After many years of looking at overwhelming balances on my credit card statements, it was one heck of a feeling when I saw all of those balances finally at zero. That’s right — I got myself out of debt!
Well, okay, I still have a bit of low-interest student loan debt, but the kind of debt I’m talking about here is high-interest credit card debt, or what I used to affectionately call it, the perpetual black cloud over my head. And just as a point of reference, at my worst, my credit card debt was nearly 20 percent of my income.
If you’re like most Americans, chances are you carry a bit of credit card debt as well. In fact, according to Bankrate, the average American carries more than $8,000 in credit card debt . Yikes! Here’s another scary stat: the typical credit card purchase costs 112 percent more than that same purchase in cash because of pesky interest charges (coupled with the amount of time it often takes to pay off balances). In other words, that $1,000 computer you charged years ago — which, incidentally, is now obsolete — ultimately, and in actuality, cost you $2,120.
It doesn’t matter how you accumulated your debt — it may have been unavoidable circumstances, or maybe you were just ignorantly frivolous — what does matter is that you get out of debt now. I mean it.
Don’t fret, I’m going to share with you how I got out of debt in the hopes that what worked for me will help others who are sick of carrying that black cloud over their heads:
1) Create a budget. You’ve probably heard it before, but often times, people find themselves wallowing in debt because they simply aren’t aware of, or lose track of how much they actually spend. Your budget doesn’t have to be a formula-entrenched spreadsheet, it simply needs to be some record of what’s coming in each month (or each paycheck), what’s going out and what’s left over. Seeing all this laid out in front of you will help you take control of your debt.
It helps to detail each expense as well. For instance, $100/month for cable, $300/month for miscellaneous expenses (that’s how I categorize my random daily expenses like lunches). Once you’ve listed out each expense (and don’t forget anything), calculate the difference between your income and your expenses to arrive at your leftover cash. And on a side note, when Quizzle launches (coming soon, I promise!), you can use the simple budget we’ve created to do all the calculations for you.
Another important point to make is that for miscellaneous expenses like I mention above, it’s a good idea to set a limit. For instance, I allowed myself $100/paycheck in miscellaneous expenses. Or for groceries, I budgeted $200/month. Don’t worry about how my numbers might compare to yours — my situation may be quite different. Just budget for yourself an amount that you think is realistic, yet also an amount that requires you to be conscientious about your spending (you’re likely going to have to make sacrifices). And of course, if you have no (or negative) available cash each month according to your budget, those limits need to be revisited ASAP.
2) Squeeze expenses. Some folks will get more out of this than others, but even finding an extra $30/month by downgrading your cable plan, for instance, can mean the difference of $360 in a year. I don’t know about you, but every extra dollar I could find really helped my situation.
So which expenses was I able to squeeze? As I mentioned above, I got quite a bit of extra cash out of downgrading my cable — $60/month to be exact. And frankly, I really didn’t miss the channels I opted out of. Another option is calling your cable company and asking if there are any promotions currently running for existing customers. You might be surprised by what you find. Or if you prefer the Web, try Fat Wallet, which has an entire community of users posting the latest deals on all sorts of things (including current promotions for cable companies).
I also saved an extra $10/month by calling my cell phone company and lowering the amount of minutes in my plan (minutes that I wasn’t using anyway).
On a daily basis, I tightened my belt on things like buying a cup of coffee in the morning. Instead, I made coffee myself, which saved me nearly $50/month (cup of joe @ $3/day, 5 days/week = $60; big tin of coffee for the month from the grocery store = $12). Another great saver is instead of grabbing lunch every day at a restaurant, I would stop by the nearest grocery store and pick up a deli item. That probably saved me $2/day. And sure, I could have just brown-bagged it, but I know myself well enough to realize that more often than not, I wouldn’t feel like making my lunch in the morning.
There are a bunch of ways you can squeeze your budget if you just look for them (and as per #1, have a budget to look at). Don’t think that just because you can save $10/month by switching from plan A to plan B, that it’s not worth it. Add up all those little savings and they might just amount to big savings at the end of the year, especially if you consider that those savings could translate in high interest you don’t have to pay because that extra cash is paying down your debt.
3) Pay VISA until it (almost) hurts. Or Mastercard, or Discover… you get the idea. After creating a budget, discovering where I needed to trim and then squeezing every expense I could, the savings I “enjoyed” all went to my credit card. It’s smart to leave yourself a cushion so you’re not bouncing checks or so you can cover that random expense that might pop up, but keep in mind, your first priority is paying down that debt. Let’s put it this way — every month, when I would write my check to VISA, I cringed a little about the amount I was sending them. On the flip side, because I was disciplined about it, those cringes are now huge, toothy smiles because I don’t have to write those checks anymore.
If you have a bunch of credit cards and aren’t sure what to pay first, a good rule of thumb is to pay down your highest-rate card first. Once you’ve paid that off, start putting the majority of your pay-down-your-debt money toward the next highest rate card, and so on. Just don’t forget to pay at least the minimum payment on each of your other credit cards as well.
An aside about rainy day funds: Most financial experts will recommend that you have 3-9 months income saved up for an emergency. Don’t underestimate the importance of this, especially if you own a home. I’m a single female who currently rents, so I opted to forgo the rainy day fund for a short time so I could pay down my debt. I wouldn’t necessarily recommend this to others, however. I was probably lucky in that I didn’t encounter any huge unexpected expenses. Sure, there were a few car repairs, but I paid for those with my credit card anyway, which just made my plight longer and more painful.
4) Stick with It and Be Patient. I know it can be hard to skip that dinner with friends because you’re squeezing your budget, or opt against that $5 cappucino even though your pounding headache indicates you need caffeine badly, but I promise — you’re way better off economizing (and yes, maybe even suffering a tad) for a temporary stint, than spending the rest of your days in credit card hell. And trust me, if you’ve racked up quite a bit of debt, you’ll likely be paying down that balance (plus an insane amount of interest) for a long time unless and until you dedicate yourself to getting out debt now. No excuses! I’ve probably used them all.
Did anyone ever tell you that patience is a virtue? Well, it also may be the only thing to prevent you from tearing out your hair because you’ve scrimped and saved for a year and your credit card balance has only dropped $1,000. Depending on your situation, it may take some time to get rid of your debt once-and-for-all. From my highest balance, it probably took me two and a half years to finally get to zero. Although, I should mention that when I really got serious about paying down my debt — very rarely indulging and leading a fairly boring life at home — I made major strides in just six months.
Point is, if it takes you one year or five years, that’s a whole lot better than a lifetime of debt, isn’t it? So be patient!
5) Once You’re Out, Don’t Get Pulled Back In. When you’ve managed to successfully erase your debt balance, stop using your credit cards unless you can pay them off each and every month! Build up a surplus of cash and pay for things the way they did in the old days — with money you actually have! A wise financial nerd once told me that if you have to pay for it with credit cards, you can’t afford it in the first place. It’s true. Accept it.
I’ll leave you with this: Ridding yourself of debt can be a tough run, but if you can suck it up for the short-term, you can enjoy freedom from debt later. And take it from me, the freedom is absolutely wonderful!