Being in debt is a condition with which many (if not most) Americans are familiar. At some point we are all faced with the allure of credit. We find something we want, and rightly so – an education, a car, a home, a nice television – but we don’t have the money to purchase it upfront. Creditors loan us that money, and we get what we want – along with an obligation to repay those creditors, and hopefully fast, because otherwise we will also pay obscene amounts for more time before we pay them back.
If you’re anything like my husband and I once were, we took debt for granted as a normal part of life. We each brought our own debt into the marriage – credit card debt, school loans, a car payment, even payments on oral surgery. We planned to buy a house soon after our wedding and tack a mortgage onto our grand debt total. At first, we paid a little above and beyond on the high-interest credit card debt and continued to make the minimum payments on the rest of the debt. We have good paying jobs, so we thought little of going out to eat whenever we wanted, planning vacations, and in general living a carefree lifestyle. We talked about the importance of paying off our credit card debt but didn’t have much of a plan or a time frame.
That is, until my husband discovered a book called The Total Money Makeover by Dave Ramsey. This book reshaped our attitude about debt, as well as our money management strategy. The motto of the book is to “live like no one else so that later, you can live like no one else.” In other words, live below your means and aggressively attack your debt so that you can soon be freed from creditors. Once we took Dave Ramsey up on his challenge, my husband and I realized that if we practiced discipline and put our minds to it, we could be completely debt-free much sooner than we had ever imagined.
If this sounds appealing to you (which I imagine it should!), here are five tips for getting out of debt and staying out. These are a summary of lessons I have learned from Dave Ramsey. Remember, this will take a lot of dedication, perseverance, and sacrifice on the part of every financial contributor in a family… but in the end, getting out of debt will make everything worth it, and you will likely grow closer to one another through the process.
1. Make a budget… and stick to it. My husband and I used to pay our bills, spend our money, and keep an eye on our bank account total to maintain a general idea of how much we had available to us, but we never took the time to inventory how much we expected to bring in and how we hoped to spend it. Now, everything is mapped out and tracked in a budget.
To get out of debt, create a thorough, realistic budget each month in a program like Excel or Quicken, and take the time to update it with each of your transactions at the end of each day. I have a column for expected income and expenses, actual income and expenses, the difference between the two, transaction amounts and descriptions, and the expected amount owed for each category and/or line item. If you are in a relationship with shared finances, make sure both people are clear about the budget each month, involved with the process of planning and updating it, and holding each other accountable to sticking to the budget.
2. Sacrifice now so you can spend later. Before we started taking control of our finances, my husband and I realized our birthdays were coming up. To celebrate, we chose to visit my brother in New York City. I compared how much money we had in our bank account to our bills and anticipated income, and decided we could afford to buy our $400 worth of airfare. This mentality failed us in the long run. Sure, it was a fun trip, but that $400 could have gone toward debt that month and gotten us out of debt that much quicker.
If you want to get out of debt, it’s not about what you can afford based upon the total amount in your checking account. It’s about what you can afford compared to the amount of debt you have and how quickly you would like to pay it off. This may mean cutting down your dinners out, downsizing your cable package, taking public transportation instead of buying gasoline, renting a little longer than you hoped, or taking a local day trip instead of a longer vacation. The quicker you get out of debt, the sooner you will then be able to make larger purchases without increasing your total interest owed.
3. Use all of your extra income to make payments on your debt. My husband and I thought we were doing the best thing possible when we used our extra money at the end of the month to feed our savings account. It finally clicked that having a lot of savings in a low-interest savings account while continuing to rack up interest owed on our debt was not doing us any favors.
To get out of debt, Dave Ramsey has a method called the “debt snowball.” He instructs his followers to apply all of their extra money to one debt each month while continuing to make minimum payments on their other debts. (This is after having set aside $1,000 for an emergency fund.) You might pay off your debts in order of size or interest rates. I have our Excel budget set to automatically calculate how much we will be able to pay toward our credit card debt at the end of every month, based on our income, our actual transactions, and our outstanding expenses for the rest of the month. This way, each time we spend less or more than what we budgeted, we can see how it positively or negatively impacts the amount we will be able to pay toward debt.
4. Do something on the side to make extra money. My husband and I have good jobs with very reasonable incomes. While we could easily live on our salaries alone, we realize that doing so would not be using all the resources at our disposal to get out of debt as quickly as possible. I write for Associated Content to add to our income. He is an eBay seller. Together, we are able to supplement our income to help us achieve our goals more quickly.
If you are trying to get out of debt, don’t settle for whatever income your job has assigned you. Take other opportunities to make extra money. Have a garage sale, babysit, pick up a weekend waitressing job, sell your typing services… even saving your change in a jar can help. If you have children who are of working age, encourage them to contribute a portion of their income toward the family debt, so you can then help them out more with their future expenses. There are lots of ways to make a little extra income, and when you are trying to get out of debt, every dollar counts!
5. Don’t buy anything else on credit. My husband would love to have a new car. We could easily afford to add another car payment on, based on our income minus our bills. However, tacking another car payment onto our monthly expenses would drastically increase the amount of time we are still in debt, as well as increase the amount of money we have spent on interest. Instead, he is driving his 1998 Buick until it dies, and then he will purchase a newer used car outright when the time comes.
To get out of debt, you should not take on more debt. Get rid of your credit cards and use cash or debit cards. If you don’t have the money for a purchase upfront, then either don’t buy it, or wait until you have enough money to buy it, if at all possible (obviously, emergencies do come up). Of course this will take discipline and sacrifice, but again, once you are out of debt, you will be able to save your money to make large purchases without having to worry about accumulating interest owed.
Certainly there are a lot of individual circumstances that will help or hinder this process, such as income, family size, amount of debt, and life changes. Each person’s situation is different, and you should practice prudence when making your personal financial plan. If my husband and I find out I am pregnant, for example, we will resume making minimum payments on our debt in order to save for the baby.
Mortgages deserve special attention, as well. Ramsey places them last on the list of things to pay off for those who already have them. For those who don’t have them yet, he prefers the “100% down payment plan,” but would realistically recommend a fixed-rate 15-year mortgage with 20% down and the payments equaling no more than 25% of your take-home pay.
While he may not be the end-all be-all of financial advice, Dave Ramsey’s The Total Money Makeover did wonders to change our attitude about debt, and we are already seeing incredible results. Our debt is shrinking, and we are feeling more and more empowered. It may sound outlandish or impossible, but Dave Ramsey’s book is full of success stories of people who probably once thought the same. There is no time like the present to take control of your debt and make changes. If you want motivation, go back and take account of the amount of money you have already paid in interest – that is, the amount of money you have paid for time – and how much you will end up paying if you continue to make only minimum payments on your debt. Take a look at how much you would have paid for your car if you had bought it outright, compared to how much you are paying for your financed car. With a lot of perseverance, dedication, and sacrifice, you can begin to control your money instead of allowing it to controlling you.
Dave Ramsey. The Total Money Makeover.
See Also: 5 Ways to Save Money at Restaurants