First things first: being in debt doesn’t have to prevent you from enjoying your life to the fullest. If you have debt, stop worrying and start fixing. Most Americans are in debt in some form or another. The people who own the biggest house in your neighborhood with fancy cars in the driveway are probably in debt. A mortgage is a debt, car payments are debts, student loans (ughhhh) are debts. Of course, you will have more opportunity to accumulate wealth once that debt is gone and that is obviously the end goal, but don’t let your debt steal your motivation.
- The very first thing you should do when tackling your debt is take inventory. Sit down with your laptop, a notebook, any statements you have and get to work. You cannot possibly know where you stand without starting here. We recommend creating a spreadsheet (we like Google Drive so you can access it from anywhere, update it anytime, and easily share with a partner or parent) and updating it at least quarterly to ensure that your net worth is going up. If you have significant debt, that’s the priority right now. We also add a row for credit score, so we can watch that go up, too. Seeing it all in front of you will give you pride and make you want to keep going! Sharing with your significant other or a sibling can help with accountability; encourage them to do this with you. You can put both assets and debts in one column, marking debts as negative numbers. Keep in mind that although your savings might not be growing while working on shrinking debt, your net worth is:
Description Value on 01/01/16 Value on 04/01/16 Value on 07/01/2016 Student Loans -$4,566 -$4,166 -$3,766 Car Loan -$9,500 -$9,399 -$9,399 Car Retail Value $11,633 $11,620 $11,600 Checking Account $1,200 $1,000 $800 Savings Account $3,000 $3,300 $1100 Visa Credit Card -$2,600 -$2,200 0 Net Worth -$833 $155 $335 Credit Score 690 692 720
You’ll see that the row titled, “Net Worth” shows an increase each quarter. Measure success here. In the last column, you can see that this person finally bit the bullet and paid off their Visa with their savings and their credit score went up. Now, this won’t get you out of debt on its own. However, seeing it on a chart in black and white will encourage you to continue improving. Think of it as a game – make sure that your net worth never goes down. If you continue to spend more than you earn your net worth will only decrease. Keep track!
- Things you may already know, but are worth repeating: pay off balances with the highest interest rates first. This will save you hundreds if not thousands of dollars in the long run. Chip away little by little and be patient. If one credit card has an interest rate of 18% and the other only 8%, pay off the 18% card first (while still making minimum payments to the lower interest card, too). Then when continuing to spend, try to use your debit card first and only the lower interest rate card if necessary. Never justify using a credit card for the sake of points alone. It’s not worth it.
- Don’t spend money you don’t have. You’ve heard it a hundred times: “live below your means”. We can’t stress this enough. Everyone wants to live in a nice apartment and eat out on Fridays, go to the movies, and buy a new outfit for every occasion, but be realistic! You have to decide if those jeans and a $12 bag of popcorn are more important to you than the feeling that comes with being debt free. If you can muster up the willpower to scale back for a year or two, it will pay off. Downsize or get a roommate to reduce rent, go grocery shopping and cook at home, don’t go shopping! Every dollar adds up. Just because those shoes are on sale, does not mean that you should buy them. And stop thinking of going to the mall as “something to do”. It will kill your get-out-of-debt plan.
- Set up auto payments for any debt you have that is at least slightly higher than the minimum due. You can always make an extra payment in between: after you get your tax return, get a bonus, birthday money, etc.. Once your debt is gone you can start building wealth. Next, set up an account that you do not touch. Transfer money automatically from your checking account into this savings account every week. $50.00 a week for 52 weeks = $2,600. I bet you won’t even notice it’s gone! The more difficult you make it to access this money, the less likely you are to dip into it. Many of our clients keep their savings in a cash brokerage account under our management. Each time they need a withdrawal, they have to tell us. (They hate doing that).
- If you have a 401(k) through work, make sure you are contributing at least enough to take full advantage of your employer’s match. This is a great way to increase your net worth while saving for your retirement. You do want to retire someday, right? If they match 50% of up to 6% that you contribute, that’s 3% of your paycheck that they are literally giving to you. But, you have to be willing to save. Most employers don’t add contributions to your 401(k) unless you do. To find out what your match is, call HR or the plan provider and ask. You can also hire a financial advisor to help with this. We do this for our clients as a courtesy. Or use the advisor assigned to your 401(k). Even though you may not know who they are, they work for you! Put him/her to work.
You can do this! Be patient and remember that debt won’t kill you. It’s okay to have a negative net worth temporarily, just make sure that each month that number is moving closer and closer to a positive number. Don’t forget: you are not alone! The key is to constantly strive for a higher net worth and a higher credit score so that you can continue to upgrade over the course of your life. Spend less money than you are taking in and your debt will shrink or at the very least, not continue to grow. Small changes now mean big results for your future.