When drowning in debt it seems like there is no way to get out. The debt gets bigger and deeper and emotions take over. It makes all other areas of your life worse and hangs over you like a black cloud everywhere you go and over everything you do. But the good news is, there is a 7 step system to get out of debt in the quickest possible timeframe. This system WORKS. The variable is how long it takes; that varies person to person and based upon the severity of the debt situation. If you follow this 7 step system to get out of debt, commit to it, follow a budget plan and take control of your emotions and temptations, you can start your new life fresh without your finances pulling you under. None of these involve going bust or defaulting. You’d need proper legal advice for that.
1. Stop kidding yourself
I recorded a TV show for Channel 4. My role was to mentor couples in different situations who’d gotten themselves into a lot of debt. They had to submit all statements and budgets and expenses prior to the face to face meeting. I was stunned to learn that most of them had underestimated what they were spending, sometimes by half. They were spending TWICE as much as they thought they were, even after going through all their finances. You need to come clean with yourself, be honest, give yourself permission to accept that it is bad, don’t judge yourself, after all if you had learned these strategies you’d be implementing them, and then work out EXACTLY where you are at. What are ALL your outgoings, expenses, overheads and costs, to the penny. Where months vary, average them out. If anything, over-estimate your expenses a little.
2. Set a budget plan
You need to set a specific ‘get out of debt’ budget plan. That involves cutting all non-essential spending ruthlessly. Then you start chopping down your debt. Then you save what you can scrape together. Only save surplus money, always get the debt that has interest attached to it paid down first. Then target a specific, realistic date sometime in the next coming months (or years) to get out of the red and into the black. Once you get to zero, then you change your budget plan, which is stage 7.
3. Target your highest interest/debt first & most
People make the big mistake of spreading their payments equally across all their debts. Perhaps they make minimum payments on them all. Debt compounds (it gets bigger and bigger as it gets bigger). The single best way to get rid of all your debt in the quickest and shortest timeframe is to target most of your repayment on the debt that costs the most and has the highest interest. The lower the cost of the debt, the less it will grow. Credit card and payday loan debt can be 25%, 50% or 1000s of % per annum. Pay these loans down first and with the majority of your repayment budget. Loans that are 8%, or 5%, or interest free for a period, pay less, or the mime amount, until you get out of debt.
4. Get rid of all DDs & expenses
Be ruthless. Much of what you are spending you convince yourself you need, but you don’t. Get rid of all your DDs and monthly costs, make some short term sacrifices like cheaper food, less cosmetics, no clothes shopping, cancel gym & TV channels, and so on. You can build them back up once you are out of debt and can afford to. You will value them more too. With the recent trends of vagabonding and minimalism, you need way less than you think to live a good life.
5. Increase you income
Most people think about cutting costs but it doesn’t occur to them to drive up the income. Whatever your debt is, if you earned that money, the debt could be paid off. Whether its’ overtime, part time work, a second income stream, selling some of your possessions you don’t need or use, selling possessions for others on Ebay or other eCommerce sites and splitting the profit, or selling products or services for others for a commission split; or ALL of these. Drive the money up and that will knock your debt down.
6. Remove all temptations
If you were to go on a diet, it would be way easier if you emptied the fridge and cupboards of all the tempting foods. Remove the temptation to spend by cutting up maxed credit cards, not going near your favourite shops, and making sure you’re not bored with access to online shopping. Discipline is far harder than removing the opportunity in the first place. Limit your access to temptation and deliver yourself to glory.
7. Once net zero, write a new budget plan
Once you are at net zero, where your debts equal your savings, or you’ve paid them off completely (except good debt leveraging assets for income) then set a new budget plan and never spend over it. Start by targeting a percentage of your income to save, say 2% to 5% or your total income. Over time increase the percentage of savings to spending to 10%, 20% and more. As you increase the net savings/disposable income, you can create buckets to put your disposable money into, live SANT (save and never touch), IR (irregular shocks), Bucket list (things you’d love to do), investing, speculating, diversifying and insuring.
For more episodes on managing your money like a master, listen to the “Money” podcast here