Debt is a scary thing. Unfortunately, many Americans don’t necessarily see it that way.
Prior to my finance journey, I was in a similar boat. While I was never on the verge of filing for bankruptcy, I absolutely had a mentality such that, “I can pay it off later.” As long as I didn’t have $30,000 sitting on a credit card, I felt like I was doing semi-okay.
Believe it or not, this is a reality for so many people. Living paycheck-to-paycheck is the norm.
But there’s something incredibly liberating knowing that you don’t owe anyone anything. When you get that paycheck, you can literally use it for whatever you want. It’s a feeling that’s hard to describe, but oh-so worth it.
You see, to truly excel financially, you need to be able to increase your net worth with each and every consecutive paycheck. I track my net worth using a tool, such as Personal Capital, to check frequently on how I’m performing. Anytime I see that little line dip ever-so-slightly, it makes me upset.
Debt is like quicksand. The deeper you sink, the quicker it sucks you in, and the more helpless you feel. While it’s not impossible to dig yourself out of it (quite the contrary), there are a number of things you have to do to prevent yourself from backsliding again.
These are five tips that I’ve used to move forward and and place safeguards to ensure that I never start heading down that all-too-familiar path again.
1. Reduce your expenses
This is easier said than done. You know what? I change my mind. It is that easy. The problem here is that you simply don’t want to.
You know those experiences in life where you hit rock-bottom, and you vow in that moment to do anything it takes to change your life?
Debt works in a similar manner.
Cutting your expenses down is hard. But it ultimately comes down to your wants versus your needs. Do you need that big fancy pickup truck? No — it’s costing you hundreds of dollars each month. Can you stop eating out at restaurants and pack a lunch to work each day? Don’t want to? I don’t care. It’s what you need to be doing.
Getting into debt is so incredibly easy, but now comes the hard part. Getting out of debt is magnitudes more difficult because it requires a very conscious, devoted effort.
Sit down and lay out all of your expenses from highest to lowest. Start with the highest expenses and see where you can cut back. Is your rent/mortgage eating up half of your income? It might be time to downsize. Or relocate entirely.
Debt doesn’t mess around, but neither do you. You’re going to show it who’s boss.
2. Build an emergency fund
It’s not a matter of if, but when life is going to throw you a curveball. Nothing sends you spiraling into debt worse than an unexpected medical bill, or car repair.
People might contend, “Well, when is that going to happen? I could be using my emergency fund to pay off debt.”
That may be true. But in my experience, life waits until your pile is just about to topple over, and then adds another jenga block to the top of it.
Having at least $1,000-$2,000 in an emergency fund ensures that should something pop up, you won’t have to reach for your credit card to shelter you through the storm.
When you’re adding to your debt balance at the same time you’re trying to pay it off, you’ll never see that number drop, and you’ll get discouraged. Discouragement eventually leads to giving up, if it happens enough.
3. Use the envelope system
Have you heard of the envelope system before?
It’s simple, and a great way to budget when you’re first starting out.
When you get your paycheck, you go to the bank and cash it out. Yes, you turn it into cash. You then go home and divide it into various envelopes, each envelope representing a different bill, payment, or savings goal. On the front of each envelope, write what the money in it is for. After you divide your cash into each envelope, you shouldn’t be leftover with any money. Every single dollar should have a purpose.
Common categories are “mortgage”, “car”, “gas”, “spending”, and “groceries”. Be sure to have an envelope devoted to “debt” as well.
The benefit of the envelope system is that no cards are used. You physically can’t spend any money that you don’t have. When your envelope is out of money, you’re done spending.
This works best for those who have a problem with impulse buying or putting money on credit.
There’s something psychological that happens, which is very different from when you’re paying with cash. Say you go to the store and buy groceries. You hand the cashier a $20 bill. In exchange, the cashier hands you your groceries, as well as $1.32 back. Ouch. You used to have $20. Now you’re left with less than two dollars. There’s an emotional response triggered during this exchange that actually hurts. You see yourself with less money than you walked into the store with.
The opposite is not true when using a credit card. In this same situation, you walk out with both your same credit card that you handed the cashier and your groceries. There’s no pain involved. You get what you want, and it feels like it didn’t cost you a thing.
The solution is simple: only spend using cold, hard cash. Completely stop using credit cards for a while. Doing this will re-program your brain, and cause the emotional trigger to be rebuilt which, until now, has been long gone. If you don’t have enough cash to cover the purchase, you simply cannot buy it. If you find that you’re running out of cash to pay for the things you need, this will cause you to re-evaluate your budget, and to cut out some of the unnecessary spending so that you can actually purchase the things you need.
Financial self-control is like riding a bike. You need training wheels temporarily, but once you gain your balance, you can begin using credit cards once again.
4. Use a budgeting app
There’s thousands, if not more, budgeting apps out there for iPhone and Android users (but let’s be honest — who doesn’t have a smartphone these days?).
If the envelope system doesn’t seem like it’s for you, this is the next best thing. In fact, you might be able to use these two in conjunction to track your spending and see a trend of where your money is going.
Find an app that fits your style. Some of my personal favorites are Personal Capital, YNAB, or EveryDollar. With each and every purchase you make, open the app and enter it in the dollar amount you just spent. Your phone is always with you, and soon this will become a habit.
At the end of the month (or every week, or every day, whenever) you can open this app to see a trend for your spending habits. They’ll graph everything for you, showing you where your weaknesses reside. Most of these apps will even offer personalized recommendations, catered to your circumstances.
In this day and age of wonderful technology, you’d be a fool not to be using at least one of these apps.
5. Think, talk, and read about money
“You are what you eat.” Wait…that’s not the quote I was looking for. 😉
“You are what you think about all day long.” ― Robert H. Schuller
There we go.
Did you know that those who think, read, and talk about business are statistically shown to be wealthier and more successful? It’s because, for these people, that’s their focus.
Take the time to talk about your financial goals, with your parents, your friends, but especially your spouse. Discuss priorities and struggles so you can help each other stay on track. Set aside time to stay current and read up on the latest financial news. You can never be too informed. But ultimately, if it’s on your mind constantly, that will set your sails towards the direction you want to head.
That’s what started my entire journey into personal finance. I was so sick and tired of being broke and in debt. So I began eating and breathing personal finance to do anything I could to get my financial life back in check. And you know what? It worked. And that’s what started the blog and has lead to me being incredibly passionate about anything to do with money, finance, and wealth
Hang in there, press forward, and don’t get discouraged.