7 Steps to Getting to Debt-Free
Posted by Gail | Filed under Debt Traps, Take Control
There’s no magic to getting to debt-free. It takes discipline and determination. And it’s hard work. It might have been easy to spend your way into a hole – cachunk cachunk – but digging back out won’t be the same walk in the mall!
1. Take stock of your debt situation: Make a list of all the places to which you owe money, except for your mortgage, unless you’ve consolidated consumer debt in your mortgage. If so, then add the amount you consolidated to your list.
2. Prioritize your debt: List what you owe by interest rate with the most expensive (the highest rate) at the top of the list. This is the order in which you’ll pay off the debt.
3. Calculate the minimum payment on each debt. That’s what you HAVE to pay to keep current and not bruise your credit history. Write the minimum payments beside each debt, add them up, and that’s the least you can put toward your debt every month.
4. Figure out how much to repay to get out of the hole: If you owe $2,500 on your credit card at 18% and you want that credit card debt gone in six months, you already know it’s going to cost you $37.50 a month in interest. But if you want to get that credit card paid off in six months, you’re going to have to slap about $417 a month against the principle to make it go away. That’s a total of $454.50 a month you’ll have to come up with to make the credit card debt disappear in six months or less. Once you’ve paid off the credit card, you can use the $454.50 you were using to pay it off for your next most expensive debt. That’s called snowballing..
5. Decide where you’re going to get the money: If you want to be debt free, you have to find the money to pay off the debt. It may mean going over your budget with a paring knife. It may mean finding a way to make more money. You’ll do whatever it takes.
6. Make your debt repayments automatic: Set up an auto pay for each debt you’re working to pay off, taking the guess work out of it, and making a firm commitment to the process. Initially you’ll pay the minimum required on all the debt. On your most expensive debt, you’ll auto pay the amount you came up with to have the debt gone by your Debt Freedom Day.
7. Chart your progress: Create a chart that shows how much you owe. You can use boxes or a thermometer graphic. Whatever works for you. Each time your auto pay goes through, colour in one of your boxes, or move your marker up the thermometer so you can see the progress you’re making.
February 28, 2012 at 6:50 am
Yup – it works. Do a reality check of where you are right now – all the nitty gritty details…set some (or one) specific concrete goal – break it down to baby steps – chip away at it and give yourself lots of rewards (frugal ones like ‘pep talks’ a night off doing cleaning, etc.) as you make your progress (you need encouragement to stay the course)…and you will get there. It works.
We’ve shaved off 7.5 yrs of mortgage payments, paid off our line of credit and one kids’ out of province university costs….having made sacrifices along the way to get there (e.g. down to one car, no more cleaners or cable TV, no fancy cell phone, 2nd hand or very on sale clothes, fix things ourselves, etc.). The pay off? Financial freedom!
February 28, 2012 at 7:41 am
I like the chart idea! It is something that I have to get into. During a FB chat I was talking to aother Gail fan and she had this amazing jar system for tracking debt that also sounds really pretty. Here is what she said just incase she doesn’t post today:
I got your message from the FB chat. I bought two glass jars from the dollar store and also some coloured stones. The decorative kind they sell. I bought 3 different colours. For example the blue are $100 of debt, the green are $500 of debt and the white are $1000 of debt. I added up how much debt we had (aaaaaaaaaaaahhh!) and put that representation in stones into the “owe” jar. Now when we make a payment I move over a stone (of the right amount, $100, $500, or $1000) to the “paid jar. But, you need to be sure you know how much of the principal is being paid in each payment. For example, we pay $271 every other week on you line of credit but only $190 of that comes off the principal, the rest is interest. So I add a $10 payment and move two of the blue ($100) stones to the “paid” jar.
I hope this makes sense! I would love to hear how you are doing with it!
I think I am going to try and get this on the go this weekend. I need the visuals!! And this way it looks like a pretty display instead of a chart on the wall that will freak out my mom!
February 28, 2012 at 7:57 am
I think the biggest mistake people make when paying off debt, is finding excuses that they can’t. Sure, they start off fine, but, Murphy’s law, disaster strikes, an emergency happens, and they feel discouraged. Who wouldn’t? But rather than find more ways to trim, cut back, or make more money, many seem to just “give up”. I have a friend that piles debt on top of debt, because emergencies come up. But some of those “emergencies” could be handled later. ie: a broken dishwasher. Sure, I replaced mine right away, but we can afford to (although I hated spending the money to do so). She could not afford to. And there’s only 2-3 people living at their house.
Just hang in there! There will be light at the end, but if you don’t travel the road, you’ll never get to where you want to be.
February 28, 2012 at 8:10 am
That jar idea sounds lovely! I always use thermometers and fill them in as we pay debt off. We have one last non-mortgage debt and then we’ll start taking chunks of the mortgage off along with beefing up our retirement savings. I blogged about our goals for this year here: http://preservingpennies.com/?p=135
February 28, 2012 at 8:37 am
We paid off all of our consumer debt last year and now we are working on our mortgage. We have less than 2 years to go. Last time we renewed the mortgage I calculated how many payments we had to make and put that many pennies in a jar. Every time we make a payment (every two weeks) I take one penny out. It is really exciting to see the jar getting empty.
February 28, 2012 at 9:18 am
We only have our mortgage left to track. Our normal payments automatically go out every two weeks, and the amount we pay has been increased to the next even hundred above what the payment is required to be. In addition, we skim off all the excess in our account (above ~$1K) every week. It goes to either extra mortgage payments, TFSAs or RRSPs. I track the decreasing balance on the mortgage with an Excel graph. I could make a wall chart I guess, but since I’m playing with the spreadsheet every few days it’s just easier to have the chart linked to the data.
February 28, 2012 at 11:38 am
I’m doing this now. I don’t have a lot of “consumer” debt, but I had to borrow more than I’m comfortable with, to fix water issues in my house. The bank wanted me to roll that loan into my mortgage, but I’d rather pay it off. So, for the next two and a half years, $200/week will be withdrawn from my bank account. Then, if I can keep that up, I’m going to apply that same amount to my mortgage and I’ll be completely debt free in 7 years.
February 28, 2012 at 12:47 pm
Last year I did a “Spending Audit” a l’a Gail and went over every single receipt, credit card statement etc for the previous 6 months. It took many many many hours but was a real eye opener. In order to pare down, and pay off you need to know where you are spending your money.
I was shocked to realize that we spend over $1200 a year on Books. And that is with over half of them being bought cheaply at Goodwill or garage sales. We now go to the library where its free.
We would spend hundreds of dollars each year on shampoos, conditioners, hair treatments, body lotions etc. and get Bored with the product halfway through, and start another.
We now have a Finish it rule, that involves watering it down as you get near the bottom. These products work just as well (they are mostly water anyway) and they last longer. We don’t have half bottles leftover, and have more room in our cupboard.
Knowing where we were spending makes it easier to cut back. Those savings are now going towards paying off the debt.
My next move? I’m switching to Magic jack for my phone and then Teksavvy for my internet.
Anyone have any experience (good or bad) with these services?
Please let me know.
February 28, 2012 at 1:25 pm
Step #1 is definitely the most crucial, I think you’ve done half of the work when you stop being in denial and face the numbers.
February 28, 2012 at 1:54 pm
Sylvia I tried the Magicjack and I had nothing but trouble with it. Being on a fixed income I need to save money anywhere I can so I bought the Magicjack Plus so I could use it anytime and didn’t need the computer to be on to use it. When I got it home I found out that I needed a different modem for it since my modem didn’t have enough ports to handle it. I bought a new modem, hooked it up like shown still didn’t work ( no dial tone ). I googled “how to hook up and what modem is best” for the magicjack. Most of the answers were for a different modem, so I went and bought that modem. Had my son hook it up for me still didn’t work, same problem no dial tone. We tried hooking it up all kind of ways and still could not get it to work. It worked great when hooked directly to the computer but once u turn the computer off the phone is off, so if u have an emergency and need to call 911 to have to turn on ur PC then wait while the magicjack turns on, I took it back and my son put me on his Att family plan now I have Free phone service for life
February 28, 2012 at 2:34 pm
@Sylvia – I have just converted over to Teksavvy for cable internet and MagicJack Plus for home phone. Both are working flawlessly for me. The internet is such an improvement and has given me so much more allowable download capacity than I previously had with Robbers that I’ve cancelled my cable TV outright (saving $90/month) and am just watching all my TV content as streaming video over the internet.
February 28, 2012 at 4:28 pm
An important thing for me with our debt replayment plan is two part…
1) Don’t let those unexpected things throw off the progress we are making.
2) Learn from the above to prevent them from happening again.
I keep a notebook with notes about things I have forgotten. My daughters skating carnival is a perfect example. Last year, I wasn’t prepared for the cost of costumes, pictures, tickets for the event etc. By making a note in my little notebook (under Feb 2011) I was prepared this year for the extra costs and had the money in the bank. I adjusted my “kids” savings account (which I re-evaluate every three months) and was not scrambling to find the money.
What it also meant was my debt repayment was thrown off by a month. So I worked extra hours when I could get them, and put that extra on the debt to bring it back to where I was suppose to be. It took me two months to get it back on track, but not only did I manage that, I was able to get it AHEAD of schedule.
February 28, 2012 at 9:02 pm
I don’t keep a chart/graph of the debt I’ve paid off, but i do keep a list of numbers, writing down what my new balance is each week. It’s nice to see them disappear. I also keep all my paper’s that say 0 balance right in plain view so that i know I’m doing well. I’ve got 2 bills gone, 2 will be done in may, then only 2 left. My debt freedom day is Dec 25/2012 (It’s the only gift i want this year)
February 29, 2012 at 1:21 pm
Kate, thanks for your feedback on your experience with the MagicJackPlus. I am sorry that you had such a crappy experience, and happy that your son put you on his ATT family plan.
I have already bought the unit so I will give it a try. No matter what, the high amount I pay right now for Phone, Internet and Satellite has to be reduced.
Chant101, thanks for your feedback. I am glad that MagicJack and Teksavvy are working for you. I will try both and hope that I have the same positive experience as you do. With streaming video on the internet and all the DVD’s we own, why the heck am I paying for Satellite?
Thanks for waking me up
March 1, 2012 at 12:31 am
Double your payments! Of course since you will be just getting, or working on getting out of debt you probably can’t do this for each card you have, but when you can you should! In addition to the automatic payment that you have set up, make an additional payment each billing cycle. By doing this you will save a tremendous amount of money that you would otherwise be paying in interest charges..just a thought!
March 2, 2012 at 10:41 pm
This was a great and timely post…. I finally bought “Debt Free Forever” and read it cover to cover. I have been able to negotiate a debt in collections down by 65% and took Gail’s advice and told them that I wouldn’t sign anything that required me to send post dated checks unless I have it in writing that they won’t cash them until the due date, and will not sign if it says “settled for less than amount owed” because they proposed the amount to me…. not the other way around.
The last year has been tough…. I lost my job, thankfully have two pensions but had to work like a banshee to get the second one started, and got a job in retail doing something I love but it paid crapola…. now employed in a great job, great pay, and my debt is less than half what it was a year ago. I chart everything in a separate notebook…. I find seeing tangible results gives me a perverse sense of pleasure!
I don’t own a vehicle, due to a nasty divorce my credit was ruined and I have made due with public transit for 10 years. I’m okay with that, but since I do live well within my means now, am paying off my consumer debt, saving for my emergency fund and am about to re start contributions to my RRSP (for the tax returns, I really won’t need the money in retirement!) and pay my bills on time and in full now, my credit score is slowly creeping up, I will have nothing in collections and no consumer debt in 12 months!! So, my little “reward” is to have a jar in which I put $50 per pay period into to start saving for a vehicle. Once my debt is paid, I will split that money between backfilling my RRSP, making sure my emergency fund is at least 8 months worth, paying off my mortgage and socking more money in my truck fund….
Digging yourself out of a hole takes a lot of hard work…. all the steps are hard, starting with figuring out what you owe, how to pay it off, and how not to go insane or sink into a depressive funk thinking it will never go away. Every bill paid, every chunk of debt paid off is a small victory in my world! When I see and hear some of the horror stories of people I know who live on credit, don’t see a way out and rely on payday loans, I thank God my parents taught me some sense, even though it took a while to sink in….
March 3, 2012 at 8:46 am
I really liked your post. These actions help to manage our debt problem. I would include an additional aspect. I think it’s important to promote a culture of savings. In the long term, as individuals and society we will benefit from this type of cultures.
March 4, 2012 at 7:58 pm
Re: Sylvia
We also use magicjack (not plus, the older version) and I use a small, low power computer to run it so it on all the time. Works great, although a few times in the evening we had people tell us that they weren’t able to get through … perhaps this was due to high volume on MJ servers. Haven’t had any issues for the past 6 months. Also, if you go for the canadian number, the $10 fee is charged each year (even if you go for the 5 year plan like I did)
Gail, love your show, we watch it every day.
March 10, 2012 at 1:59 pm
[...] 7 Steps to Getting Debt-Free [...]
April 30, 2012 at 8:03 am
word which says “link.” this is a…
helpful button where you can have your traffic click on a blue highlighted word, or sentence that you have directed to go to another one of your blog posts. make certain that the blog posts relate to each other. you can…
May 9, 2012 at 10:31 am
prefer adam sandler or steve martin, and…
others will find all of these people funny. be sure to think about your intended audience and try not to alienate anyone with your humor. for the beginning humor writer, avoiding religion, gender, race, and politics might be the best way…
November 24, 2012 at 8:50 pm
[...] Vaz-Oxlade gives us a useful list with 7 Steps to Getting out of Debt (you could of course cheat and at step ZERO, don’t get into [...]