Folks who’ve known me for a few years know that my life went through upheaval in 2009. My relationship of seven years ended; my home went into foreclosure (and I eventually lost it); my already bad debt problem went into overdrive as my finances plunged into the abyss with my house; and I was unable to file for bankruptcy.
As they say, sometime you have to hit the bottom before you can come back up.
Since then, I’ve paid of $48,600 of debt the old fashioned way. I’m still clawing my way out, but the end is now in sight. The final consumer debt piece will be killed in about 3 months, and I will be completely debt free in 12 months. By the end, I’ll have paid off $62,000 in debt since June 2009. ($10,000 of that number is interest paid.)
Those are terrifying numbers. That’s more than I make in a year. That’s a debt hole of dizzying size to me. I fell like I’ve been chucking bricks into the Grand Canyon for three years. But here’s the thing: if you chuck enough bricks into the Grand Canyon, it will eventually fill up.
I posted these numbers on Twitter a couple days ago and got quite a response. I’m not shy about posting these numbers; while I’m ashamed my life got to that point, I think it’s important to tell others that it is possible to slay this monster. It’s not easy, but you get used to the routine, and it’s pretty thrilling when you start to see results.
Below are some nuggets of advice that I can give. Please keep in mind that I’m not a finance professional, and I know that not all of these tips will work for everyone. These are simply things that worked particularly well for me.
Step 1: Do everything you can to get a foothold
Sell anything you own that you don’t need or use frequently. Cut your budget to the bare minimum. Withdraw savings accounts (not retirement accounts, though). If you have stock, sell it. Take a second job for a while. Do freelance work. Bonuses, windfalls, anything that looks like money… send it all into the debt canyon as soon as you can. Any principal you pay of NOW kills a ton of future interest. When it comes to paying off debt, faster is better, because that interest will not get a chance to accumulate.
The bigger head start you can get, the easier the rest of the process will be.
I know. Nobody likes budgets. However, there’s no way around it: you need one in order to pay off debt. You need to know what money you make, you need to know what money you spend and where. You need to know exactly how much fat you can trim, so everything else can go straight into killing the debt.
There are plenty of personal accounting programs out there. Depending on your lifestyle, you may want to look into something where you can access your budget online or via your smartphone (if you have one). Do some homework, find one that works for you, and stick to it.
This goes hand-in-hand with having a budget. Having a smartphone is a godsend in this case. Log everything you spend, even if it’s just a buck for a candy bar. Keeping a budget is a lot like counting calories while you’re on a diet: once your brain can see the hard numbers of what’s going in and out, you automatically start to re-evaluate the things you’re willing to spend money upon.
If it helps, think of it like a game. Give yourself points for not overspending.
The best part of tracking everything is after you’ve been at it for a while and you actually start seeing results. It’s very rewarding to look at numbers and see concrete evidence that your hard work is paying off.
Get rid of stuff
The less stuff you have, the less money it will cost you to keep it. You can have a smaller house/apartment, which means less rent, lower heating/cooling bills, and generally less stress. I literally sold about half of everything I owned, so I could move from a three-bedroom house (with a basement and a garage, all full of stuff) into a two-bedroom apartment (with no storage). It was hard at first to offload so much stuff, but I soon really enjoyed it. I love having less clutter. I might go through again and sell yet more stuff, just because it feels awesome.
And for those of you who are natural pack rats (like me), consider this: when you get rid of all the mediocre things in your vast collections, your collections start to look really awesome because only the coolest of the cool shit is on display.
Kill the credit card
Cut it up. Freeze it in a block of ice. Burn it. Get it the hell away from your wallet. USE IT NO MORE. Use only cash or debit cards.
It’s really hard to cut the credit habit, but it must be done. It’s far too easy to overspend and go backward on your debt payoff, and every mistake like that compounds your problem.
So, get rid of the card itself, then work on paying it off. If you have multiple cards, close the accounts after you pay them off. You may want to keep one open at the end, just to retain your credit history, but don’t use it except in the absolute direst of emergencies.
And after you pay off the debt… still stay away from credit cards. Credit cards are a very bad deal, and you won’t need them anymore.
Savings accounts are awesome
This is a neat method I learned from my friend Laurie. It works best if you have your checking/savings at a bank that gives you easy online access to your accounts.
Once I figured out my budget for various non-monthly-bill items (groceries, car repairs, clothes, etc.), I started a savings account for each category, and then started automatic monthly deposits into those accounts. For instance, I have a Groceries savings account, and $100 automatically gets loaded into it each month. Whenever I buy groceries on my debit card, I take that amount out of the Groceries savings and put it back into my checking account. If I don’t have any more money in my Groceries savings account, I need to eat ramen until the next deposit. It’s a great, concrete way to track your budget and your money. It’s also great in the cases of things like car repairs, where that money just sits until you absolutely need it. You might not have a lot of spending cash in other categories when your car breaks down, but hey! That car-specific savings account is just sitting there, waiting to buy your car a new alternator!
Arrange your debts by interest rate. The one with the highest rate (the one that accumulates finance charges fastest) is the one that gets special treatment. Pay minimum payments on everything else; throw everything else you have at the highest rate account until it is gone. Then proceed to the next one. Here’s a more detailed description of this method.
If you can shift some or all of your debt into the lowest (or even just lower) interest buckets before starting the snowball, even better. The point is, when you pay off the highest interest debt first, you are ultimately softening the blow you will take from accrued interest.
Learn to cook
Restaurants are probably the biggest killers of budgets. Cooking for yourself is much, much cheaper, and once you get into the habit of cooking, you’ll probably make meals that are better than most run-of-the-mill restaurants anyway.
I was a notoriously horrible cook before this whole debt-killing project, but I finally bucked up and learned. It took a few months, but I’m now an absolute master at soups. I now can cook a couple hours and wind up with enough meals — lunch and dinner — for about two weeks. Two weeks of meals for about $50. And my soup is AWESOME.
Remember, I once actually managed to set water on fire during a failed cooking attempt. I also once beat the shit out of a pot of boiling eggs with a sword. If I can learn to cook, so can you.
Oh, and bring your own lunch to work. You’ll probably wind up eating healthier because of this, too.
Buy inexpensive, but not cheap
Yes, you are trying to spend as little money as possible. However, the money you do spend is worth more if you spend it on more worthwhile things.
Higher quality clothes are more expensive, but they last longer. A better, younger car will cost more than a junker, but it will run cheaper and more reliably in the long run. Ramen will keep you alive, but you’ll feel a lot better if you buy some real food. It’s often worthwhile to spend a few extra dollars, even while you’re on a budget, to get something that will last and give you fewer surprises.
Look for sales. Buy used if at all possible. You can find great things on Craigslist and at thrift stores. Buy fruits and vegetables only when they’re in season. But don’t waste your money on something that’s not going to last or give you real satisfaction.
Don’t deprive yourself
This one is really important. Yes, it’s critical to pay off your debt as fast as you can, but it’s also important to keep in mind that you’re in this for the long haul. I’ve been working on my debt payoff for three years, and it will take a total of four years to complete. That’s a long time.
Your budget isn’t going to last long if you feel like you’re not enjoying life along the way. It’s important to see friends, travel, see a movie every once in a while… whatever it is that floats your boat. You do need to live. You just need to weigh your options when it comes to money. Perhaps you can no longer buy concert tickets every week, but you can treat yourself once per month, and attend free shows in the meantime. Or perhaps you could cancel your cable services, and replace it with a Roku (around $70 one-time cost) and a Netflix Streaming subscription ($7 per month).
Debt payoff is tough. It’s important to reward yourself along the way.
Spend money on experiences, not stuff
This one is a general life lesson, which dovetails nicely into the previous bullet point.
Stuff won’t make you happy. Experiences make you happy.
Stuff goes obsolete. Stuff breaks. Stuff gets lost. Stuff needs to be stored. Stuff can be lost in fires and floods. Yet even if something horrific happens and you lose everything you own, you will still have your memories, your education, and your life experiences.
Before spending money on stuff, consider how it will change your life. Will upgrading to a video-capable camera enable you to capture your life adventures in a way only you can? Great! Will owning a brand new computer improve your life more than buying a slightly older, lightly used computer? Probably not. Will buying an action figure improve your life at all, besides sitting on a shelf? Hmm. Will going to a concert with friends be something fun you remember for long after that camera, computer, or action figure are gone? Quite likely.
This is why I now spend almost no money on DVDs and Blu-Rays, yet I travel to film festivals without reservation. Yes, I travel on the cheap (I drive instead of fly, I couch-surf, I pack my own food), but the money I do spend actually experiencing film with other people is worth ten times the amount I would spend on simply owning a single DVD.
There’s a book that came out earlier this year, which I wish I’d had much, much earlier in life. This book should be required reading for every college student. The book is named Poorcraft: The Funnybook Fundamentals of Living Well on Less, by C. Spike Trotman and Diana Nock. You can get the book for $10, or download the PDF for $5. Yes, it’s a comic book, but it’s a great primer on how to shift your life so you can live happily on far less money. You can read it in a couple hours, and it covers everything from budgeting to the basics of cooking. Great stuff.
Remember that you are learning to live well
The process of paying off debt is tough, especially at first. However, once you get the hang of it — and once you start seeing the first results — it’s not bad at all. We humans are adaptable by nature.
Keep in mind that, through this process, you are not just improving your finances. You’re also building lifelong skills. You’re improving your life in general. Once you’re out of the debt canyon, money will be a powerful tool instead of a burden.