Everyone knows how to solve debt and credit problems — make more and spend less.
However, knowing what to do is one thing; actually getting it done is another matter.
If you are in debt, then those results prove that something is standing between you and the solution you already fully understand.
Tracing the problem back to its root works like this…
- Your money problems result from excessive spending or insufficient income.
- Excessive spending and insufficient income are caused by life habits.
That is why debt and credit problems are so difficult to resolve for most people. It’s a personal life problem (habits) masquerading as a financial problem (debt). You look for financial solutions but they don’t exist because you’re looking in the wrong place.
The emotional cause behind your debts must be resolved first to affect a permanent solution. You must change your behavior patterns that caused debt; otherwise, the problem will go away for a short time only to return later.
In other words, getting out of debt is only half of the solution: staying out of debt is what you really want. Unfortunately, debt can’t be permanently eliminated just by fixing the financial symptoms. That’s why debt payoff and reorganization strategies seldom result in a permanent cure. They do nothing to keep you from piling on new debt in the future.
You need a three-step solution that cures the underlying cause first and then treats the financial symptoms second so that you can become permanently debt free.
[Related Article: The First Thing You Must Do Before Paying Off Debt]
You Don’t Just Reinflate the Flat Tire
Debt is like a flat tire. You can reinflate the tire for a quick fix to get you down the road, but unless you find the source of the leak and fix it first, the tire will flatten again.
Permanently repairing a flat tire requires three action steps:
1. Identify the source of the leak. Why is air getting out? It could be a nail in the tire, bad valve stem, or any number of other causes. You must first identify the root cause so you can permanently fix the problem.
2. Then you must take action by repairing the cause of the leak. Until you do whatever is necessary to fix the root cause the tire will just flatten again and again no matter how many times you reinflate it.
3. Once you’ve completed the first two steps, then it makes sense to reinflate the tire — not before.
Debt works the exact same way. You must plug the holes in your budget by fixing the cause of the debt before actually pursuing financial solutions (reinflation) to pay the debt off.
Yet most people do just the opposite. They mistakenly go straight to step three by hiring a debt consolidation company, or transferring balances to a HELOC or a 0% credit card, or they try a quick fix by selling assets such as a house, boat or car.
Unfortunately, all of these methods are the financial equivalent of reinflating the tire without ever finding the huge nail that caused the leak in the first place. That is why so many debtors repeat the cycle over and over again — paying off credit cards only to run them up again. The source of the leak never got fixed so the tire just goes flat again.
The three steps below can help you identify and repair your budget leaks so that you can permanently solve your debt problems.
Step 1: Identify the Cause
You are the cause of your debt.
More specifically, your debt is caused by your habits and attitudes that determine hundreds of daily financial decisions. Literally, you financial situation is a matter of habit.
In the second and third articles in this series we identified the habits that cause you to spend more than you earn, resulting in ever-growing debt. Your action step is to review those two articles first before continuing to read so you can identify which habits and attitudes caused your debt.
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Step 2: Implement the Cure
Once you’ve identified the habits that cause you to get into debt the next step is to adopt new habits that move you toward wealth.
With this step you literally engineer your life to create wealth one habit at a time. This means stopping all the slow leak habits and replacing them with wealth building alternatives. Below are four questions to consider:
- What behaviors got me into debt in the first place?
- Are there specific situations that brought about my current debt problems?
- Why didn’t I stop accumulating debt?
- What has previously kept me from solving my debt issues?
Once you identify the habits and attitudes that started your debt problems and kept you from solving them, then it is time to apply whatever strategies might be helpful from the list below to plug the leaks in your financial tire:
Make a realistic budget with spending limits for each category. Start by adding up and categorizing all spending from the prior 12 months to create a benchmark, then shave what is unnecessary until your planned spending is less than your income.
Track your daily spending. The first reason tracking is important is to make sure you are staying within budget. The second reason is to raise your consciousness around your spending to create further saving. For each expense ask yourself two questions: “Is this getting me the highest and best value for my money?” and “Is this taking me toward my goals or away from my goals?” These questions align your spending with your values and goals by directing all spending toward getting you want you want out of life.
Learn how to curb emotional spending. Prepare a shopping list before leaving the house and only buy what is on the list and within budget. You should also try out some of these specific tips for how to curb your shopping:
- Leave your credit cards at home. Consider freezing your cards in ice so that it requires time and inconvenience to use them. By spending only real cash you are more connected to the cost of things and less likely to overspend.
- Identify and avoid shopping situations that cause excessive spending. For some people this might be shopping alone, and for others it might be a social situation with friends who encourage you to pleasure shop. Whatever situations encourage you to spend should be avoided.
- Set a shopping schedule that you don’t deviate from so you can eliminate “retail therapy” and shopping as entertainment.
- When facing any unplanned buying decision always require a “cooling” period of a day or more. No unplanned, emotional buying allowed. Force yourself to wait 24-48 hours and then reconsider if you really need the item.
- Identify which emotions you attempt to satisfy through the shopping habit then find alternatives that bring greater enjoyment to your life. Activities such as exercising, listening to music, or enjoying nature cost little and can be a healthy and economical alternative.
- Create accountability by telling all your friends and family about your planned habit changes. Ask them to ruthlessly support you by calling you out if you backslide into old patterns.
- Cure shopping shame by always showing your family and friends what you buy. Do not hide any purchases except gifts (temporarily).
- Join a debt support group in your community or online.
- Develop other habits besides shopping that make you happy and replace the shopping habit with these more productive alternatives.
- Reduce your exposure to advertising — particularly for the products you’re most vulnerable to wanting. If you have a passion for fashion then drop those magazine subscriptions. Unsubscribe to Internet marketing letters that prompt your desire for their products. Record your favorite television shows and fast-forward through the ads. Don’t allow Madison Avenue to dictate your values.
- Remember the other side of the coin — increasing income. Can you temporarily work overtime to get your debt under control? Is there seasonal or freelance work available, or can you convert a hobby into income?
- Finally, remember to adequately insure those risks you can’t afford to take. Yes, it costs money and adds expense to your budget, but you don’t want one of life’s unpredictable yet totally expected hiccups to send you back into debt. Be prepared with reserve funds and proper insurance.
Each of these strategies has one objective — to plug all the habitual ways you leak money so that you never go into debt again. You must persist in plugging these leaks until you are spending less than you earn. You are not complete with step two until you are in compliance with this foundational law of personal finance — spend less than you earn. That is the sole criteria for completing this step.
It may take some time to achieve this objective so don’t make the mistake of trying to plug all your financial leaks instantly. Instead, pick one debt producing habit and start living the wealth producing alternative until it is comfortable and then pick another. Most people overestimate what they can accomplish in one month and way underestimate what they can accomplish in three years of dedicated effort. Be persistent. One habit at a time will get you to the goal with minimal pain.
Finally, set yourself up to win with proper expectations by realizing this isn’t a quick fix solution. It’s about long-term financial management and permanent habits that convert your debt into wealth.
The goal for this step is to spend less than you earn. When you reach this point you will have the monthly savings necessary to begin paying down your debt in the third step.
[Related Article: Can You Really Get Your Credit Score for Free?]
Step 3: Treat the Symptom
Now that your financial life is positive cash flow, it is time to pay off all your debt in the most reliable, efficient way possible. This step is broken into three sub-steps to make it easy to complete.
- Begin by organizing all your debts to minimize the monthly bleeding. Consider which consolidation and refinancing strategies can help you lower interest costs and eliminate penalties and fees. Contact your existing creditor and try to negotiate special terms. Every dollar saved in interest and penalties is one less dollar you need to pay off.
- Sell your stuff for a quick payoff. Do you have jewelry, an extra car, R.V., furs, or a boat that is seldom used? What things can you sell to make a quick dent in your debt and accelerate the payoff process?
- Once your interest costs are minimized and quick payoff strategies are implemented, then organize your remaining debts according to either the debt avalanche or debt snowball methods. Structure your debts using the rollover method so that as soon as the first debt is paid off then the freed-up payment amount is used to pay down the next debt even faster. Continue the process of paying off debts (building like a snowball) until you are completely debt free. It is the most cost-effective and emotionally satisfying way to get out of debt.
- Debt Avalanche: This creates the fastest payoff by ordering your debts from highest interest rate to lowest interest rate. By concentrating your payments toward your most expensive debt first you lower the total interest cost and pay off the debt faster. The downside is if you have a large debt at a high interest rate, it could feel slow to start.
- Debt Snowball: This is the most emotionally satisfying payoff strategy because debts are ordered from lowest balance to largest balance so you can see results faster. This gives greater odds of staying the course to completion because of the emotional reward of watching entire debts get wiped out rapidly.
The key is to have a clear plan and execute your payoff strategy with discipline. Start by minimizing interest and expenses on your debt to stem the bleeding. Then figure out what stuff you could sell to make a quick dent in your debt. Finally, structure the remaining debts into a disciplined payoff strategy. This is the fastest, most reliable path to debt freedom.
When you follow these three steps you may be surprised how fast you can get out of debt. The key is to take it one step at a time and be persistent.
Remember: Your goal is much bigger than just getting out of debt. This three-step process sets the foundation that can literally translate your debt into wealth and transform your financial situation for a lifetime.
[Free Resource: Check your credit score and report card for free with Credit.com]
The first three articles in this series:
- The Shocking Truth About Debt: It’s Not a Financial Problem
- 7 Money Habits That Can Make or Break You
- Stay Out of Debt by Planning for the Inevitable
Image: Ron Chapple Studios