How To Dig Your Way Out Of Debt

In 1993 I was $48,000 in debt. I lived in an apartment, paid monthly car payment to the bank, and after expenses, rent, electric, phone, insurance; the rest went to paying on credit cards. I had no savings, and to say I was living paycheck to paycheck was an under statement because at times I was actually paying one credit card with another card. You can imagine, this scenario didn't last long before I was truly drowning in debt.

I was so oblivious  about my financial situation; I actually thought that since I was making a pretty good salary, I could buy a house.  Needless to say, the bank set me straight on that thought process real quick.

That is when I realized I had to get out of debt if I was going to be a successful individual in life. I had to "grow up" and begin to live within my means. But how?

Sure, it seemed easy to say, spend less than you make, or live below your means, but how?  I didn't have a financial coach, or even a money mentor, which I really needed. I had to figure it out on my own.

I wrote down what my bills were and how much I made every month...is was rough, no where near the process that I described in "Money Management aka Cash Flow" I realized I had to change my spending habits.

Once I told myself "Kim the way you have been spending money isn't working, let's try something different" the change began to happen. After all, to continue to do the same thing over and over again expecting a different result is  the definition of "insanity" and I am very sane and able to improve.

So I changed how I was handling money. I stopped eating out (which I was doing every day lunch and dinner.) I stopped going out on the weekends. If I needed to get out, I would go to a store with a friend and walk around with her as she shopped. Sometimes, I even put stuff in a cart, and then walked back around putting it all back on the shelves. It got me out of the apartment, I got to socialize, but I didn't have to spend money. I changed my thought process and spending habits. I had a goal to get out of debt so I could buy a house. Guess what? It worked!

Two in half years later I had paid down that $48,000 debt to $18,000 and I was approved to purchase my first home.

Now, did I do it right? Well, it was right because I paid a lot of debt in a small amount of time, but was it the best way? No. I made mistakes. I didn't put any money away for savings so every time the bank owned car broke down, I had to charge the repairs. Not good.

Yes, I said charge repairs which meant I didn't cut up those credit cards, mistake number two.  I did close many of the accounts but not all of them.

I didn't know how to properly pay off credit card debt; I just paid it best I could, focusing on the highest interest rate first. Not necessarily wrong, but it sure didn't give me any short term "feel goods" by having paid off a smaller card first and seeing a success.

So what are the steps that I would now recommend to pay off debt?

1. Work your budget or cash flow plan every month.
2. Stop using all credit, no new charges, no new loans
3. Pay yourself first. Put at least $1000 in the bank to cover emergencies, and keep that amount there. If there is an emergency, then you have to replenish that amount so you maintain $1000 in the bank. Even if it means not paying a credit card or two for a month two.
4. Change your spending habits, cut back on eating out, entertainment, and magazine subscriptions. Think frugal. Use coupons, buy generic. It all adds up. Put the extra you save by cutting back on debt.
5. Pay your smallest debts first. Put as much on your smallest debt as possible while paying minimums on the rest. That way when you pay off a small debt, it is an accomplishment, and you can see you are progressing forward.
6. Think of ways to bring in more income...we will touch of some of those areas in later blogs.

Stay focused, the process is not easy to start, but the payoff in the end is well worth it.

So where am I today?  Well as I mentinoed above in 1993 I was $48,000 in debt with nothing to show for it.  Today, I am debt free  except for my new home.  A home that was in part paid for with the proceeds from the sale of my that first home I purchased in 1996, a home that I paid off the mortgage in full by 2006.  My new home will be paid off in full in just three short years.

Oh I know what you are saying, "Of course she can pay things off, she makes a whole bunch of money", well let me assure you, I don't.  I do have a steady income, but it is modest.   My hard work goes into how I manage what I make and live below my means.

Believe me, if I can do it you can to.