The 4 Simple Secrets To Getting Out Of Debt

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As any recent college graduate, single parent, or small-business owner will tell you, it’s a lot easier to get into debt than out of it. Fortunately, no matter how or why your balance sheet is in the red, there are four simple steps you can take to decimate your debt. "Simple" is not the same thing as easy. Tackling debt takes patience, time, and hard work. With an unconventional background in philosophy and accounting, Mindful Money is my thing. Here are the four steps to take if you want to pay off your debt mindfully, and a description of what each entails:

1. Admit you have a debt problem.

The first step in solving any problem is admitting you have the problem. And, if you are losing sleep over how you will afford your next car payment, feel overwhelmed by your student loan balance, or have a panic attack every time you open your credit card bill, you definitely have a debt problem. The good news? Since it’s your problem, you can be part of the solution!

The not exactly good news that may make you feel a little better? You are not alone. Plenty of your co-workers, family members, closest friends, and next-door neighbors are having a hard time managing their debt, too. They just aren’t talking about it. Why? For the same two reasons you avoid the topic: shame and denial.

The twin forces of shame and denial work together to sabotage your success and make it all but impossible to honor one big debt you owe yourself. Honesty. Since shame makes us so uncomfortable, most of us will do anything we can to avoid it—like performing complex mental gymnastics to deny that we have a debt problem.

I once had a client who built an impressive house of cards to delude himself. He was balancing three business loans, 14 credit cards, five personal loans, a mortgage, and a home equity line of credit to manage his household and business expenses. On paper, he had ample income to pay down his debts, but he could never get ahead. One day I realized the real problem: He wasn’t showing me his new spending. His convoluted financial structure had allowed him to keep adding new debt without admitting he had a problem.

I know personally how painful it can be to admit that you are in the hole, but once you’ve taken that step, you start moving toward the light at the end of the tunnel.

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2. Become mindful of the difference between needs and wants.

It doesn’t matter if you’re living high on the hog or close to the bone. There is really only one source of debt: spending. And all of our spending can be broken down into just two categories:

  1. Needs like food, shelter, medical emergencies, household repairs, gas, etc.
  2. Wants like new experiences, luxury goods and services, the mindless acquisition of things, etc.

The distinction can be tricky since our wants often overlap with our needs. For example, you may need to borrow money to pay for your college education, but that school sweatshirt you picked up when you were buying your books does not qualify as a need. You may need a car get to work, but do you need to drive a new entry-level Lexus when a used Toyota can do the job? Nope.

If you’re trying to eliminate debt, be mindful of your needs and keep your wants in check. No college sweatshirts. No Lexus. No overlaps.

3. Change your spending habits.

The first law of holes states: "If you find yourself in a hole, stop digging." Spending creates debt, so if you are in debt, stop spending.

I recognize that this can be really hard to do, especially if you haven’t yet cut up your credit cards or canceled your Amazon Prime account. But each of us can take conscious steps to live more cheaply. Google "simplify your life" and "minimalism," and you will find countless examples of life-cost reduction strategies. Not all of them will work for you, but some of them will. Want to be debt-free? Learn how to stop spending.

Tracking where your dollars go can also be tremendously helpful. Buy a mini spiral-bound notebook and write down every single penny you spend during the next month. I am certain you’ll identify plenty of "needs" that actually belong in the wants category. Once you’ve documented your financial behavior in black and white, you’ll find it easier to change your spending habits.

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4. Create a debt reduction plan...and follow it!

When you’ve mastered these first three steps, you’re ready to tackle your debt.

Start by gathering the most recent statements for each of your debts and create a one-page debt review that looks like this:

TOTAL:

1. Use the "Order" box to determine which debt you’ll pay off first, starting with your No. 1 highest interest rate and working your way down.

2. Next TOTAL your monthly payments. This total is the amount you will pay every single month until you have knocked out ALL your high-interest debt—anything over 9 percent. From now on, make minimum payments on everything except your No. 1 highest interest rate debt. Any extra money remaining after covering your monthly needs (not wants!) should go toward this No. 1 debt.

3. Once you’ve paid off this first debt, direct your extra money to the next highest interest rate debt without reducing your total monthly payments. The money you no longer need to pay off the No. 1 debt can now be applied to the No. 2 debt. Repeat this process until you have conquered every one of your high-interest debts. Then celebrate your success by saving for something you really want!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations to any individual. All investing involves risk, including possible loss of principal. For your individual planning and investing needs, please see your investment professional.

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