Last year I had several thousand dollars in credit card debt and wasn’t sure how I could pay it off. One year later, I’m finally debt free and have learned how to take better care of my finances.
One of the things that comforted me when I was facing my mountain of debt was the knowledge that I was not alone. In fact, millions of Americans have credit card debt (and other types of debt) and many of them are working to pay it off. I learned some important lessons by reading lots of good advice and personal stories.
Now that I’ve taken care of my own credit card balance, I want to help others achieve financial freedom, too. Toward that end, here are 5 behaviors that helped me get out of debt:
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In my case, I had accumulated my debt over the course of six months as I transitioned from one career to another. During that period, while the income wasn’t coming in like usual, I compensated by putting monthly expenses like utility and grocery bills on my credit card. At first, it was only a few hundred dollars per month and I wasn’t too worried about the balance as it was slowly growing. But each time I received a credit card statement the amount would be larger and larger, and eventually it became big enough that I was worried about how I’d pay it off.
Around that time, my new job started and I knew I needed to get serious and make a plan to eliminate my debt. The first thing I did was look at the numbers and decide how I wanted to tackle the situation.
I made a concrete goal: to pay off the entire credit card balance. And I gave myself a deadline — December 31st, 2012 — to accomplish it. But the goal itself was not enough. What really helped was making smaller goals that I could try to achieve each and every month. For example, rather than focus on my total balance, I asked myself to focus on paying at least $400 toward my debt every month. As long as I did that, then I considered the month to be a success.
Mixing large and small goals is crucial to getting your debt paid off.
2. Be realistic with yourself
One of the worst ways that people unknowingly sabotage their own debt-free goals is by expecting themselves to be perfect or to accomplish difficult outcomes in short time periods. When you set unrealistic expectations for yourself, you will always fall short — which will make you disappointed.
Being disappointed stunts your progress because the human psyche relies on hope and optimism in order to be productive. You won’t last long in your journey if you’re feeling disappointed about your progress. So when you create your goals, make sure they’re realistic. If you think you might be able to pay $500 toward your debt on a good month, then make your goal $350 and try to overshoot it every month. You’ll feel way more excited — and way more motivated — about going above and beyond your goal than if you were barely reaching (or not reaching) it.
Of course, that doesn’t mean you should make your goals easy. They should challenge you, but within reason. And remember, you can always adjust your smaller goals to reach the larger goals.
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3. Spend time with people who share your financial goals
One of the most surprising things I learned during my journey was how much we’re influenced by the people we spend time with. This is true for any kind of behavior, not just financial behavior. If your closest friends and family are exercising frequently, you will be more likely to do so as well; if all your friends are involved in serious romantic relationships, you’ll be more likely to be in one as well.
So use this knowledge to your advantage and make sure that while you’re pursuing your financial goals you’re surrounded by people who share them. Of course, you can’t change who you’re friends with, but if you know that one friend in particular always likes to go shopping at the mall, you might want to schedule other activities (where he or she can join you) that don’t require spending money.
And if you can develop new friendships with people who, like you, are striving for financial freedom, then by all means do it! They will no doubt inspire you to stick with your goals and may teach you new and better ways to take control of your money.
4. Track your spending
I cannot emphasize enough how much it helps to track your spending. Believe me, I used to think it didn’t matter if I used a spending plan (aka budget) as long as I made frugal choices. But the fact of the matter was that money was leaking out of my bank account every month without me realizing it. One of the worst culprits was the lunch I was buying every weekday, instead of bringing food from home.
Once I finally got around to using a budget spreadsheet to carefully track my spending every month, it became clear to me that there were some things I needed to do in order to save money on a monthly basis. To be successful with your goal, you’ll need to do the same – and then take action based on what you find out.
5. Understand your interest rates (and attack the highest one first)
Although most of us have credit cards and/or loans, oftentimes we don’t even understand how the interest works on these things. Whether your debt consists of student loans, credit cards, an auto loan, a mortgage, or all of the above, take some time to read the fine print on your statements so you understand exactly what you’re paying each month and why.
Identify the account with the highest interest rate and put it in your crosshairs. Then dedicate any extra money toward that account so you can pay it off as fast as possible. For example, if you dedicate $350 per month toward all your debt, first make sure you can pay all your minimum payments and then use whatever is left to increase your payment to whichever one has the highest interest rate.
The bottom line is that you have to approach your journey toward financial freedom with purpose and forethought. By using a plan and relying on the behaviors above you will accomplish your goal in no time!)
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Image: Franco Folini, via Flickr