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Getting Rid of Debt

Debt – an obligation owed by one party (the debtor) to a second party (the creditor).  Yeah, that’s the technical definition.  However, the definition that most are familiar with is that little monkey in your wallet that keeps throwing all your cash into thin air.  But just how can you get that monkey to stop?  This post will offer you the basic outline of how to make it all happen.

Our very own Jared Rogers is no stranger to debt and the effects it can have on your life.  While never a big spender, he did manage to rack up some debt when he was beginning his professional career.  You know the new car necessary for work. Then there were the student loans taken out for business school.  Then there was the condo and the merging of finances when he got married.  However, after a few years of dedicated work, he and his wife eliminated most of their debt (with the exception of the mortgage) by following a simple formula.  How much debt?  Somewhere in the neighborhood of $65,000.

Jared just recently signed up to be a debt coach to a family over at The Debt Movement.  Here are the simple steps that he suggests to those looking to get rid of that debt monkey for once and for all:

Track Your Spending.  If you don’t know where you’ve been, how will you know where you are going?  The first step in any debt elimination process is to know where all the money is being spent.  This can be done with something as simple as a spending journal that you carry in your pocket or as elaborate as using financial software.  However you do it, it is imperative that you actually identify where your hard earned dollars are seeping out of your bank account.  Many individuals think they know what they spend their money on, yet are often shocked when they find out how much when analyzed by category.

Determine Your Profit.  Now that you know what you’re spending money on, you need to determine if it is more or less than the income you take in.  If your spending is like the government, you will see a nice big fat deficit that you will have to balance.  Unfortunately, unlike Uncle Sam, you can’t just sell your debt to China and keep on operating like business as usual!  So the next step is to look at your spending and identify the discretionary categories (e.g. entertainment, clothing, etc.) that appear to be out of whack or excessive.

Balance The Budget.  Once you know where the problem areas are, you must next get them in line.  Everyone’s living expenses will vary depending on where you live and the associated cost of living.  For example, a resident of New York City might spend 50% of their monthly budget on housing costs while someone in Mexico Missouri might only spend 25%.  However, there are certain “standards” that you can start with to put you on the right path.  The next step would be to try and align as many categories as you can with the ideal budget.

Pay Yourself First.  One thing that gets us all in trouble is the unexpected emergency.  But just like they say, expect the unexpected.  With that being said, you should always pay yourself first.  It doesn’t matter if it’s 5% or 10% of what you make, but you should put that away (preferably in a separate account) for a rainy day.  But why first?  Well, it will ensure you don’t have to tap high interest credit cards or take out a pay-day loan when the car’s engine implodes and you need to get to work.  Additionally, it will ensure you do it.  When the money for the month is spent, but there are still bills, someone doesn’t get paid right?  Stop making that someone you and pay yourself before the phone, electric and cable companies all take their cut.  Ideally, if you get your check direct deposited into your bank account, why not have them split it between your checking and savings?  You can’t spend what you don’t miss and if your savings is out of sight, it will be out of mind.

Apply The Debt Accelerator.  The reality for most of us is that we make more than enough money to handle our debt obligations.  The world of credit is based on ratios and lenders do a pretty good job of making sure you can pay them.  The corrupter/interrupter is often the mismanagement of one’s discretionary spending.  However, if you put yourself on a budget, you can easily start to generate a monthly profit (i.e. income greater than expenses) that you can then apply to your debt (a.k.a  the debt accelerator).  From here you simply tally all your debts and calculate how long it would take to pay off the smallest debt using the normal payment plus the debt accelerator.  Then you simply get to work paying extra on that debt until it is gone.  Once vanquished, you take that old payment and apply it to the next debt that can be paid off the quickest.  This is what is known as debt snowballing and is a tried and true technique to eliminate your debt.

That’s it; there really is nothing more to it when it comes to getting rid of debt. Sure, you can make the process complicated, but it’s really just as simple as outlined above.  The hard part is staying committed to the plan and not giving up when you hit a setback.  If you do, simply brush yourself off and get back on the road to financial freedom.  The sooner you do, the quicker you can leave the debt monkey on the side of the road to hitchhike with someone else!