The new norm in America is being buried in debt, whether from mortgages, credit cards, personal loans, student loans, or business loans. The amount owed has risen dramatically. The average American in 2021 has an average personal loan debt of $16,458. Due to this, it is very easy to understand why Americans feel overwhelmed and anxious when it comes to their finances. The problem with debt and stress, in general, is it blocks us from seeing the options in front of us. We often feel trapped and paralyzed by the situation. If we genuinely want to get out of debt, we need to start by digging our way out, one shovel load at a time. There is no shortcut to getting out of debt. It takes hard work, dedication, and sacrifice, but it is absolutely worth it. The great news is being in debt does not have to become your identity. Here is a proven 6 step method to get out from under debt and begin to financially thrive.
1) Take Responsibility
Simply put, you can’t beat what you can’t define. The stress of debt can be crippling, and a very normal reaction to that stress is trying to avoid the problem. If we can’t see the problem, it doesn’t exist, right? Unfortunately, the problems we can’t see still hurt, but there is hope.
The first step in overcoming anything is recognizing you have a problem. We need to be able to take responsibility for the financial situation we are in today. This does not mean that we need to feel shame for what we have done, but we need to recognize we can not continue on this path anymore. The more we are able to take responsibility for our past mistakes, the better our future will be.
2) Throw It On The Wall
The next step is the fact-finding mission. We need to get all of our ducks in a row. Don’t worry about making sense of what you have at this point in the process. Just get all the information in front of you.
The natural question is, what does this look like practically? Here are a few items we need to “throw” on the wall during this stage.
- Average Monthly Take Home Income
- Housing Expenses. (If you are renting, it is straightforward. We just need the amount you are paying in rent. If you have a mortgage, we need to know the balance, interest rate, and provider.)
- Credit Card Bills balance, interest rate, and provider
- Student Loans balance, interest rate, and provider
- Medical Bills
- Tax Obligation Expenses
Once we have gathered this information, we need to get our damage report which for us is a credit check. A credit report shows the status of our credit activity and our overall standing from the lender’s perspective, which affects our rates and premiums and shows our potential problem areas. You can get a free credit report once a year from the three main credit bureaus: Experian, Equifax, and TransUnion.
Essentially it is time to clear off the kitchen table and get organized! We want to get a net number per month of profit or loss. Once we have all that information, we can start developing a safety net and create a plan!
3) Develop A Safety Net
Before we go on tackling our debt, we want to make sure we can cover whatever life throws our way. The goal is financial margin and what we don’t want is to have to go into more debt trying to pay off the debt we already have.
A general rule of thumb is we need to have $1,000 saved to cover unexpected expenses before we start tackling our debt aggressively. Now, of course, we can have more than this in our savings safety account, but I wouldn’t recommend any less. This safety net is not to be used monthly on everyday expenses. It is designed to cover unexpected costs, so if you are tempted to spend it, do whatever you need to do not to spend it! That can look like putting the money in a different account, having an accountability partner, not having “easy” access to the funds, etc…
This step is all about foundation repair so that we have proper support moving forward. The foundation we lay today will directly impact our results tomorrow. Life is stressful enough; let’s make our finances a little easier.
4) Choose A Debt Payment Plan
Once we have our emergency fund in place and have organized our debt, it’s time to initiate a plan to pay it off! We want to create good credit good habits such as budgeting, automatic payments, using a low debt ratio, and being aware of the rates they charge. Doing this will allow you to dig yourself out of debt, but we still need a concrete strategy to get out of debt.
My two favorite strategies for getting out of debt are the debt snowball and the debt avalanche! They are both highly effective and will produce extraordinary results!
5) Get Creative
Getting out of debt usually means sacrificing what you want today for what you want most. Depending on the level of debt, it may seem impossible, but there is always a way forward. It might just require some discipline and a little creativity.
In order to create a financial free life and to be debt-free, we need financial margin. By making some extra money plus monitoring and cutting our expenses, we can create some serious margin in our lives.
There are several side hustles that you can do to generate some extra income, thanks to the emergence of the gig economy. There are several opportunities to make some serious side income, including Ubering, Lyft, dog-watching, writing reviews, selling your old stuff, etc.
Once we have budgeted and identified our spending habits, it is typically time to make some changes. There are two main changes that I like to classify as soft cuts and hard cuts.
Soft cuts are when you substitute the thing you want for a cheaper version. Such as, instead of a trip to the beach, you try a staycation. Instead of the gym membership, you buy a jump rope and some running shoes. You replace going out for dinner and a movie with going for a walk in the park and having a picnic. These types of substitutions are easily made and can make a serious impact on getting out of debt.
Depending on our level of debt and spending habits, we may need to take more drastic measures. These harder cuts look like downsizing your home, selling your car, and cutting all of your discretionary spending. These harder cuts are more radical changes to our lives, but they can make radical changes in our financial situation.
6) Don’t Do It Alone
At the end of the day, getting out of debt is hard. If it was easy, then no one would be financially stressed and loaded with debt. People fail when they don’t have the proper support and help along the way. That’s where a financial coach or advisor is so helpful in the process. They can help hold you accountable and provide you with concrete steps to take for your personal situation. A financial coach can also help you walk through more nuanced financial decisions such as refinancing, negotiating with creditors, and choosing a payment plan.
Wherever you are in your financial journey, it is important to know that you aren’t alone when you hit the bottom and that it is possible to come out from under debt being strong and financially stable.
