How to Get Out of Debt

Here's a piece I wrote a couple years ago for a national magazine. Thought you'd enjoy it.

Debt is smothering Americans.  According to the Federal Reserve, Americans carry an average credit card debt of $8,000.  The average household owes $69,227 for their mortgage and $19,000 in consumer debt (a 41% increase since 1998).  In addition, personal bankruptcies have doubled in the past decade.  Americans are truly living beyond their means to repay and it’s showing up in the form of troubled marriages, increased medical problems, and stressed-out lives.

Getting free of the debt monster’s grasp will take some time and discipline, but everyone can take responsibility for their finances and live debt-free. This article will show you how.

Two Options

There are really only two sources to obtain the extra cash needed to reduce or eliminate debt:  spending less from your current income to create a surplus; and finding creative ways to bring in more income to apply towards the debt. 

Looking at Cash Flow

Before you can count on your cash flow to generate any cash, you need to know where you stand. This requires you to make a budget.  It doesn’t need to be complicated – even a simple listing of what you make versus what you spend each month can be surprisingly valuable. 

On one page, list all the money you receive monthly (or monthly average if you’re income varies) to determine your “Monthly Gross Income”.  Subtract from this your taxes, automatic deductions (insurance, retirement, etc.), and tithes to your church to get your “Net Income”. 

Next list all your monthly expenses – housing, utilities, food, transportation, clothing, medical, insurance, debts, entertainment, savings, charitable giving, and miscellaneous.  Record your average spending in each of these categories by reviewing your checkbook, bank statements, and receipts over the past three months. Remember to include things requiring annual payments, like insurance, additional taxes, or subscriptions.  Finally, track your cash spending for 30 days, adding every unaccounted-for penny to the proper category.  When finished, subtract your expenses from your Net Income to (hopefully) get a positive number.

If you find your monthly expenses are greater than your income, you’re not alone.  According to MSN MoneyCentral, 43% of American families spend more than they earn each year.  But never fear, you can get back to even – and even better – by evaluating your budget and taking some reasonable steps.  Here are a few ideas:

• Look at what you could do without.  Involve everyone in the family to “sacrifice” something to get the family debt-free.  Perhaps eliminate the expensive vacation this year, limit children’s camps or activities for a season, and make simple presents instead of buying them.  Work as a team to conquer the “debt monster” and build family unity instead of resentment.

• Cancel your cable. Turn off the TV and spend some time enjoying your family, friends, and the beauty of the world around you.  You’ll be surprised how much more time you have.  At $30 per month, this tip will net you $360 each year.

• Take your lunch and snacks to work.  You’ll save $2-3 every day on lunch and a dollar or so on snacks.  That adds up to $500 to $1,000 each year!

• Stop smoking.  In addition to the health benefits and lower insurance premiums, you’ll easily save over $1,000 per year kicking a one pack a day habit.

• Reduce “small” spending.  Limit the hundreds of little purchases you make – candy bars, coffee, gum, lunches out, whatever.  Instead set a weekly allowance for such extras.  Saving $2 a day on snack breaks at work yields $500 a year.   

• Cut energy costs.  Fans can reduce perceived air temperature by 10 degrees at one-tenth the cost of air-conditioning.  In winter, reversible ceiling fans help heat your house by gently pushing warmer air lower to the living area.  Inspect your home for leaks around windows, doors, pipes, ducts, electrical outlets, and vents that go through walls.  Simply caulking and weather-stripping can cut your bills up to 10%.  Close doors and vents in unused rooms.  Set your thermostat as high as possible in summer and as low as comfortable in winter.  Just a few degrees shift can save significant costs.
  
• Reduce insurance expenses.  Shop around for coverage on life, health, car, and homeowner’s to save hundreds of dollars.  Consider raising your deductibles to save 15 to 30 percent on your insurance payments. Review your coverage annually to check rates, applicable discounts, and adequate coverage.

• Be a savvy shopper.  Avoid impulse buying.  If you see something you want, put it on your “wish list”.  If you still want it after two weeks, save when purchasing it by asking for discounts. Most stores mark prices up significantly, giving them plenty of room to lower prices and still make a profit.  Arrive armed with competitive prices from other stores or the Internet.  For best results, offer to buy an item in cash for lower than list price.  The powerful sight of five $100 bills for that $750 couch will be hard for many managers to refuse.

• Eat well and save.  One evening out at even an average priced restaurant can equal half a week’s grocery spending (not including the cost of the babysitter!).  Limit eating out to promotional specials and two-for-one deals.  Bag your lunch and snacks at work and eliminate expensive junk food. At home, cook from scratch as often as possible.  This can be up to six times cheaper than buying a mix, frozen meal or eating out, and is usually more nutritious.

• Ask for coupons - Getting coupons on products you always buy is money in the bank.  Check out the Internet (www.valupage.com) or contact a company directly for coupons.  Sandi J. of Bloomfield, Iowa regularly writes companies and compliments their products.  She has received free products, coupons, and other offers for a small time investment.

• Ask for discounts - Most products are marked up 20-100% giving stores plenty of room to lower prices and still make money.  As a result, many retailers are willing to sell items for less than the listed price. So, ask..  Also, be knowledgeable.  Come armed with competitive prices from other stores or the Internet.  And if you’re not satisfied, use the greatest power you have – walk away.

• Buy used - Garage sales, flea markets, consignment sales and thrift stores are treasure chests for discovering great buys for pennies on the dollar.  Dave Ramsey, best-selling author of Financial Peace, regularly buys mint-condition men’s suits at thrift stores for $35 each – much less than their retail value of $500 to $800!

These are only a few examples.  Brainstorm with your family about all the potential ways you can save and then make a plan to do them!

Creative Options

Once you’ve freed up some cash from your income, it’s now time to consider other options of available cash that can be used to pay down debt.  These may not be as readily visible, but they can be as or even more lucrative than the ideas above.  Here are a few:

• Selling items – Consider turning some of your belongings into cash.  Have a garage sale or place ads for items of value you own but can do without such as antiques, cars, appliances, etc. Just by cleaning out your closets each spring and fall you can easily earn $200 to $300.

• Get a part-time job – Most Americans are already working pretty hard, but you may be able to pick up an extra part-time job for a year or so.  That extra $200 per month could come in handy as a debt-fighter.

• Discover money owed to you - Believe it or not, there are billions of unclaimed dollars in America.  They are held by federal and state governments as well as private companies in the form of pensions, bonds, taxes, real estate, and savings accounts.  These items have been forgotten, abandoned, or belong to unsuspecting heirs of someone deceased.  To find out if you have a missing fortune, consult Assets Unknown: How to Find Money You Didn’t Know You Had!

• Change your withholding – Americans get tax refunds averaging nearly $1,700 because they claim low exemptions.  Although people like refunds, they are really giving Uncle Sam an interest free loan!  Set your W-4 exemptions correctly and you could generate over $100 per month.

• Cash out insurance – For those people who have cash value insurance, you may be able to get access to that cash.  But there are drawbacks, and this can be a complicated venture.  See your insurance agent for specifics.

• Refinance your mortgage – Kiplinger’s Personal Finance magazine notes that you can save $100 per month for every percentage point lower than your original (refinancing an average loan of $150,000).  You may want to take some of your home’s equity out when you refinance, and use it to pay off debt (after your spending is controlled or you’ll be in worse shape than before!).  According to Money magazine, homeowners took out $223 billion in new loans backed by the equity in their homes in 2003.  This trades high-interest debt for low interest debt. And while Kiplinger’s estimates 26% of Americans have withdrawn equity to repay other debts, it also estimates another 30% to 50% could benefit from refinancing but haven’t yet.

• Restructure your debt – Consider taking out a consolidation loan to borrow at an attractive rate, and then use this money to pay off higher interest rate loans, effectively “moving” a chunk of your debt to a lower-cost loan.  Again, you have to be disciplined and not spend the windfall, but this can often allow you to be debt-free sooner. The down side to consolidation loans is that you’ll have to pledge something of value (that you might lose if you default) as collateral.

There’s no mystery to getting out of debt.  It comes down to disciplining yourself to spend less money than you make on a consistent, long-term basis.  And the benefits of living debt-free goes beyond the peace of mind you’ll experience today to knowing that you’ll be passing along a good inheritance for future generations.

Comments

[Terry]

Consolidating my debt sounded like an attractive option until I read the part about putting up something valuable as collateral. The only "valuable" thing I have is my college degree, and I cannot find anyone willing to pay me anything for it.

[Anna]

I'm in credit counseling and never had to put up anything as collateral. It sounds like you're making excuses!

[Smsy]

Very nice list! Thx for it!

[Know The Ledge]

This is a great list of practical ways to reduce your debt. I think the smallest changes (when stacked up on top of each other) make the biggest impact. Small tweaks in our lifestyle really do make a difference.