Is there anything out there that will help you get out of credit card debt?

How to get out of debt.

Getting out of dept is easier and harder than most people think. Easier because - you probably already have the money to do it hiding away in your budget. Harder because - our society really frowns on savers and stingy people. So the first question you have to ask is do you really want this more than you want that double frappacino. It sounds trite but many people don't actually want out that bad.

Assuming you do want out - here goes.

First a bit about me. I am an Engineer (i.e. practical & logical, forget emotion) who left for college in 1980 with $200 in my pocket and a rusty 72 Buick got me there (yes anyone can get a college education). I’ve eaten mac and cheese for 2 weeks straight because that’s all I had. I’ve been there. The only thing I still owe on is my house, but I could pay it off with cash in my bank account (tax advantage).

Step zero: I call this step zero because it’s so obvious I can’t believe anyone wouldn’t see this, but I’ve found people that need this kick in the pants. If you are in debt, you can not keep spending money of luxuries. So, and I can’t believe I need to say this but I will, sell the boat, the extra car, the toys. You can’t buy your spouse, significant other or kids gifts that are more than 1% of your monthly income.

Step one; find cheaper money to borrow. Most people in deep dept don’t really have many options, but it is worth reviewing. If you own a home – can you refinance to consolidate the debt? Credit cards or sometimes even car loans require higher rates and fees. It may even be beneficial to refinance your house to reduce the rate or extend the payments so that you can reduce your monthly expenditure. Using that extra cash flow every month to pay off your other debt quickly makes a lot of sense (as long as it’s not a reverse or sub-prime mortgage). Using it to buy something disposable does not make sense. At the very least find the lowest interest rate card you have and transfer the balances over to that card.

Step two; commit your self to the fact that you will never (unless in danger of loosing everything, even then maybe not) borrow money for something disposable. Despite what many advisors say, rich people are not necessarily dept free. Their net worth is positive, but Donald Trump borrows money to build buildings. Money can be borrowed for your house to offset rent and gain the investment leverage. Money can be borrowed to start a business (but that is risky). Money can be borrowed for other business growth opportunities (i.e. education that will net out in a higher salary). What you are doing in that case is leveraging your money with someone else’s to increase you % gain. Don’t under any circumstances borrow money to buy a new car, clothes (but their on sale – no), furniture (even at zero %), etc. What you are doing in those cases is making someone else rich. They win you loose. I use credit cards for purchases, but I pay the full balance at the end of every month.

Step three; find easy money to cut. I hate budgets. Most everyone does. Fact is that most of the items in your budget can’t really be changed easily. You can’t go to your landlord and ask for a rent reduction. The electric company won’t drop your rate. Identify the items you can’t easily change and skip them for now. There are items that can be cut with very little impact to your life though. You would be amazed how those items add up over time. Here’s a few that could save you $5000+ per year:
- Dining out: You don’t really need to go out to dinner. That is a privilege. If you are up to your eye in debt. You need to skip this until you get your feet back under you. It won’t take long, and you can reward yourself (reasonably) once you see that you are ½ way to your goal. Most people can save $100 a month on this item alone (that’s $1200 per year).
- Take your lunch to work. When you cook that dinner listed above. Cook about 50% more than you intend to eat. Throw that in the freezer and take it to work next week. You’ll probably eat better food for lunch by the way. The average lunch in my area is $8. You can easily save $5 per day by bringing lunch (that’s $1250 per year).
- Cut back on beverages. Starbuck’s everyday is another $1200 per year habit. Make a pot of Folger’s in the morning. Another major expense people don’t think about is soda from the vending machine. At a buck a piece I know I can spend $500 per year (that’s 2 per day). Most offices have a fridge. Buy a 12 pack and put it in there.
- Clothes: If you don’t need it, then a sale item is not saving you money. I’m not saying you need to go to the second hand store or the outlet mall. Just don’t buy something you won’t wear every other week. You need 2 weeks worth of clothes. That plus a few special occasion items. That’s all. People aren’t paying that much attention to what you wear. It’s better to buy reasonable quality conservative styled clothes too. Buy them to last and wear them often. I bought a Roots shirt in Canada several years ago. It cost about $20 more than I wanted to spend. I bought it anyway. I wore that shirt till it literally fell apart several years later. I’ve bought several tee shirts off the clearance rack and they sat in my drawer till I gave them away. The Roots shirt was a very good buy. The tee shirts were a waste of money. BTW I paid cash for all of them.
- Cut back on vacations: Most people that are in credit trouble still take vacations. Vacations are the definition of disposable (see step two). It won’t kill you to skip a year. Use the money you would have been paying to start a separate savings account for next year’s trip. Never never never borrow to go on a vacation. Vacations should be saved up for and paid with cash. The rich never borrow to take a vacation. One other note on this. I keep a change jar at home. When I get home I put the change from my pocket in the jar. When we go on vacation and we see that special opportunity that we didn’t plan for (star light cruise, jet ski rental, etc.) I use the money from the change jar to pay for it. You can still have some fun in life.
- Get rid of the storage unit. So many people have storage units, yet they never evaluate the cost of the unit vs. the value of the items. I personally was paying $100 per month mainly so I could store an old sectional. After six months I would have been better off throwing the stuff out (or better yet selling it for cheap).
- Cable/internet: It’s become such a part of our life that we don’t even think about it, but as little as 20 years ago, most homes did not have either cable or internet. Many homes in the US still feel that the internet is a total waste of time. There is typically a cable package available that is just the local stations plus public access. The cable guys don’t like to sell it, but it is available. If they won’t sell it to you, maybe an antenna will do for 6 months (that’s probably about $300 you saved). Internet is also about $300 per year. Can you go to the library to see your spam?
- Phone: Many people have both a land line and a cell phone. Why? Also, do you really need the cell package you have? Savings: $300-500 per year.
- Children: If you have kids you’re probably spending much more on them than you need to. We tend to way overspend on our kids because we feel guilty. Your kids want you to be happy more than they want the toys or the camps or the sports or the extra special day care. This is an area that I personally need to continually challenge myself. We want “the best” for our kids. What we can afford is what’s reasonable. Leave “the best” for the folks with the net worth over $5 million. Your kids will never notice one less present. They’ll never notice that you didn’t buy the happy meal. What they’ll notice is that you gave them a fiscally responsible model to follow in their life.

Step four (if you need it); find hard money to cut. True lifestyle change is tough, but if you still aren’t making ends meet, it’s time to change. Note: if you don’t have to be this drastic then don’t. This step is more than most people are willing to do, but if you’re spending more than you’re bringing in, and you can’t cut the small stuff enough to make ends meet, your only choice is to cut the big stuff. That would be move to lower rent, Sell your car(s) and buy something cheaper (yes, you can get a reliable car for under $5000), or find some other major expense. Again, hold off on this one unless you’re really prepared to make a true sacrifice.

Step five; pay down that debt. Ok, by now we’ve stopped the increase in debt. And, we’ve freed up some extra cash. There are many “gurus” out there with “plans” to follow. It’s really pretty simple. Find the highest interest rate debt, unusually your credit card (remember we consolidated in step 1) and apply all of the money you saved to paying this debt down as fast as possible. Note: many of the gurus tell you to build an emergency fund. If you’re paying 18% interest on a card and you can still borrow on that card in case on an emergency you are foolish to put money in a bank account at 2% interest. Pay down the high interest.

Step six; pay down some more. Once the cards are paid off, use the money you were paying on the cards to pay off the car loans, school loans, etc. I would also suggest taking $1-200 per month (in cash) at this point to allow you to regain some social life (lunch once a week or dinner once a month, etc.). Don’t let up too much though. You are still being foolish to have loans on cars and other expendable items.

Step seven; evaluate what’s important to you: This is where some of the gurus get crazy. They push to pay off the house. If this is your life’s dream and it means more to you than anything else; ok go for it, but you’re only earning about 5% on your efforts. Better to invest in other more lucrative investments. For example, a company matched 401K invested in the general stock market will pay 10-12%. When you retire you can pay off the house. From here on out you are in wealth building mode, so you need to determine where you want to invest that money you’ve been paying down. You will also want to reward yourself for having regained solvency (gain back some of that social life). The other thing you will need to determine is what items you will want to save up for. Remember, we don’t borrow to buy disposable items. Finally you want to protect your new lifestyle. Make sure that you store up an emergency fund equal to 3 months take home (what your check reads).

I could go into steps 8-? On how to build to retirement, but that’s another topic. Good luck.