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If you’re stuck living paycheck to paycheck, and wondering how to eliminate debt and get on with your life, there is hope. Don’t think you’re alone. Believe it or not, about 78% of people in the U.S. are living paycheck to paycheck.
Living like that is not only damaging to your long-term finances, but it just sucks. Who wants to keep seeing your neighbors going away on trips, and improving their home while you’re struggling just to buy groceries.
But there’s a way to break out of this pattern. It’ll require you to be a lot more intentional about spending money, but once you do, it’s amazing how many other opportunities start to open up.
How to Eliminate Debt and Start Living
The scary thing about debt is that it sneaks up on you. And by the time you realize you’re in trouble, it can be too late. It happens easily enough. You get a new credit card and you realize you can have that huge sectional sofa in your living room tomorrow. So you buy it on credit, thinking you’ll pay it off over the next year.
Then you get an invitation to your friend’s wedding across the country. You don’t have the cash for the trip so you charge it.
A few months later your car dies. Now suddenly, you have a car payment.
Within a few months, you’re deciding whether to go food shopping or pay the electric bill. “How did this happen” you wonder. You’re now paying hundreds of dollars per month on loan payments. You can barely afford necessities. At that point, all it takes is one stroke of bad luck – like a job loss – to bankrupt you.
You can spend years trying to recover from this. So here we’ll talk about how to eliminate debt and finally start getting ahead.
There’s Good Debt and Bad Debt.
When I say debt, I don’t mean a mortgage payment. Assuming your mortgage payment is in line with your income, this is putting a roof over your head, giving you a tax deduction and is hopefully an appreciating asset.
I mean the debt from department stores or other loans where:
- You’re paying a rate so high that the finance charge adds many more months to the payoff period.
- Or the combined effect of multiple debts that eat away at your ability to afford anything else.
It’s these debts that keep you from moving forward, or worse, bankrupt you.
Why shouldn’t you carry debt?
- You’re borrowing from your future. It’s very easy to fall into the trap. You “deserve” that new living room set. The neighbors are going to the Caribbean this winter. Why shouldn’t you? Before you know it, you owe $9000 and the minimum payments are preventing you from paying for something you really need, like a car repair or an unexpected medical payment.
- You’re paying more for the items you buy on credit. Why look for a 15% off sale when you’re charging the purchase on a credit card that charges 25% or more interest?
- Not eliminating debt keeps you from accomplishing other goals like vacations, establishing an emergency fund, and contributing to savings.
- If you’re single or unattached and you feel like moving to Costa Rica or Fiji for 3 months, it can be difficult, if not impossible with thousands of dollars of debt hanging over you.
- It creates a lot of stress on you and your marriage when you live beyond your means. If you’re constantly struggling to figure out which bill to pay, then you’re probably not enjoying many stress-free nights out together. You’re probably not taking vacations. And you probably can’t afford anything to improve your home.
- Take a look at the homes in your area on a site like Zillow.com. The foreclosures are highlighted in blue. In my neighborhood, I count eight foreclosures within a mile from my home. I’ll bet several of these were families who were over-extended with debt, had no emergency fund, and maybe because of a job loss, were bankrupt within a few months.
- You’re Putting Your Financial Future into Neutral – or Reverse
To illustrate how carrying high-interest debt hurts you, consider this: You owe $3000 for a living room set you’ve bought on credit and are paying 25% interest. Making a $150 per month payment would take 27 months pay off!
But if you were able to put that same $150 per month into an IRA for the same period, you’d have over $4000. That’s how the need to get things before you can afford them is really borrowing from your future.
Making the Attitude Adjustment to Eliminate Debt
Once you make the decision to eliminate debt from your life, it’ll help if you can give some thought to how you accumulated it in the first place.
A big reason many of us get in over our head is trying to keep up with everyone else. We see our neighbors or friends buying that 60-inch TV or the latest model car. It’s easy to get the wrong idea, that we’re supposed to have certain things by a certain point.
But you don’t know what your neighbor’s real financial picture is. For all we know, they may be in debt up to their eyeballs. They may have acquired a lot of ‘stuff’ but are living paycheck to paycheck too.
So, taking an honest look at your situation is key.
Once you figure out how much you can put toward debt each month, forget about your neighbor’s new hot tub. Or your sister’s trip to the Caribbean.
The only way to eliminate debt and be able to pay cash for things is to have your own budget and make your own choices. You’ll have those things too, but won’t it be nice when you’re not laying awake at night wondering how you’ll pay for them?
So Where Do You Start?
First get a clear picture of where you stand. It’s easy to lose track of just how much you owe when you have several accounts. Be honest. Add up every department store card, car payments, student loan or personal loan. The total may shock you – but you need to identify it to set your sights on it.
Create a simple one-page budget listing all income you have each month and every bill and expense you have. Here’s where you’ll see just how much this debt is hurting you. You’ll have a balance sheet.
Determine your most expensive debt. If you have a student loan of $15,000 at a relatively low-interest rate but you also owe $800 to Best Buy where you’re paying 26% interest, I’d attack that high-interest debt first. Put everything you can toward paying that down. If you receive any unexpected income like a work bonus or gift, put that toward it.
Then target the next most expensive.
One of the keys also is to put away your credit cards. You wouldn’t keep bailing water out of a sinking boat without plugging the hole first. Don’t pay down one card while you use another.
When you identify the account you’re going to target first, think out of the box. Don’t assume you can only make a payment each time you get paid. Make a game out of it. Look around and see what you have in your closet or attic that you no longer use and has some value.
- A musical instrument that you haven’t touched in five years.
- A treadmill covered in dust that’s used for stacking laundry.
- Golf clubs, ski’s or a weight bench that you haven’t used for several years.
- An old cell phone or laptop.
- Do you have a skill that someone may pay for, like tutoring, typing or computer assistance?
Setting Yourself Up to Succeed
Discarding items that you haven’t used in several years doesn’t mean you’ll never do those activities again. It’s about evaluating your position right now and putting yourself in the best situation to succeed – for now.
Once you put yourself in a better position – when you’re out of debt and making some more income, you can buy yourself a better pair of skis.
Make a list of what you have around the house and look on eBay or Craigslist and see what price you can get. You may surprise yourself and find that you can eliminate a sizeable chunk of your debt by eliminating clutter.
And once you sell the items, immediately write a check to one of your creditors. Avoid the temptation to take that wad of cash to the mall. Remember, you won’t always need to be this frugal. But it’s taken you awhile to get into this situation so just remember that with some ingenuity and focus you can get out of it.
Here are three posts that’ll help you to uncover money that you can apply to eliminating debt:
- 10 Insanely Simple Ways to Save Money
- 12 Keys to Drastically Reduce Your Grocery Budget
- Are You The Only Person Left on Your Street Still Paying for Cable TV?
Generating Extra Income to Eliminate Debt
Once you accumulate a few thousand dollars of consumer debt it’ll take you several years to pay it off if you’re making minimum payments. And interest charges of over 20% will ensure that you’re paying back a lot more than you borrowed.
Tightening your budget is the first step in eliminating debt, but creating extra income is what will really create momentum. Even if you feel that you’re only skilled in one area, or that you don’t have any more time, there are things you can do.
The difference between paying the minimum of $25-$50 per month or several hundred per month can have a huge effect. And it’s not just that you’ll be rid of the debt quicker, but you’ll put yourself in a safer position faster.
What would happen if you drag out your minimum payments over two or three years and half way through the payoff, you have another emergency? Your car dies, or you have an unexpected medical expense. Suddenly that furniture payment is hurting you much more than you anticipated.
And the longer you stretch out payments, the longer you go without building your emergency fund or saving for other things.
So, depending on your family situation, consider generating some extra income. Income that you’ll be able to dedicate to eliminating your debt.
Here are some ideas you may be able to use to generate some extra income:
- 25 Realistic Ways You Can Generate Extra Income
- 4 Beyond Simple Ways to Have Checks Sent to You Each Month
- 20 Companies That Will Hire You to Work From Home
- 5 Ways a Side Hustle Can Transform Your Life
Consolidating Your Debt
Another option, if you have several high-interest accounts, is to shop for one card that advertises a very low balance transfer rate for 12-18 months or so. You can move as much of the debt as possible to that card. And then throw every spare dime you have toward that account until you pay it off.
And it it’s still not paid off by the end of the introductory period then apply for a new card with a low introductory rate, transfer the balance to the new card and make sure you close the first card.
But that comes with a word of warning.
When you consolidate debt, it doesn’t mean you’re getting rid of it. You’re transferring it. Sure, you’re transferring it to a lower rate card, and if you pay it off within the agreed upon time, you can save hundreds of dollars in interest.
But the fact that you need to consolidate your debt is a red flag. It means you’re living beyond your means. And even if you pay off the debt, if you don’t adjust your spending and live within a budget you’ll repeat the same mistake.
If you do open a debt consolidation account, I’d make sure of three things:
- Don’t charge anything while you’re paying this off.
- Create a budget. Write down your income and expenses and stick to it.
- Take this as a warning that you’re over-spending and need to either increase your income or adjust your lifestyle.
Whichever method fits your situation, make the commitment to stick with it and keep track of your progress. Each month, record the progress you’ve made. You’ll slowly see your balance sheet going from negative to positive. This will fuel your incentive to keep going.
And once you do pay everything off, don’t lose sight of what you’ve accomplished. By eliminating the monthly drag on your income, you’re creating other opportunities. The chance to establish an emergency fund, contribute to a retirement or college fund, or even to enjoy a guilt-free night out once in a while.
Have you been able to eliminate debt in a unique way? Or are you struggling now with student loan debt or credit card debt? Are you using any of the methods here to eliminate it?
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