Debt. Most of us have it - in fact, according to a 2015 American Household Credit Card Debt Study, the average household with any of the following types of debt has $15,762 in credit card debt, $168,614 in mortgage debt, $27,141 in car loans and $48,172 in student loans - and an average of $130,922 TOTAL DEBT PER AMERICAN HOUSEHOLD! That. Is. NUTS.
In 2015, there were about 124.6 million American households - so if we're talking strictly averages here, that works out to over $16 TRILLION in debt! Think of what we as Americans could do for ourselves, our families, our country, our world if that wasn't the case! What if we wanted more than just bigger and better STUFF?!?
That's why I'm so passionate about spreading this message. Getting out of debt isn't just about you. It's so much bigger than that! When you get out of debt, you show this culture and these "norms" what weird really looks like. You show the people you know and love what freedom looks like - not just financial freedom, but freedom from comparison and peer pressure and societal norms. You can set up your family, neighborhood, city, future generations, etc. to be financially sound, generous, healthy, stable - anything you want!
It's possible to turn your life around. It's possible to make a difference in this world - and it all starts with you! Below are seven steps to getting out of debt, Part 02 of this series - if you missed Part 01 - you can read it here. I hope you find this helpful! <3
Step 01 // You Have to Want It
Some people might say that you need to believe something is possible before you can achieve it, and although that holds some truth - I don’t think that’s a great place to start. So much in this life is beyond our imagination - if we only stick to what we think is possible, we’ll have a pretty ordinary life. I don’t know about you, but I don’t want that! So, instead of starting out believing you can do it, I think the first step to paying off debt is wanting to pay off your debt in the first place.
In our culture today, debt is completely normalized. I remember getting a few “Why would you want to do that?” faces in the beginning when I first said, “We’re paying off our debt.” It’s not considered a “normal” thing to do, but then once you come across someone that’s done it - you can’t help but feel one of two things - envious or enlightened. I’m not going to lie, I’ve definitely felt envious from time to time in this journey, but overall I’ve been left feeling more and more enlightened.
The less my mind and heart are tied to my money - the more open I become, the more generous I become, the more my heart begins to dream again. I want to pay off this debt because I want to be free to live the life I want and not be chained to payments - which brings me to the next step.
Step 02 // Establish Your “Why”
I touched on this a bit in my previous post, but when I realized I wanted to live a life of generosity and adventure, I made the switch overnight. I want to help solve some of the world’s largest problems, namely homelessness, education & clean water. I want to travel, I want to have a family, I want to pay for our [future] kids’ education whether that be college, trade school, conference hopping, world traveling, etc.
Over the last year, Carl has expanded that dream to also paying for our grandkids and I’ve added on at least one non-related, low-income child - I want to help someone starting out as I did. I don’t want our future family to have to go through anything like I did - I want them to be able to go after God’s vision for their life that He’s placed on their heart without worrying about money. I want to be able to homeschool my kids one day [an entirely different post] taking them on trips to different countries and museums and galleries and festivals [Burning Man here we come] and anything else I can think of to give them the best and most holistic education possible. I want to live abroad for at least a year. I want to retire in Tuscany. I have at least four other businesses I want to start in my lifetime. I want to Road Trip across the US [again]. I want to take several around the world trips…
You get it. I want to fill this one life I’ve got with all of the things. Debt is keeping me // us from achieving those dreams. My “Why” is to leave a legacy of generosity & adventure - to not let society’s “norms” dictate the life I live, and there’s a lot that goes with that, as you can tell from the short list above.
Any time I get off course and spend beyond our budget - yes, it still happens from time to time - there’s only one reason - I’ve lost sight of my “Why.” To get out of debt, you need to have a reason and a dream [or several] that you’re working towards, or else, what’s the point?
Step 03 // Be Aware of Your Starting Point
Ok, before you start setting big expectations of paying off all of your debt by next week [if you can do this, what are you waiting for?!?!?] - you’ve got to get a sense of where you’re starting from. That means. Looking. At. Your. Statements.
Yes, it’s time to look at where your money is going. You won’t be able to tell your money where to go if you don’t know where it’s already going now. I remember doing this and being absolutely shocked, and then not at all, by how much I was spending on clothing - which is hilarious now, seeing as I wear the same clothes all the time. Anyways, pull up your accounts - all of them - every bank, credit card and anywhere else your money exits.
Get out a notebook and pencil or create a spreadsheet and go down each item, categorizing it as you go. This will look different for everyone but some things will be the same like housing, food, utilities, payments, clothing, recreation, gas, etc. Over time, your categories will get more and more specific to your needs. For now, just track every one of your purchases and bills for at least last month. I’d recommend going back further than that to get a true sense of your spending habits, but so as not to overwhelm you, just start with one month.
You might make $2000 a month and after doing this exercise, see that you spent $2700 last month. Whatever the numbers are - you need to know them so you can start working them to your benefit.
Step 04 // Consciously Consume
Now that you know where you’ve been spending your money it’s time to stop overspending or to start being more intentional with your money. When it comes to overspending - stop.
Stop? That’s it? Isn’t it harder than that?
Oh, no - it’s hard but it’s pretty simple. If you’re feeling a bit panicked after reading that - start out slow. See how long you can go without spending money. When you need to spend money, like for groceries, set a budget in your head and keep track of how much your total is adding up to as you go through the store. I started out this way, but if you’re feeling more advanced than I was, I would suggest writing out a weekly meal plan, making a list, looking for deals, and sticking to your budget.
[A few tips for that are, get vague with your shopping list - instead of writing “Pears, Strawberries, Apples” write “3 Kinds of Fruit” and look for which ones are a better deal, stick to the perimeter of the store - packaged foods add up QUICKLY, and of course - keep your eye out for specials. The first time I did this I cut my grocery bill in half - I was amazed and was the obnoxious girl talking about how she just got all of these groceries for $37!!!!]
Before you go to Target for laundry detergent and batteries, check yourself when you pick up that pretty scarf on sale for $7 and the eyeshadow for $8 in the color you’ve been wanting to try out. It’s SO easy to go in needing a few things and coming out with bags full of stuff you don’t need.
So, does this mean I can’t buy anything I want just because I want it until I get out of debt?!
Yes and No. It’s your life and it’s your plan. It depends on how quickly you want to get out of debt. For us, we’ve said ‘No’ to TONS of things but I’m a moderator and it’s EXTREMELY hard for me to go cold turkey for an extended period of time like, say four years. I need to be able to go out on a date night every once in a while - which is really more of an investment, but I’m getting ahead of myself. We want to be able to go to people’s weddings and see our families on holidays. Because of that, it’s going to take us a little longer than if we just went cold turkey. Ultimately, it's up to you, how you're wired, and what your goals are.
I would say that when you’re starting out - you need to go cold turkey on as much as you can for as long as you can, work your budget and adjust from there… which leads to the next step.
Step 05 // Make A Budget
It’s really not AS scary as it seems. Take your list from Step 03 and look at where you can cut back. Take into account every bill and necessity you have first and write them in order of importance. The Minimalists have a strategy that I think would be very helpful - it’s called Needs, Wants, Likes. Basically, you list everything you spend your money on into those three categories. Then in the first month you eliminate your likes. The next month you eliminate your wants until you are only spending money on your needs. From there, they recommend cutting your needs in half and slowly adding your wants back in one at a time. It’s a very simple and poetic way to go about reducing your debt.
Your budget is a living-breathing organism. It will evolve over time, so don’t stress too much over getting it perfect on the first go. You’re likely to forget something or have unexpected things happen that shift your budget or even collapse it altogether. It’s totally normal to take 3-6 months to get in a groove. After a while, you’ll start to see where you can cut back even more, what bills you can eliminate completely, things you can sell, ways to increase your income, etc. This extra money you create will become your snowball payment and be put towards your debt. The goal is to get your snowball as large as possible so you can pay off your debt as quickly as possible.
Step 06 // Start an Emergency Fund
As I mentioned in Step 05, sometimes things happen that throw your budget completely out of whack. For that reason, it’s important to have an emergency fund. Dave Ramsey recommends $1000 to get started. That’s a really decent size that should cover almost any emergency, like a car repair or a new washer for the house.
Once you have that saved up and you have your budget streamlined, something else you can do is set up even smaller savings. For example, Christmas - it happens at the same time every year, but it takes so many people by surprise. Since it’s now July, that gives you six months to save up. Set a budget for Christmas and divide it by six - then tuck that amount into a savings account each month. For us, we have multiple things we do this with, like car repairs and clothing. I go shopping a few times a year, but I save up for it by putting the same amount away every month. When my Jeep needed $2000 worth of repairs, none of which were extreme emergencies, we saved up a portion of that every month until we could pay in cash.
Setting up these “mini” accounts are for everything you know you need to spend money on in a years time that you don’t spend money on every month. Other things could be your car taxes, business taxes, or travel expenses. Make a list of everything you can think of that fits into this category, add them up and divide by 12 - then add that amount to your budget and save it each month.
This was hard for me to come to terms with at first. We had worked so hard to get our snowball as large as possible and then all of a sudden, a huge chunk was going into savings. I hated watching that account pile up, but then when we forgot to account for the cost of a trip to see our family or when my car needed some unexpected repairs we just wrote a check and it was fine. That feeling of ‘Oh crap - I wasn’t expecting this, well there goes our savings.’ is WAY better than ‘Oh my God, how are we going to come up with the money for this?!’
So, to sum up this point - you need an emergency fund for the unexpected and you need a “mini” savings account for the things you expect to spend money on over the course of a year. Having these two things in place will release you from unnecessary worry - freeing you up to focus on your goals.
Step 07 // Strive for Flexibility
As you go through this process, things will happen along the way. It’s important to not let those things derail you completely. An unexpected expense might mean depleting your emergency fund and your snowball payment in one go. Be prepared that something like this could happen, so that when or if it does, you aren’t taken by surprise. You have your budget in place and you have savings - you can get through this!
Look for ways you can increase your income. That might mean delivering pizzas at night or selling everything in your house that isn’t nailed down or even starting your own business. Decreasing your expenses and increasing your income will only make things happen faster. You might need to do some uncomfortable things along the way. You’ll have to say ‘no’ to your friends asking you to go out all of the time. You might need to sell your house or your car and downgrade for a while. You might need to take on a second shift. The harder you work and the more focused you are, the quicker you’ll be out of debt and financially free.
Another way to account for flexibility, outside of your “mini” savings account is to budget blow money or have a miscellaneous category for those small random things you forgot about like paying for parking to go to a meet-up. Each of these categories should be as small as possible, but they allow room for slip ups and room for treats here and there to reward yourself throughout the process. So - I’ve got $20 a month that I can spend when all I want is pie.
Lastly, extend yourself some grace. No journey is perfect, especially when spanned out over the course of a few years, or longer. You’re going to slip up here and there, things outside of your control are going to happen, you’re going to want that brownie. It’s OK. The longer you’ve been at this, the better you’ll get at it and the sooner you start, the sooner you’ll be done. I promise - if I can do this - anyone can!
If you missed Part 01 go back and read how I got loaded down with debt to begin with and when I realized I needed to turn things around. Did I say this would be a two-part series?! Well, I think I’ve got a lot more in me on this topic, I mean, I should hope so after three years - so stay tuned, more to come on debt, money and how to budget & save.
Once again, thank you for reading and I hope that if you haven’t started yet, that this post will encourage you to start taking charge of your life by taking control of your finances.
Love & Blessings,