Everyone knows the cliché answer to the question of how to get out of debt: “When you find yourself in a hole, the first step is to stop digging!” Like many clichés, this one has some wisdom behind it.
But also like many clichés, it assumes that you live in an ideal world where you can cut up your credit cards and tackle your debt, just like that. In the world most people live in, debt traps are progressively difficult to get out of. You make a payment on a debt, and then you don’t have enough cash to get you through the week, so you start charging more things. Then the next payment that comes due leaves even less in your wallet, which means you have to borrow even more. And so on, until you can no longer raise the cash you need to make even the minimum payments, or until you max out your credit lines. Or both.
It can be tough to break this cycle. Tough—but not impossible. Here, then, is a strategy for escaping the debt trap.
List All Your Debts
In twelve-step recovery programs like AA, one of the crucial steps to recovery is to make a “fearless and searching moral inventory.” To recover from debt, you need to do something similar, but less daunting. You don’t need to list your moral flaws—you just need to list the debts you owe. Your list should include the name of your creditor, your account number, your current balance, your minimum monthly payment, and—crucially—the interest rate you are being charged. This sounds simple, but in reality it can be daunting. A lot of people are afraid of know how deep their debt hole is. Feel the fear and do it anyway. It’s not so bad. Debt is not a moral issue.
Now that you’ve got a picture of your debt trap, take a closer look at it. Which creditors are charging you the most interest? Those are the debts to prioritize. Make minimum payments on the lower-interest debts and funnel every available dime to paying down the high-interest ones. This is the fastest, cheapest way to get out of the trap.
Set a Budget
Of course, you have to eat—but you don’t have to eat out. Ever. Of course, you have to see your friends—but you don’t have to go out with them. Of course, you have to get to work—but you don’t necessarily have to drive alone. Of course you have to wear clothes—but you probably don’t need new ones. Budgeting doesn’t mean doing without food, friends, transportation or clothing. It means figuring out how to cut the expense of enjoying those things.
Just as you’ve got to know who you owe money to, you also need to know where your income is going. Keep track of what you spend in a month. This is a lot easier to do this nowadays. Nearly everything can be paid for with a debit card, which provides you with a written record of each purchase. What did you spend on food, entertainment, transportation, clothing, utilities, and personal items last month? Write that down, line by line. Once you’ve got that information, you’ve got the power to change it.
Set Goals and Deadlines
One step to getting out of debt that some people find useful is to make a progressively diminishing budget plan. You see what you spent in your first month? Then make a budget for next month that reduces the amount you spend by, say, five percent. And make a budget for the following month that’s five percent less than that. And so on, each month. Put the money you save—those five percent savings—into payments on your highest-interest debts. As each month passes, you’ll have figured out new ways to save money, while at the same time your monthly expenses will decline because of the debts you’re paying off.
Another technique that some people find useful is to set deadlines for when you can reasonably expect to pay off your debts. Remember to focus on those with the highest interest rates first. Look at those deadlines often—at least once a week—to keep yourself motivated. This sounds tough. And it can be. But the great thing about this strategy is that it gets progressively easier. The more debt you pay off, the faster you can pay off other debt.
Make Regular Payments
It probably goes without saying, but you really need to keep making payments on your existing debts, even if it’s just a token amount. This will keep you out of the bill collectors’ hands and preserve your credit rating. When you get each paycheck, pay something against each debt you have. Auto-pay may help in this regard. One way to psych yourself into this mindset is to stop thinking that you’re paying a debt. Actually, you’re buying your freedom. And every dollar you put toward those debts makes you just a little more free.
Contact a Debt Relief Company
But what if you list your debts, you make a budget, you try to meet your obligations, and you find there’s no way it can possibly be done? At that point, take another piece of advice from twelve-step recovery programs and admit you need help. Debt relief companies may be able to help you by negotiating loan settlements, by helping you consolidate high-interest debt into lower-interest loans, and by intervening with your creditors on your behalf.
Again: debt is not a moral issue. It’s a financial one. Thinking of it as such will help you avoid the kind of discouragement that prevents well-meaning people from following through on plans to get out of the debt trap.