Let’s start with a story on how to become debt free and then get into specific strategies in personal finance like debt relief and early retirement. Let’s walk the Road Out of Debt…
For Joe, life seemed to be going pretty well. He and his wife and just refinanced their home and used the extra money to pay off their debt. He had just received a promotion at work that had doubled his income and his wife had just picked up a new job that was in her career field for the first time. They were happy, financially secure, and headed for a relaxing retirement in 20 years or so.
Or so they thought.
Just 60 days later, Joe was laid off from his job. His wife continued to work and they had a small income that was coming in, but it wasn’t enough to pay the mortgage and all the bills in full. Joe tried to find work, but there weren’t any offers coming in. Month after month passed and Joe saw his savings account vanish. They had to cash in their 401k plans. Joe even used the funds from a “fortunate” car accident that put a major dent in his car to pay the mortgage one month.
It just wasn’t enough. After 7 months, Joe was tapped out. After 9 months, the lender filed for a foreclosure on the house. That was in 2010.
Now Joe is financially independent once again, saving for retirement and back on track, although about 3 years behind from his original plans. He hopes to make up the difference with some strategic investments, but knows that slow and steady is the way to go right now as he continues to build up his credit.
You Can Be Just Like Joe… And It Doesn’t Have to Take Long!
With smart financial planning, even the biggest debts can be wiped out within 7 years in almost every instance. About 70% of people can wipe out a majority of their debt within 5 years. 33% of people can wipe out their debt in 24 months or less and become financially independent once again. How do these people accomplish this?
It’s a pretty simple process, but it starts with a scary word: budgeting.
Without a clear, concise budget, there is no way to become financially independent. None. Zero chance whatsoever. You’d have a better chance of throwing a rock out into the ocean and having it hit a leprechaun! Your budget is the map of your journey toward retirement. You need to create so you know what financial goals to set, how you’re going to hit those goals, and what adjustments might need to be made in order to hit those goals.
How can you start that process right now? Just like this.
What Do You Spend Money On All the Time?
In order to become financially secure, you must do one of two things: cut expenses or make more money. Those that achieve the fastest levels of financial independence from debt are able to do both things simultaneously. In order to get this process started, you’ve got to find where money is leaking out of your bank accounts.
There’s a good chance that you don’t even know that money is leaking out when you’re in debt.
Let’s take a look at some of the most common ways that money is spent from a budget without people even realizing it is occurring.
One cup of coffee from a coffee shop every morning before work: $1,040
One energy drink, soft drink, or other beverage during the day: $547.50
Running the thermostat at 72F in winter instead of 68F: $192
Watching television on cable while having a streaming subscription: $1,096
Most households have some form of these four precise expenses no matter what their budgetary situation happens to be. Add up the numbers and you see that controlling just these four leaks in a budget could save over $2,500 in just one year!
Every household is unique. Every debt is unique. Yet in all of this uniqueness, debt also has some very important places where common ground can be achieved. Let’s take a look now at some of the specifics that can help you get out of debt fast. Like today kind of fast.
Credit Card Debt Is Crippling
There are trillions of dollars in credit card debt held by people around the world right now. It isn’t a bad thing to have debt on your credit cards, especially if you pay most of that debt off every month, but all it takes is one bad month or one lost job for it to become a problem. That was one of the biggest concerns that Joe had and why he decided to refinance his home. He and his wife had over $25,000 in credit card debt.
If you’re in debt right now and you’ve got a credit card, you’ve got three options:
keep paying as much as you can on the outstanding balance every month without using it ever again except for an emergency;
cancel your line of credit so that no more new purchases can be made on it; or
stop paying your credit card altogether so you can begin negotiating on the debt.
Most credit card companies are not willing to negotiate on an outstanding balance if they feel like there is no threat to their incoming revenue. They would rather have you pay the monthly minimum due every month because that is their primary moneymaker. Although laws have been passed to help people get out of debt without ruining your credit, sometimes the damage has already been done.
That was the case with Joe. His foreclosure had dropped his credit score by 160 points. He wasn’t going to get any new credit soon. Therefore he decided to take option 3: to stop paying on his credit cards altogether. Then, at the 90 day mark, he contacted his credit card lenders to negotiate his balances. All of them were willing to settle the debt because it was past due and his out of work circumstances made him a high risk. Out of the $25k Joe owed, he ended up paying $7,900 in total to pay off the bill.
Here’s the best part: all but one of the lenders let him make this settlement payment in monthly installments over the course of 6 months.
Credit card debt is an unsecured debt, so if your income qualifies for a Chapter 7 filing, that is always an option as well. That’s the 7 year option, however, because that will stay on your credit for some time and even make it difficult to get an apartment to rent in some communities. Bankruptcy doesn’t help with certain types of debt either, like your student loans.
How Do You Control the Rest of Your Debt?
The best way to control debt is to use what is called the “snowball” method. If you dropped a snowball at the top of Mount Everest and it rolled all the way down, how big would it be by the time it reached base camp. It would be enormous! The same is true with debt. Focus as many resources as you can on your smallest debt without letting other debts go past due unless you’re doing what Joe did with his credit cards. As each one gets paid off, take those resources and go to the next debt. Then the next debt.
And then pretty soon, you’re putting a tremendous amount of resources towards your largest and last debt of all. That’s a good feeling right there because it means that you’re almost out of debt!
As you are doing this, take a good look at your secured debts – like those student loans. Many of them have repayment programs that will let you reduce or even eliminate the monthly payment that is due for some time. This creates a positive score on your credit report and gives you more resources to pay down other debts!
And that brings us back to the budget. You can’t manage these debts or create a repayment snowball unless you know what your expenses are compared to the income you’ve got coming in. Chart everything. Food expenses, gas, travel, internet, cable… everything. Eliminate things you don’t need. Look to freelancing websites like Fiverr or Elance to turn hobbies into cash generators if need be.
Just don’t settle for the idea that this is the way life is supposed to be. That’s the most dangerous trap of all because that creates procrastination and procrastination creates more debt.
It really is possible to be like Joe and learn how to become debt free and financially independent, even if you are mired up to your eyeballs in debt right now. Get your budget going, create a strong plan, stick to that plan consistently, and you’ll be out of debt more quickly than you ever thought possible!