • Freedom. When you have monthly payments to meet, you’re chained to your job. You’re unable to take risks. Once your debt is gone, a wider range of options becomes available to you.
  • Peace of mind. Best of all, once you’re debt-free, you can sleep easier at night. You’ll put less pressure on yourself, and you’ll have fewer fights about money with your partner.

When I first tried to get out of debt, I lacked a system. Without a plan, I sent extra money to one credit card and then another. As a result, I never seemed to make any progress.

After deciding to become boss of my own life, however, I researched how to get out of debt. Many books recommended a strategy called the “debt snowball”. Although I was skeptical, I gave it a try. The method worked. Using it, I managed to eliminate my debt and begin saving for the future.

Stop Acquiring New Debt

This may seem self-evident, but the reason your debt is out of control is that you keep adding to it. Stop using credit. Don't finance anything. Cut up your credit cards.

That last one can be tough. Don't make excuses. I don't care that other personal finance sites say that you shouldn't cut them up. Destroy them. Stop rationalizing that you need them.

  • You don't need credit cards for a safety net.
  • You don't need credit cards for convenience.
  • You don't need credit cards for cash-back bonuses.

You don't need credit cards at all. If you're in debt, credit cards are a trap. They only put you deeper in debt. Later, when your debts are gone and your finances are under control, maybe then you can get a credit card. (I don't carry a personal credit card. I don't miss having one.)

After you destroy your cards, halt any recurring payments. If you have a gym membership, cancel it. If you automatically renew your World of Warcraft account, cancel it. Cancel anything that automatically charges your credit card. Stop using credit.

Once you've done this, call each credit card company in turn. Do not cancel your credit cards (except for those with a zero balance). Instead, ask for a better deal. Find a low interest credit offer online and use it as a bargaining wedge. Your bank may not agree to match competing offers, but it probably will. It never hurts to ask.

Establish an Emergency Fund

For some, this is counter-intuitive. Why save for an emergency fund before paying off debt? Because if you don't save first, you're not going to be able to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies. Destroy your credit cards; save cash for emergencies.

How much should you save? Ideally, you'd save $1,000 to start. (College students may be able to get by with $500.) This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It is to be used when your car dies, or when you break your arm in a touch football game.

Keep this money liquid, but not immediately accessible. Don't tie your emergency fund to a debit card. Don't sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening an online savings account. When an emergency arises, you can easily transfer the money to your regular checking account. It'll be there when you need it, but you won't be able to spend it spontaneously.

The Debt Snowball

With the debt snowball, you set aside a specific amount of cash each month to pay off the money you owe. At first, progress is slow. In time, however, you begin to make rapid progress, picking up speed like a snowball rolling downhill.

Step One

The first step is to make a list of your debts. For each obligation, include the balance you owe, the interest rate, and the minimum payment. Arrange the list so that the debt with the highest interest rate is on top. Next comes the debt with the second-highest interest rate, and so on, until you reach the final debt on the list, which will be the one with the lowest interest rate.

For instance, here’s the actual list of my debts from October 2004, ordered by interest rate:

  • Computer Loan: $1116 @ 15% ($48 min)
  • Business Loan $2800 @ 11% ($30 min)
  • Home Equity Loan $21000 @ 6% ($100 min)
  • Car Loan $2250 @ 5% ($170 min)
  • Personal Loan $1600 @ 3% ($100 min)
  • Personal Loan $6430 @ 0% ($60 min)

I had $35,196 in debt and my minimum payments totaled $508 per month.

Step Two

Once you’ve listed your debts, decide how much you can afford to pay toward them each month in total. This should be at least the total of your minimum payments ($508 in the example above), and preferably more. In my case, I started by allocating $700 every month toward debt reduction.

Step Three

Now, for all of your debts except the debt with the highest interest rate, make minimum payments every month. Use the rest of the money you’ve allocated for debt reduction to pay down the debt with the highest interest rate.

The computer loan topped my list of debts with an interest rate of 15%. The minimum payments for the other debts combined to $460 per month. Under this plan, I’d then take the remainder of the $700 I’d allocated toward monthly debt reduction and apply it to the computer loan. Instead of making the $48 minimum payment, I’d pay $240.

Step Four

Repeat this process every month until the debt at the top of the list has been eliminated.

Step Five

Here’s where this method gets powerful. With your first debt defeated, you don’t use your improved cash flow to buy new things. Instead, you use the extra cash to attack the next debt on your list.

If I start by applying $700 toward debt each month, for example, I continue to apply $700 toward debt each month until all of the debt is gone. After the computer loan is retired, I focus on the business loan. Because the minimum payment on my other debts would be $430, I could funnel $270 to pay off the business debt every month.

When the business debt is gone, I’d then throw $370 per month at the home equity loan, and so on. Ultimately, I’d be left with a single loan: the $6430 personal loan at 0% interest. Every month, I’d apply all $700 to get rid of this debt.

Pros and Cons

The debt snowball is powerful and effective. Mathematically, it’s the best way to get rid of your debt. There’s just one problem.

When you attack your debts from highest interest rate to lowest, you’ll pay less money in the long run. Unfortunately, many folks – including me – find the going difficult. In my case, I hit a wall when I reached the third debt on the list, my home equity loan. That $21,000 balance was going to take years to repay. I didn’t have that kind of patience.

Fortunately, I learned there were other ways to order your debts. You don’t have to tackle the high interest rates first.

Snowball

Building a Better Snowball

Humans are complex psychological creatures. They’re not adding machines. Many of us know what we ought to do but find it difficult to actually make the best choices. (If we were adding machines, we wouldn’t accumulate consumer debt in the first place!) It’s misguided to tell somebody so deep in debt that they must follow the repayment plan that minimizes interest payments. The important thing to do is to set up a system of positive reinforcement.

Because of this, many people prefer slight variations on the debt snowball method. These methods ignore math in favor of psychology.

Dave Ramsey's Debt Snowball

Financial guru Dave Ramsey has popularized one variation of the debt snowball. Instead of ordering your debts by interest rate, he suggests you attack those with the lowest balances first.

Using Ramsey’s method, my debts from 2004 would be ordered like this:

  • Computer Loan: $1116 @ 15% ($48 min)
  • Personal Loan $1600 @ 3% ($100 min)
  • Car Loan $2250 @ 5% ($170 min)
  • Business Loan $2800 @ 11% ($30 min)
  • Personal Loan $6430 @ 0% ($60 min)
  • Home Equity Loan $21000 @ 6% ($100 min)

As with the standard debt snowball method, I’d make minimum payments on each debt except the top one on the list. At it, I’d throw everything else I’ve allocated for debt reduction each month. When the top debt was eliminated, I’d move on to the one with the next smallest balance.

Ramsey’s variation isn’t as quick as paying high-interest debt first, and in the long-run, you’ll lose slightly more to interest payments. (In my own case, the projections showed it'd take an extra month to repay my debt and I'd pay and extra $841.15 in interest.) However, there’s a psychological advantage to doing things this way.

By attacking your smallest debts first, you get some quick wins, which provide a mental boost. This psychological lift provides extra motivation to keep attacking that debt. Every few months, you get the satisfaction of crossing another debt off the list! Ramsey says this is “behavior modification over math”, and he’s right. In fact, I opted to use this variation of the debt snowball when I repaid my own $35,000 of debt in 39 months.

Adam Baker's Debt Tsunami

Other experts, including my buddy Adam Baker from Man vs. Debt, suggest yet a third alternative they call the debt tsunami. They argue it's best to pay off your debts in order of their emotional impact. Attack your debts from smallest balance to highest, they say, but for added psychological boost, prioritize any debt that particularly bugs you.

“I used to be addicted to gambling,” Baker says, “and I had debt that was specifically associated with gambling. To pay that off first changed me as a person. To pay off the $600 I owed on a credit card was great, but it didn’t change me. It didn’t signify that my life was going to be different and that I was going to live in a different way.”

But paying off his gambling debt did mean something to him, so Baker attacked that first.

Here's another example: Many people borrow money from their parents. These loans may carry interest rates of only two or three percent (or maybe they’re interest free), but they come with a lot of psychological baggage. This is another instance where it might make sense to pay down low-interest debt first because the non-financial rewards are so great.

The most important thing when paying off your debts is to pay off your debts; the order in which you do so is ultimately irrelevant. Find a system that works for you and develop the discipline to stick with it.

Note: It’s less imperative to repay low-interest debt. Businesses use “leverage” to borrow money cheaply so that they can earn higher returns elsewhere. You do the same when taking out a mortgage at low rate (like three percent) or using school loans to improve your education (which will, in theory, provide high future returns). It’s good to repay all of your debt, of course, but it’s okay to make repaying the mortgage a long-term goal instead of lumping it in with your debt snowball.

Supplementary Solutions

You can do other things to improve your money situation while you're working on these three steps.

First, focus on the fundamental personal finance equation: to pay off debt, or to save money, or to accumulate wealth, you must spend less than you earn.

Curb your spending. Re-learn frugal habits. (Frugality is something with which most college students are all too familiar.) You can find some great ideas in the archives of this site. Also check Frugal for Life.

While you work to spend less, do what you can to increase your income. If possible, sell some of the stuff you bought when you got into debt. Get an extra job. (But don't neglect your studies for the sake of earning more. Your studies are most important.)

Finally, go to your local public library and borrow Dave Ramsey's The Total Money Makeover. Don't be put off by the title — this is a fantastic guide to getting out of debt and developing good money habits. I rave about it often, but that's because it has done so much to help my own personal finances. After you've finished, return it and borrow another book about money.

Simple, Not Easy

Human beings are complex creatures. Some of us are highly logical. Some of us are emotional. Most of us fall someplace in between. We rarely make decisions based on optimal paths; more often, we choose what makes us happy in the short term. I'm not saying that this is the right thing to do — it's just what happens. For those who routinely make financial decisions based on emotion, it can be difficult to turn things around.

Complaining that personal finance is easy and “why doesn't everyone do what they ought” is like saying that running a marathon is easy so why can't everybody run one? Most of us understand how to prepare for a marathon — eat right and run a hell of a lot — but few of us have the dedication and mental fortitude to complete one. However, with a little discipline and some hard work, most people can complete a 10k race.

It's the same with personal finance. It's easy to say, “To build wealth, you must spend less than you earn”, but it's another thing to do it, especially over the long term. In some ways, building wealth is more difficult than running a marathon. Training for and completing a marathon takes months. Dedicating yourself to a sensible financial plan is a lifetime process.

If personal finance were really as simple as understanding the math, we would all be rich. But it's not. And we're not. That's why I think any small financial victory is important. That's why I run this web site, and why I share whatever tips I can find.

I always say “do what works for you”. Some people are able to succeed by paying high-interest debt first. But some people — myself included — have only been able to succeed by trying another approach. The approach may not be best from a mathematical viewpoint, but I believe that any method that actually helps you meet your goals is better than one that doesn't.

Personal finance concepts might be simple, but that doesn't mean they're easy. I don't mean to imply that they are. It took a lot of hard work (and a little luck) for me to get out of debt. It didn't happen quickly, and it wasn't easy.

The Bottom Line

As I mentioned at the start, I've come to believe that debt repayment is a side effect and not a goal. You shouldn't make it your primary purpose.

If you do the other things I recommend, such as creating a personal mission statement and boosting your profit margin, you'll naturally pay off debt as a matter of course. But you'll enjoy a benefit many people don't have once their debts are gone.

You see, a lot of people feel lost once they've dug out of debt. Search online and you'll find tons of questions and conversations about what to do next. Debt repayment had given them purpose, and now that purpose is gone. As a result, they lose financial direction. And like a dieter who had aimed for a weight instead of a lifestyle change, an unfortunate few of the newly debt-free find themselves resuming bad habits.

If you're pursuing other goals and intentionally building good habits, you'll get out of debt. And once you get out of debt, the good times will continue: That debt snowball you've been building will transform itself into a wealth snowball.

Congratulations! You're on your way to financial freedom!

Have you ever had to dig out of debt? What methods did you use? Were some more successful than others? If you had to do it over again, would you have done anything differently? What advice would you give to others who have just taken on the role of money boss in their lives?

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Somebody
Somebody
14 years ago

I did cut up my credit cards years ago, and got in a bit of a jam when I tried to rent a car. Car rental companies will only reserve cars with credit cards, not debit cards or cash. Once you’ve returned the card, the fee can be paid with debit or cash, and nothing is charged on the credit card.

Deb
Deb
9 years ago
Reply to  Somebody

That’s the only reason why I have a cc … to be able to rent a car when I need to. Other than that, my balance is always zero.

Matt
Matt
7 years ago
Reply to  Deb

Deb,

That is a great example of using credit cards wisely to enhance your credit rating.

Ryan
Ryan
8 years ago
Reply to  Somebody

I use my debit card for car rentals all the time. As long as it’s a Visa or Mastercard debit card, they’ll preemptively charge your card, and the charges will augment after you return the car. Works for me every time.

Brian
Brian
8 years ago
Reply to  Somebody

I say baloney on that! I’ve rented cars with a DEBIT card this past February 29th after my Mercedes was totaled. So that’s BS, you most certainly can rent a car with a debit card…Visa is Visa my friends.

MOLLY
MOLLY
8 years ago
Reply to  Brian

why so hostile,let’s be civil

Clay R
Clay R
8 years ago
Reply to  Brian

ACTUALLY the previous poster is absolutely right, Budget is one will NOT accept a debit card under any circumstance. That happens to be the only rental place within an hour drive of the town I live in..

Jon Smith
Jon Smith
8 years ago
Reply to  Somebody

I’ve got to say that I think the debt snowball is an odd way of going about it. Debt is not necessarily inherently toxic, as you can invest in products with better interest than some debts have. If you’ve got a terrible deal on a big debt, though, you should pay that off fast imho, not take out smaller debts first.

EDIT: Oops, this wasn’t supposed to be a reply. Can a Mod move this?

Gal
Gal
6 years ago
Reply to  Somebody

Credit card or not, for me using shopping list is a significant part of saving. I am using a list on my phone which is always with me and also automatically sync with the rest of my family. I use https://play.google.com/store/apps/details?id=com.gal.appshoppinglist

Doe rae me
Doe rae me
6 years ago
Reply to  Somebody

Yes, it depends on the company policy if you can rent a car with a credit card or not. I don’t recommend cutting up credit cards, I only found this site after getting out of credit card debt. I recommend finding the highest positive ratio of debt and attacking it first: Take the total debt and divide it by the minimum payment for all debt, the highest number is the debt to pay off first and yields the most benefit. It will give the quickest payoff with more minimum payments going to other debt sooner.

Doe rae me
Doe rae me
6 years ago
Reply to  Doe rae me

My bad, it’s been a while. The above method would give the LOWEST number to attack first. Example: 2 credit cards, one with 400 balance and 15 minimum payment and one with 500 balance and 25 minimum payment. If you have 100 extra to attack debt, paying off the 400 credit card first then the 500 would take 8.34 months (without interest/finance charges). Attacking the LOWEST ratio (the 500 first then the 400) would take 8.2 months (without interest). Having the extra 25 to apply to other debt works faster. It also curves the temptation to use that credit card,… Read more »

William Mize
William Mize
14 years ago

I’d like to elaborate on the “Sell Some of Your Stuff” advice – I’ve had really good luck selling used books and CD’s on amazon.com. They make it dead easy, and even reimburse you for Media Mail shipping.
Now granted, you may end up getting $5 on a $20 book, but for me it’s about getting rid of ‘stuff’ and having some cash flow into my life, as opposed to out of my life.
That $5 can go into this person’s emergency fund or into his wallet, keeping him from the ATM for a while longer.

Him
Him
14 years ago

“or when you break your arm in a touch football game”

That’s one helluva game of touch football!

Great write up. I think that many forget about step #1, even though it is faily obvious.

Gwyn
Gwyn
14 years ago

I keep and use a credit card for almost all of my day to day purchases. The reasons why this is a good idea for me are: 1. it’s free. I don’t pay any interest because I pay it off in full every month. In fact I actually maintain a small credit balance most of the time so they actually pay me a few cents interest every month. And you thought irony was something that happened to other people. 2. it’s free. I don’t pay a monthly fee for transactions. The debit card I get from my bank has a… Read more »

Steven Williams
Steven Williams
9 years ago
Reply to  Gwyn

Shop around for other offers from other banks. My debit card has a $10,000 daily limit.

It also had a very good rewards program that they just canceled because the businesses owners got upset with higher merchant account fees to pay the rewards.

Credit card companies have good reward card programs because they charge you interest on the charges you make. In essence they are paying you with your own money.

I’m not totally against credit cards but I just don’t have them anymore personally.

Joe 6
Joe 6
8 years ago
Reply to  Gwyn

While you’re right that it is free to you since you pay off the balance each month, please realize you are still feeding the system. The banks make money by charging the merchant 2 to 5% as a fee when you swipe your card. This is money draining out of your local community and going into the coffers of the big banks. Keep the money local: use cash!

date eater
date eater
7 years ago
Reply to  Joe 6

The stores accept cards despite the fees because they will make more in sales. People are more likely to buy more if the store takes cards. If everyone paid in cash, the stores wouldn’t be earning as much.

Student Loan Consolidation Advice
Student Loan Consolidation Advice
14 years ago

You could consolidate your loans – http://www.StudentLoanConsolidator.com offers both federal and private student loan consolidation. However, an even better idea would be to sign up for their affiliate program and help all your friends consolidate their student loans. For each friend who consolidates, you get $100. Get just 10 of your firends to consolidate and you have $1,000 to pay off your student loans – or spend elsewhere.

Jeremy
Jeremy
14 years ago

This is excellent advice. Interestingly enough, I am already applying this method to my own debt. I left work a few years ago to go back to school so I could get into a job I really wanted. Unfortunately, that meant being very dumb and living off credit cards. I would not have needed to do this, but I was accustomed to a particular lifestyle that I did not modify for being unemployed, retarded I know. Let’s just say i wasn’t an econ major. 😉 Anyways, so here I am years later, and I have lots of high-interest, five-figure debt.… Read more »

Sue J
Sue J
8 years ago
Reply to  Jeremy

Please – do not say “retarded”. It’s one of those old terms that has to go – just like “the N word” .

RoC
RoC
6 years ago
Reply to  Sue J

One of the dumbest replies I’ve read in quite a while…

Diana
Diana
6 years ago
Reply to  Sue J

OT – thank you for your comment. People who use this word may not know it is offensive, but will likely stop using it if they’re told it is a slur against people with disabilities.

Jeremy
Jeremy
14 years ago

Oh. And for those that are unclear on the Debt Snowball, it is a great idea that totally makes sense once you put it into action. Example: You have 3 CC. a) $2000/$100mo, b) $2500/$120 c) $5000/$200. Pick a budget, an aggressive one, let’s say, $600 a month to pay towards CC debt. This is the MINIMUM you pay. Pay more when you can. And pick a card to focus on, we’ll choose card a. So, out of that $600, pay the minimum on cards b and c, and pay the remainder on card a. So, b gets $120, c… Read more »

Sam
Sam
7 years ago
Reply to  Jeremy

Good advice especially if card A is the one with the highest interest rate of your 3 cards, and you do not use card A while paying it down.

Chris Thomas
Chris Thomas
14 years ago

Dave would be proud. Great post.

Spam
Spam
13 years ago

“Car rental companies will only reserve cars with credit cards, not debit cards or cash.”

This is totally untrue. I have NO credit cards and have never had a problem renting a car with my Visa check card.

DonnieD
DonnieD
9 years ago
Reply to  Spam

I have! I had to deposit money into my paypal acct and use my paypal card to rent a car at the airport. Paypal is looked upon as a credit card at car rental companies, at least through my experience.

Gordon
Gordon
13 years ago

I’ve recently (this week) launched a free website and forum where people can discuss debt and debt problems.

Feel free to pay it a visit. Thanks.

http://www.a-debt-solution.com

Ryan
Ryan
13 years ago

Here is a great resource to read up on debt management and creating a budget with over 100 informational articles. http://www.careonecredit.com/Knowledge/debt-management.aspx

Erek Ostrowski
Erek Ostrowski
13 years ago

I really enjoyed this post and I think your advice is spot on. I’ve written my own Getting Out of Debt series with a couple other tricks that supplement yours nicely. Thanks for your great work!

Erek

MiserMan
MiserMan
13 years ago

Here’s a simple pragmatic way to get out of debt – save your money and pay it down – stop spending it on all that crap that you don’t need. Even cable TV is really not absolutely necessary. You may only have to stop spending for a little while. http://www.stopspendingmoney.com has some good ideas. There’s even a blog. Take care out there!

Debbie
Debbie
13 years ago

If you think you cannot get out of debt, try being over 500,000 in debt. These guys are doing it and so can you! http://www.joelmaxwell.com/

Chris
Chris
13 years ago

I don’t normally advocate the use of credit cards, but in some instances they are useful. For example, if your CC information is stolen, your CC company cannot hold you responsible for any unauthorized charges. However, if your debit card info is stolen, along with your PIN, you may be out of luck. At best, you’ll get your money back eventually (after a long waiting period), and at worst, you’ll be liable for everything.

http://finance.yahoo.com/banking-budgeting/article/102730/credit-cards-offer-better-protections-than-debit-cards

Michael
Michael
13 years ago

The “snowball” does not recognize math should play into the equation. I have managed to get most of my debt down to 5% or less, but there are two cards with higher rates that won’t go lower. I am paying higher% before lower%.

I understand that sometimes the psychology of paying a CC off in full is important, but not always. People need to start looking at the total INTEREST charges of all their debt each month, adding it up, and setting fire to a pile of $1 bill (fakes) to represent that money.

It hurts!

date eater
date eater
7 years ago
Reply to  Michael

I agree, except that I really value cash flow. It’s important to free up more dollars sooner. So I will consider/weigh paying off something with a lower rate in order to free up more $ sooner that can go to paying the next item down. If I were to set up my snowball to pay off highest rate balances first, it would tie up my cash flow longer. If my highest interest rate item is also the biggest balance, I would be making minimum payments on everything for a long time. But if I can get some cash flow free… Read more »

Stacy
Stacy
13 years ago

Okay I have a mess…..$21,000 in credit card debt, a home that where are buying $69,000, and a new car $10,000.00. Between my husband and I we make $2,500 a month! Yeah I know we are really in a big mess. We have cut up the cards and are just making it by with min. payments on the cards.

Do you have any tips for us?

Diana
Diana
6 years ago
Reply to  Stacy

You MUST increase your income. $2500 is not sustainable for doing anything beyond living expenses unless you’re living rent free, given your level of debt. If you have children, increasing work hours may require increased day care costs. Avoid creating that new expense by working opposite shifts or adding work during school hours only. You will have to give up your life for a while and only focus on debt payoff – it won’t be fun, but it will be worth it.

Liz
Liz
13 years ago

I found this site while looking for sites on getting out of debt, and it has been wonderful and helpful. I never thought of the idea of snowballing (?) my payments before, and just started on that recently. I have to say it is almost fun to see the balances on something reduce themselves even a tiny bit – I have a whopping amount of personal debt from being a student, and also being depressed for about four years.. it amassed quickly. But I seem to have finally found something that is working. My situation is this: $12,000 in student… Read more »

venkat from chennai India
venkat from chennai India
13 years ago

Getrichslowly- an amazing website and accidentally i visited this site. The artilce by DJ on repaying loan is simply mind boggling as he just mirrored my mind 2 out of his 3 ways are already used by me and giving great results. The snowball is the new concept which i will try to put in use now. Thanks DJ.

JohnK
JohnK
13 years ago

Debt by itself is not a bad thing, but is far too frequently abused. Many people would not be able to drive a car or live in a house if they did not incur a debt to purchase it. I agree that many people cannot manage debt well, just like many people cannot manage a diet well with chocolate cake in the house 🙂 You don’t blame the cake for the diet problems and you don’t blame credit for credit problems. However, if you are too tempted to not stick to “the rules”, then manybe eliminating the problem from your… Read more »

skinny
skinny
13 years ago

I had a card @ 30% apr, minimum payment monthly was $45 but the finance charge was $38. So for every 45 I put on, my bill only went down 7. I’ve found the easiest way to judge which cc to pay off first is whichever one has the smallest difference between the monthly finance charge and the minimum payment amount. The greater that difference, the more your payment is actually paying down debt. The smaller that difference is, the more you’re just paying interest and will never pay it off. Throw huge chunks of money at those cards immediately!!!… Read more »

ST
ST
13 years ago

Seems that this post is about putting “overcoming your faults” over good financial sense. If you cannot equate credit cards with cash, that’s your problem. If you think the advice here is good financially, it seems that you should go into therapy instead. Go into *more* debt in order to figure out how to live within your means by dealing with what’s making you act irrationally. A good friend of mine did that: therapy, then got a new job, then went to the bank and got a 6% loan to cover all her debts and paid off all her credit… Read more »

Barbara Saunders
Barbara Saunders
13 years ago

I find it fascinating that most “get out of debt” advice pieces skip the obvious. Some people simply need to make more money. I had some very bad credit problems years ago and did some soul-searching. I was spending beyond my means, yes, but I was also underearning at a level that was ridiculous. That is, spending within my means at the time would not have afforded me a decent place to live and groceries. I was paying dentist bills and replacing holey underwear with borrowed money. This is a self-esteem issue. I’m in a job now that I enjoy… Read more »

Hannes
Hannes
13 years ago

Again, a fantastic article. I am in a bit of a bind with debt, and I think by following your easy steps, I should be able to get out of this hole. Thanks.

sasha
sasha
13 years ago

OK some of these ideas are great but what if your trying to pay off debt and your making less than $15,000 a year and that is with two jobs no benefits and I am still looking for a full time job. I am finding it hard to manage my living expenses I haven’t even started paying my student loans I am working on paying my cc debt off. It is depressing. I am cheap too I use coupons to get stuff for free, freecycle on yahoo and still I have trouble making it.

D Trevino
D Trevino
8 years ago
Reply to  sasha

Unfortunately it is easy to by in your situation even if you earn more than $15,000 a year. You have to go back to basics no matter what you earn which means spending less than what you earn.

Steve "The Debt Settlement Man" B
Steve "The Debt Settlement Man" B
13 years ago

I completely agree that credit cards are worthless and you don’t need them. They are stocked full of traps that will make you pay way more in the long run. They are one of the major obstacles that will be in your road to financial freedom and wealth. Imagine if all the money going to your interest each month alone was actively invested. What would your bottom line be?

Derek
Derek
13 years ago

I can’t wait!!! You really hit the nail on the head. I’ve been trying to figure out a way out of this LITTLE situation I’m in; I think I’ve be posting a comment again next year with good news. This is awesome!

Ming
Ming
13 years ago

I understand the temptation to cut up credit cards, but I would only resort to this as a very last resort for someone who has addictive problems. Why? Building credit is important! Because I had credit cards I paid off every month, as well as being extremely responsible with my bills, I was able to get a mortgage on my first home. I had no one to cosign, so without credit, I would have been screwed. Home prices have appreciated nicely since then, so I’m glad I did this.

Steve "The Debt Settlement Man" B
Steve "The Debt Settlement Man" B
13 years ago

I love the Carnival of Debt Reduction.

Jane
Jane
13 years ago

Most of the students nowadays fear debt (Education Guardian, 2006). However, debt is not necessarily a bad thing, if you can control it. The first rule of controlling your debt is not to spend too much. Other ways that you can save make money are;

1. Find jobs in universities
2. Find other alternative like doing some money online opportunities like selling your past essays, coursework and dissertation (http://www.coursework4you.co.uk/sel.htm)
3.Look for summer jobs.

marie
marie
13 years ago

i would tell nick, the first step is to start earning more money than your currently making so that u can fund purchases and expenses without adding to your credit card. after that he can start a debt snowball with whatever cheapest debt causes him the most stress. imo the focus isnt to reduce debt, its to reduce stress with a smaller debt, so you get quick results and greater peace of mind. good luck

Daria
Daria
13 years ago

What a great post!

I recently bought a house and I was worried about my credit history – along with the debts I owed. I’m still not out of debt, but I have been working hard on getting there. This plan is going to help me out a lot.

I particularly like the snowball idea. It just makes sense. =)

shane
shane
13 years ago

Great topic you have here. First off debt=slavery really let that sink in and all else will follow. I had afriend in some debt, in the orde r of 10 k he was going about it all wrong, trying to pay off the highest interest, which made sense to him (stress does weird things to the thought process) I instructed him to free up some money by paying off the lowest balance first and start saving. Which you recommend. Then had him look at where his money was going. Freakign nut was paying like 250$ month on cable phone and… Read more »

Someone out of debt
Someone out of debt
13 years ago

I took a different route to clear all my student debts after University. I ended up taking a job though hagwanhelper teaching English in Korea. It wasn’t the easiest job I’ve ever had but I got to spend a year in Asia and by keeping my expenses low I was able to save enough money to wipe out most of my debt in that first year. A second year wiped out the debt and gave me a good chunk of change in the bank.

Hans
Hans
13 years ago

thanks J.D. This has helped me to cut 2 credit cards just now when you write to stop rationalizing. Indeed!

Jenn
Jenn
12 years ago

My thing is my student loan payments are more than I make each month and when I try to lower them I’m told I can’t. Now I’m being told i cannot re-consolidate because I have defaulted because well I don’t have the money. If the company won’t work with me how can I get out of debt. I want to be able to save, but I can’t when I am throwing all my money in student loan repayments and cancer bills.

Maria
Maria
12 years ago

Sounds a lot like Dave Ramsey… We’re following Dave’s baby steps to get out of debt and it’s working…slowly but surely.

I totally agree that ditching the credit cards is crucial to financial success.

Steven
Steven
12 years ago

Debt is simply a product of insufficient
cash-flows – too many people over estimate
the inflow, and underestimate cash out-flow.

If you stand any chance to get out of debt
and increase wealth you need to create 1. A
Cash-Flow spreadsheet – all money earned vs.
monthly expenses, 2. Develop a budget, a
(be honest about your spending) a budget
where you pay-yourself first, then creditors.

JohnK
JohnK
12 years ago

Once again, people blame “debt” as being the evil, when debt should be used as a tool. Many people in this world would not have a car (even poor people who can barely get a “buy here, pay here car) without some form of loan. I don’t know of anyone who paid for a $250,000 house with cash. Debt is a tool that should be used carefully, it is not “evil”. Those who cannot manage debt are like those who cannot resist chocolate, and gorge themselves on it. If that is your case, then feel free to not use it….but… Read more »

Melissa Otdoerfer
Melissa Otdoerfer
12 years ago

Hi, I am working with a debt settlement company right now to help me pay off credit cards. Is there any way I can pay this off faster?

keith
keith
12 years ago

As a good friend of mine will say, if you dont have enough cash to pay for it, it means you can’t afford it.

Aimee
Aimee
12 years ago

Great advice.

I think having your savings in an account that is not easily accessable is a great idea. It has worked really well for me.

Once that initial urge to buy something has warn off (usually a few hours) that money is still tucked safely away in the bank account and you’re relieved that you didn’t spend it.

ING is good for that or if you’re in Canada PC Financial has a high interest savings account (over 4%) that makes you wait a day to access your money.

2million's envelope budget
2million's envelope budget
12 years ago

Great advice. I think that also applies even when you not in debt, but headed in that direction. For instance to manage expense — certain categories of purchases for my wife and I are cash only. When we do a vacation — we bring a envelope of our budgeted money. Another example is food/dining out. These are two areas that we currently do this and it helps us control our expenses. Other areas we don’t have concern over.

Aaron
Aaron
12 years ago

For students looking to avoid debt, I would say join http://barefootstudent.com. It is a great site that helps students find odd jobs such as babysitting, landscaping, and more.

Mfreeze
Mfreeze
12 years ago

I hear people who claim debt is not the problem and partially that is true. You do need the ability to borrow. However, they are not looking at the real problem with our economy and the debt burdens that people have been subjected to. Credit Card companies like to lure you in with small opening balances and as time passes and you make payments they increase those limits sometimes to unbelievable sizes. For instance I have a $25000 credit limit on a card.I also have 21900 on that card charged. I have another card that has a $4000 limit and… Read more »

KathyJ
KathyJ
12 years ago

Test. Does this work?

SSNurse
SSNurse
12 years ago

Great article! To the person [#5] who has the credit card with the $500. limit: That used to be me, I spent and then overpaid so I had a credit of aprrox. 2 or 3 dollars every month. Then an EMERGENCY came up, cleaned out my savings $3000. at the time, cleaned out my checking $400. [which was left after paying my bills] and I could only afford the minimum on that credit card. Took me a year to recover and pay of a 300. balance! The moral of the story is things happen and if you pay cash, you… Read more »

Dave Paul
Dave Paul
12 years ago

After 17 years on the job and spending money like it was going out of style , I had my job threatened and it has lead me down the same path as many of you , I could not agree more on not needing credit cards at all , I am convinced that the only good debt would be a house andeven that is a stretch , My blog talks on some of these points but also points out free opportunities to make money to make the snowball larger faster , visit http://thecarrotandthestick.blogspot.com/

Student Loan Advice
Student Loan Advice
12 years ago

Here is a site I have in my del.icio.us bookmarks that has helped me get out of debt (I’ve been debt free for 4 years!!): Dave Ramsey – Real Debt Help: http://www.daveramsey.com/ In addition to his information, videos and mp3’s he has a community area that is probably the best “get out of debt” community site I have ever been a part of. Make sure to check his site out but he also has a radio show. I don’t know what station it is but I do listen online through his website. There hasn’t been one day I haven’t learn… Read more »

Jen
Jen
12 years ago

I discovered this blog about a month ago while searching the Internet for ideas to get out of this MASSIVE debt that is currently crushing my husband and me ($52,000 in credit cards — plus a mortgage, a Home Equity Line of Credit [second mortgage], and 2 car payments… not to mention we are expecting our first baby in 5 months — which equals more debt!), and just when I was at my wit’s end, this entry about the debt snowball really gave me hope. We have already completed steps 1 and 2 (stopped acquiring new debt and cut up… Read more »

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