Who doesn’t want to get out of debt? Debt comes from many sources for both individuals and families. Some are unavoidable, such as managing medical emergencies and family crises. All too often, though, the reason people find themselves in debt is that they simply didn’t manage their money well. They overspent, overindulged, and lived outside their means for so long that their debt started to add up in a big way. Since they were already doing such a poor job of keeping track of their financial situation, they likely didn’t even notice until it was too late.
Unfortunately, we can’t go back in time, look ourselves in the eye, and tell ourselves to put the credit card away.
What we can do, though, is make a resolution to ourselves.
“Today’s the day,” we might say. “Today’s the day I get smart about managing my money and start to get myself out of debt.”
If that sounds like something you’re ready for, then this article’s for you. We’re going to break down the optimal way to learn to manage your money and get yourself out of debt for good.
First: Understand how you got into debt in the first place
Assuming you didn’t enter debt due to some unforeseen tragedy, racking up your debt was a conscious decision that you made. Of course, you weren’t thinking at the time that your main goal was to wreck your finances and take on an enormous monetary burden. You were thinking about the things you wanted. Here are a few common ways that people get into debt without realizing that they’re doing it.
No budget and no plan
It’s a cliché thing to say, but it’s true: proper planning prevents poor performance. Planning our spending and saving forces us to develop a structure for how we handle our money and identify any deficiencies or liabilities in how we spend it.
More than that, it forces us to articulate our financial goals and vision for the future. Do you want to save up enough money that you could quit your job and follow your dreams without immediate financial repercussions? Do you need to buy a new car or a new house? Would you like to send your kids to college without saddling them and yourself with a ton of debt? These things don’t happen overnight, and all of them require proper planning to make into reality.
People who get into debt often have no plan. They aren’t thinking past the present. They just see things that they want and use credit to get them. They know they’ll have to pay those purchases off at some point, but it’s easy to ignore because the money doesn’t come immediately out of their account. It’s also easy to forget about interest. That $50 pair of shoes you put on your credit card didn’t seem like a life-changing expense when you charged it, but when it started to compound interest, it became a real burden.
Overly concerned with other people’s spending
While most of us like to think that we don’t base our lives around material things, for many of us, that couldn’t be further from the truth. We want the latest technology, the newest fashion, and the best night on the town possible. When we don’t have those things, we feel the pain of missing out.
We feel that pain more acutely when we see other people in our lives with new things. It’s one thing not to have the newest smartphone; it’s another thing to not have it and then see a co-worker pull it out of his or her pocket the day it comes out.
This impulse to keep up with the people around you is natural and understandable. Who wants to remain behind while others move forward?
However, when you turn to buying on credit to afford a lifestyle that, in reality, is far outside your means, it can lead to huge problems with debt and spending that you need to reel in before it’s too late.
No financial discipline
“Financial discipline” simply means that you can tell yourself no. This type of discipline isn’t limited to spending on credit; it’s a quality that smart managers of money share no matter how much or how little debt they have.
Imagine you have $100 left over at the end of the month. You aren’t sure what to do with it. You’ve just started a savings account, and your goal is to build up a safety net of at least $1,000 so you have at least a little bit of financial security.
All month, you’ve wanted to find a night to take your significant other out to a fancy dinner at a new restaurant downtown. You know that you’ve both been working hard; you deserve a night to unwind.
If you decide to put that money into your savings account rather than spend it on the town, then you have financial discipline. That’s not to say you have to deny yourself of anything fun; you just have to be smart about it and weigh what you can afford while still meeting your savings goals.
Financial discipline seems easy on paper, but it’s extraordinarily difficult to practice in real life. No matter how good your intentions to make smart decisions about your money might be, you can always find exceptions to your financial rules if you’re looking for them.
Now that you’ve confronted the reasons you got into debt, you have a choice: stop doing these things and get back on track, or keep doing them and risk mortgaging your future.
We’re going to assume you’re ready to stop. However, the biggest question remains. Now that you’re no longer digging a deeper hole, where do you go from here?
How to manage your money when you’re in debt
Those in debt often curl up into a ball and just hope the mass of creditors leaves them alone. Obviously, this accomplishes nothing. There are some hard truths to face and tough decisions to make.
Know how much debt you’re in
Fear is a common emotion for people in debt. You’re afraid of answering the phone in fear that it will be a debt collector calling to harass you. You’re afraid to open your mail in fear that it will be a threatening letter from one of your creditors.
Worst of all, you’re afraid to look at the statements you get from your creditors and face up to how much debt you actually owe.
Take a deep breath. It’s going to be difficult to get through, but we need to figure out how much debt you’re in if you really want to get a handle on your finances.
Sure, you probably know your minimum payments and your payment deadlines like the back of your hand. Maybe you see them in your nightmares. However, if you don’t know the sum total of your debt, whom you owe it to, and what your interest rates are, then you don’t really know much about your finances.
Over the coming month, you need to gather up all the statements you get in the mail from your creditors. Log in to any payment portals you have access to in order to get the most up-to-date picture of your debt.
Log all of that info into a spreadsheet in Microsoft Excel, Google Sheets, or another equivalent program. If you’re not computer-savvy, you can do this on paper, but it’s going to be much harder to update numbers and make calculations.
Tally up the total amount you owe to your creditors. Then, excluding any long-term debt you might owe (such as a mortgage), divide that number by 36.
That, roughly, is how much you’d have to pay per month to get out of debt in three years. It might seem like an impossible number, but it’s something to work toward, and it’s definitely good to know.
Tally up your minimum payments per month as well, just to get a sense of how much you’re paying now. While you’re most likely aware of how much your minimum payments are each month, seeing all those payments lumped together can be an eye-opening experience. After all, imagine if you weren’t in debt. You’d have all that money to save (or spend), free and clear.
Know your budget
Now that you know how much you owe and how much you’re paying, you can intelligently create a spending plan and a budget to manage your finances wisely. This is how you begin to make meaningful progress toward paying off your pile of debt.
First, figure out your monthly income. If you’re on salary at a stable job, then this part is easy. You know exactly how much you make each month as a baseline.
Hourly employment is a bit trickier, since you may not be able to predict exactly how many hours you’ll be scheduled for each month, or if you’ll be able to add shifts during the month. Still, you should have an idea of how much you make each month. Start there.
Then, figure out your essential expenses. Things such as rent, car payments, insurance payments, utility bills, and groceries are all essential expenses since they’re necessary for day-to-day living. Some of these bills (such as gas for your car) may be variable each month, so make intelligent guesses as to how much they’ll be to give yourself a baseline. You can always adjust later on.
It’s also a good idea to set aside a small budget at this point for non-essential things, such as recreation and entertainment. You’re only human, after all, and you’re going to want to be able to buy yourself a coffee or treat yourself to dinner occasionally. Building a small budget for these types of things helps you set limits on your spending and anticipate them instead of treating them like exceptions.
Finally, compare all of these numbers against how much you need to pay each month to cover your minimum payments for your debt. Whatever you have left over is money that you should save or, preferably, use to pay down your debts.
Know your debt payment options
Ideally, after planning your budget, you’ll have enough money left over each month to make a real dent in your overall debt. By paying above your minimum payment every month, you’ll actually make progress towards becoming debt-free instead of merely keeping up with interest charges.
If you don’t have enough money left over each month to make meaningful progress, then you still have options.
On one hand, you could find ways to earn more money. You could take on a second job or push for a promotion at work, boosting your income and making it easier to bolster your finances.
On the other hand, you could seek some kind of help or relief for your debt. Plenty of options exist for individuals who need help paying off their debts. One of the most popular is debt consolidation.
With debt consolidation, you take all of your debt and consolidate it into a single, easier-to-manage monthly payment. Not only do you now only have one payment to keep track of each month, but you also might pay less each month than you would pay via your former minimum payments combined. In addition, the interest rate on your debt consolidation package will likely be more forgiving than the interest rates on your previous debt were, so you’ll save money over time as less interest compounds each month.