A Plan to Get Out of Debt

how-do-you-get-out-of-debt

In my last post, Debt Is the Enemy of Residual Income I explained how debt was the killer of residual income. Even though you have a plan for creating a stream of wealth; if you don’t have a plan for dealing with debt you will eventually just create a larger hole that you never seem to get out of. It’s human nature that an increase in disposable income will gradually lead to an increase in additional spending. The problem with first starting out on a new business is understanding the amount of money that is actually yours to keep vs. the money that needs to go back in the business in order to sustain it. Here are just a few items that comes with running your own business in no particular order:

  • Taxes
  • Website name
  • Website hosting
  • Email auto responder
  • Cost of accepting payment in any form
  • Copy writing
  • Additional Staff – if successful
  • Software – this is both purchase of new software as well as online. Some are onetime costs, while others are recurring.

If you don’t understand this cost then you are doomed to remain in debt.

A Way Out

Just like Alcohol Anonymous, before you can seek help, you have to admit that you have a problem. The same holds true for debt. You need to know that you’re close to the edge of not having the money necessary to pay for the things you got early. So the first step in this process is to stop adding to the hole and not spending another penny with a credit card. It may be hard for many to know that you don’t need to go to the mall and purchase things that you really don’t need in order to to satisfy your craving or even a depression. Take a walk around the block, read a book, garden, clean your house, anything other than jumping in a car and flocking to the mall and spending what you don’t have now. Once you are able to do that, then next step is to cut the card up. You don’t need to always borrow from someone to get things. What you need to do is live within your means. Simply put, if you don’t have the actual cash for an item you’d like to have, then you’ll need to wait and save until you do. Some of you might say, but if I cut the card up I might have a bill that comes due and won’t have the money for it. At this point you need to understand that you’re “robbing Peter to pay Paul” and creating one problem to solve another. In that case you didn’t solve any problem. You just increase the first problem.

Here’s a situation that many people get wrong because they believe that any incurred debt is like dealing with a loan shark and that physical harm can come to you if you don’t pay on time. This couldn’t be further from the truth. Credit card companies, banks, lenders, mortgage houses all want the money they’ve lent. The have zero need nor are they equipped to receive the goods back from the purchase you made by borrowing from them. So talking to them, or having someone talk to them on your behalf is much easier and moves to “solving” the problem than just worsening it. Perhaps you can delay a payment, or have interest reduced. You will never know what can be done if you don’t start to work on the problem and be open about it. Hiding from debt just delays the inevitable, where you are going to end up paying, claiming bankruptcy or just disappear from your life. Of course that 3rd solution always ends up with the person being found and still owing the money.

How to Solve the Problem

So now you’re at the point where you might say that you don’t have the money to pay back the debts and this will never work for you. WRONG! Anyone can work on the amount that is going out as well as gathering addition money to help with this problem. Follow the steps below to get your plan working:

Step 1 – Gather up all your recurring monthly bills. Put them on a spreadsheet so now you are looking at them in writing. Start with each one and see what you can do to squeak out some dollars on what you’re spending. Let’s take you cable or satellite television and see the package you’re using. Can you do without television at all? Most will say they can’t but, what if you’re able to just use a service like Netflix for $7.99 per month? If you state that you just can’t give up television, then you need to examine the bill you currently pay. If you have premium channels like HBO, ShowTime, etc. drop them. While you’re in debt, you really can’t afford the “Game of Thrones” or “Shameless” as your weekly watching regiment. Find something on basic cable or read a book each night. This reduction could save you about $50 or more per month. How about your broadband internet service? Do you need to have this pushed out to extreme download for that extra $40 per month? Reduce that amount too. Do you have a home phone and a cell phone? Stop one of them for additional savings.

I hope you see where this is going as those three areas alone can save over $100 for help with repayment. Continue on to the next bill on your list. Is it electric, oil, gas or a combination of the 3? Start to look at the consumption. How can you reduce? Perhaps install automatic motion lighting in bathrooms, bedrooms and kitchens. They will go off much faster than you would remember. Stop showering each day and stretch it out to every other day. This will cut down on the amount of time necessary to heat your water, and you won’t stink if you do a quick wash by the sink each day. How about the thermostat? Can you live in the winter with a sweater on and cut the temp a degree to two? You need to look at all your utilities as well as your food bills and find ways to reduce the monthly outlay. Bring a lunch with you to work. Stop getting that special cup of coffee from a popular chain store each morning. Don’t purchase take-out food for dinner and stop going out to restaurants. All of these may seem drastic to you, however you didn’t think it was drastic when you pulled out a piece of plastic to by the next great thing you just had to have.

Step 2 – Sell things you are no longer using. You can do this with a yard sale, garage sale, tag sale or whatever you call it where you’re from. How many things sit in attics, garages, basements or are taking up space in spare rooms or even in the rooms you sleep and live in? Get rid of these by selling them. EBay is a great way to sell items no longer necessary. Just get a nice picture of the item in question and review sites on line that show how much people will pay for a used “whatever”, figure out the shipping and post your item for sale. You’d be surprised how much you can recoup as well as get the added benefit of cleaning up your space. This one practice can help with reducing your principle on many of your loans.

Step 3 – Use coupons to purchase items with. Don’t make your next move to the supermarket without looking at your Sunday inserts for the coupons that will reduce the original cost. Some store offer double or triple coupon reductions. Make it a point to visit those stores. You should look over your items that you need to exist on and come up with a way to eat that involves the use of coupons for almost all your food items. There are also many online sites that offer tips on how to use this as a way of life. Take advantage of it. Food should now be looked at as just sustainment and not gourmet eating. Days of Porterhouse steaks, lobster tails and caviar shouldn’t be on your shopping list. Chuck steak, spaghetti and roman noodles are your staple.

Step 4 – Prioritize your debt and attack this as a snowball effect. If you follow the three steps above, you should now have “extra” dollars that you didn’t realize before. Here’s now the important point to review what you have left in regards to loans. Many of you may have a mortgage, maybe a second mortgage, automobile loan or two. Education loan, and maybe even a personal loan. If you have debt, there’s a good chance you have credit cards as well. Line them all up on your spreadsheet and list the item, the minimum payment due, the total amount outstanding and lastly (this is important) the interest rate. What you’re going to do is now list them from high to low in either the most amount owed, or by interest rate. Now if you start with the loan that has the smallest amount due, what you’re going to do is pay the minimum due for all of the loans, however you’re going to take the “found” money from reducing your utilities and other recurring and put that on the lowest amount due. Please see the table below.

Loan Minimum Amount Due Total Due Interest Rate
Mortgage

$1,007.00

$186,322.00

5.4%

Car Loan 1

$328.50

$13,255.00

6.8%

Car Loan 2

$284.00

$21,230.00

7.3%

Education Loan

$155.00

$16,210.00

8.0%

Credit Card 1

$154.00

$11,540.00

13.6%

Credit Card 2

$86.00

$5,400.00

20.9%

 

For this one you would pay the minimum payment on all except credit card 2. That you would pay minimum as well as all the additional money you got by reducing utilities, using coupons and selling items. Say if you had an additional $1000 your payment would be like this:

Loan Minimum Amount Due Total Due Interest Rate
Mortgage

$1,007.00

$186,322.00

5.4%

Car Loan 1

$328.50

$13,255.00

6.8%

Car Loan 2

$284.00

$21,230.00

7.3%

Education Loan

$155.00

$16,210.00

8.0%

Credit Card 1

$154.00

$11,540.00

13.6%

Credit Card 2

$1086.00

$5,400.00

20.9%

 

It would now take a very short amount of time to pay that off. After that is done, you now pay the rest and apply the same principle to the next lowest amount due on the list.

There is another theory and that’s to pay off the highest interest rate and the next highest and so on. Either way will eventually get you out of debt and well on your way to establishing wealth.

I hope to add more in coming posts on how to get yourself setup with your finances so that you can really enjoy making a residual income and living the life you dreamed of.

About The Author

Thomas

A husband, father, brother, uncle and cousin to a great group. I'm an budding entrepreneur that has interest in making money that will sustain deep into retirement. At this point in my life I see no reason why I shouldn't get my piece of the pie.