7 Steps That Made Me Debt-Free

(Note: I've used "me" and "us" interchangeabley in this post. The "us" is me, plus the better half.)

It’s OK. We’ve all been there. "How did I land myself in this situation?" "What have I done?" "How could I have been such a *&^%$#?" Questions that each of us has asked ourselves at some point or the other. It doesn’t matter now. What matters is that you are aware that you are in debt and you want to do something to reduce your debt. With that, you have already started! Take a few more steps and slowly, but surely, you will be debt-free. Believe me, I’ve been there. Here are the steps that I followed to get out of debt. Hope they help you too!

1. Stop adding any more debt: If you are really serious about being debt-free, then the next logical step, is to stop adding any more debt. This is very very important. That means do not charge more than what you can pay off each month, to your credit card. Also, postpone all purchases for the time being, unless you absolutely need it. That includes TV or a play station or a car (especially, a car!) or a dress – anything! Notice I used the word postpone and not avoid. Once you have paid off your debt, if you still want to, you can always go back to making those purchases. For the time being though, just put it off.



2. Know your personality: Getting rid of debt is little like quitting smoking. You will be surrounded by temptation. But if you are determined, you can do it. Knowing your personality or style will help improve the odds of success. If you wanted to quit smoking, would you go cold turkey or would you wean yourself away slowly? If you answered cold turkey, then you like drastic steps. You want results quick. If you answered slow weaning, then you are patient. You do not like drastic changes, but will make an effort a little bit at a time. While planning your strategy, keep your personality in mind. Push yourself, but know that sometimes you may have to pull back.



3. List your debt and sort it based on your style: If you already haven’t, then now is the time to make a list of how much you owe and at what interest rate. Sort the list according to your style. Here's an option. If your personality type is someone who likes drastic changes, then sort by the interest rate, so that the first item on your list is the one with the highest interest. If your personality type is someone who likes to go slow and steady, sort by the amount you owe, with the first item on your list being the one with lowest balance. Financially, you will be better off if you pay off the debt with the highest interest rate first. But, if you choose to chip away at your debt slow and steady, paying off the lowest balance first is supposed to help you stay the course psychologically. Remember, these are just suggestions. You can sort the list anyway it works for you. (Based on the usage of the term supposed above, you probably have guessed by now that I chose to payoff my highest interest debt first.)



4. Negotiate lower rates or transfer balances: Call every single one of the agencies you owe money to and request a reduction of interest rate. The competition in this area is quite stiff and if you have decent credit history, they may well agree to reduce the rates. I know this could be annoying, but it will be worth the time spent. Even a small change in interest rate can make a huge difference in the long run. Also, check if you can transfer some of your higher interest debt to lower interest credit cards. If you have multiple lines of credit by the same provider, see if you can consolidate them into one lower interest line. Keep hammering at that interest rate to bring it to the lowest you can. In the end re-sort your list, if needed, according to your style discussed in the previous point. (We kept transferring balances from one low interest blanance transfer offer to another, until we paid off. Educate yourself thorughly about the impact on your credit history, if you choose to go this path)



5. Plan the attack strategy: Now decide how you want to reduce that debt. Irrespective of how drastic you want to be, or how slow and steady you prefer, you will have to make some changes to your lifestyle. Get used to the idea. This may sound like psychological mumbo-jumbo, but it helps. Your changes could be something simple like skipping the latte at the coffee shop to brew your own, or packing lunch instead of going out. At the other end of the spectrum, you could choose something drastic like this lady who chose to live like the homeless until her debt was paid off! We preferred something mid-way; live like poor students :) Now budget the whole month out (rent, groceries, utilities, everything!). Set aside a little bit of money for miscellaneous expenses. Split the remaining amount among the different debt accounts. If you are asking “what remaining amount?” you will need to start making more changes to your lifestyle or add more sources of income… sorry that’s what it takes, but believe me it will be well worth it! Irrespective of what your style is, follow these rules. Rule 1: Pay at least the minimum on all cards; Rule 2: Pay more than the minimum on at least the one at the top of your sorted list. How much more? As much as you possibly can (and then some)! Remember, the more pump in, the quicker you can get out!



6. Implement the plan: Set up automatic payments for EVERYTHING that you possibly can. I cannot stress this enough. This was the most important step that helped us succeed. When you do not automate, you have to fight the battle every month, every day. You have to keep resisting the temptation to put the money towards the debt instead of something else that provides instant gratification. That’s asking for trouble. By automating, you will drastically improve your odds of success. However, make sure to check your payments and your bank balance every now and then to make sure there is no possibility of over draft.



7. Periodically re-evaluate: Are you ok with the current style? Maybe making regular payment has improved your credit history, try negotiating lower rates again. Re-sort list, and repeat above steps. I found that as we started to reduce the debt, it was so exhilarating, that we couldn’t get there fast enough. We pushed ourselves more and more. Find ways to make it a positive experience (more on this later). And sooner than later, you will be there. Debt-free.


That’s it. That was our strategy, and by golly, it worked! That said, here are is an additional "changing times" step.


8. I used to keep a journal with entries every month of where we were and where we were headed. Just some numbers to track progress. I had not discovered the blogosphere yet. These days, I see a lot of people doing the same thing, but publicly (of course, protected by a cloak of anonymity). Check if this is something for you. Start blogging away your debt like this person. It not only helps you vent out your hopes and frustration, but more importantly, helps build that anonymous support network. No matter how strong a person you are, it will help to have some support to ride you through the dark times.

Good Luck! You can do it, if you really want to!

Related Articles:

• Debt – Were We Really Irresponsible or Just Ignorant?

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