Becoming debt free.
American families are treading water in a sea of debt.
On average, U.S. households are carrying debt at more than 130 percent of disposable income. That’s twice the rate of 30 years ago!
Being in debt can take an emotional toll, and is one of the reasons frequently given for marriage failure. Reducing debt can improve your financial, emotional and even your physical health.
If you have more non-mortgage debt than you can afford to pay off, then work out a plan to eliminate it in five years or less. The first step is to stop using credit – especially to pay for consumer goods.
Financial success is impacted by emotions, so prepare accordingly. Calculate your net worth (what you own minus what you owe) and compare it to your lifetime earnings. What do you have to show for all your years of hard work? How deep is the hole when you add up all of your debts? Seeing these numbers will give you the resolve to become debt-free.
Now, enlist the aid of supportive friends to hold you accountable and provide encouragement when you face setbacks. (They probably could benefit from reducing their debt, too.)
Have a reserve
Before aggressively repaying debt, establish a cushion of at least $500. Otherwise, you’ll go right back to using credit cards when the next emergency hits. Once you’re debt free, you can rapidly build a bigger emergency fund. Ideally, you should have enough set aside to pay six months of expenses.
Clutter is the manifestation of over-consumption. It makes you more likely to buy things you already have (and cannot find) and takes energy away from your debt-elimination efforts.
Consider selling items you haven’t used in 24 months, using that money to pay down a debt.
The funny thing about numbers is that they always seem to add up to more than you expect. Tracking your spending has many benefits:
- It tells you how much you’re really spending in each category.
- It helps you estimate the monthly cost of auto maintenance and similar expenses.
- Best of all, it helps you find ways to save in each category. Looking at the numbers, ask yourself, “If I had that money to spend over again, would I make the same purchase?” Often, the answer is “no.”
Debt must be attacked fiercely. If you make only minimum payments each month, it could take you decades to pay off debt.
If you’re serious about being debt free, then it’s time to think big:
- Can you sell something to eliminate a big debt?
- Can you ride the bus to save on gasoline, car repairs, insurance and maintenance?
- Can you move into a smaller house?
Track progress and celebrate
Each time you pay off a debt, schedule a little (low-cost) celebration to recognize your success and renew your commitment. Keep a record of your progress, so you can see how far you’ve come.
Once you’re debt-free, hang on to those records as a reminder of your accomplishment. By then, you’ll realize that no purchase can bring as much happiness as being debt-free.