By Jeff and Charlotte Lee - October 2008
Normally I keep my posts short, light and humorous. This one will be different.
But if you're one of the millions of people who are victims of crushing credit card debt and think paying it off is hopeless, then you may want to take an extra 10 minutes and read this. Because it isn't hopeless. And I'm living proof.
About 12 years ago, my wife Charli and I were drowning in debt with no hope of recovery and as a result our home was at risk and our marriage was suffering for it. However, just 2 years later we were basically debt free, with the exception of our mortgage and the standard monthly living expenses. But as far as credit card debt... we had (and continue to have) none.
We wanted to write this because about 8 years ago we gave a talk at our church on how we overcame tens of thousands of dollars of debt, in the hopes that other people would be inspired to seek help for themselves as well. At the time we were simply hoping to convey some helpful information, but instead we were immediately approached by dozens of people who wanted to learn more. And over the next several months to follow (and even to this day) we have been told that our little talk had literally changed their lives. That's pretty powerful stuff.
Now, as I stumble around the blogosphere, I read over and over again how people are struggling with finances. Some people come right out and say it's a problem, other people hide it behind an offhand comment or joke - but it's easy to spot all the same. People are struggling. And with the economy in the toilet, gas and food prices getting higher every day and job security more at risk all the time, it only makes sense.
Therefore, even though we run the risk of coming off like we "know it all" or sounding like we think we're better than those people who can't handle their finances, we're willing to take that risk for 3 reasons:
1. It's not true. We definitely didn't know it all then and don't know it all today. The only reason we ever got out of debt in the first place is because we got help from people who were WAY smarter than us about finances, and who taught us what we needed to learn to turn our problems around. And even today Charli is constantly learning more every day by reading financial blogs and books, and paying attention to new solutions as the experts continue to address these issues.
2. There is hope - for everyone. And if we can save even one person from drowning in debt, losing a home or destroying a marriage then all the time spent writing this will have been worth it. For the first time in 3 years, I am not concerned with being funny, receiving affirming comments or gaining new readers. I simply want to share the knowledge of what we had to do to recover from a painful time in our lives so other people can take advantage of our experience.
3. Nobody will ask for help. The most common thing we heard from people after our talk was:
- they were in denial that they had a problem
- they were embarrassed to seek help or discuss it with anyone
- they thought it was hopeless and didn't know what to do
And then the other day a woman called us up after 8 years because she had finally reached the end of her financial rope and had been thinking about our talk this whole time, and was wondering if we wouldn't mind helping her. This is when it occurred to me that... wait a minute, if this woman has been keeping this to herself this long, maybe, just maybe someone else out there can benefit from a little proactive advice as well.
That's when it hit me to write this.
But please - don't think we're going to write a silver bullet "here's how to end all your financial woes in one easy post" type of story. It doesn't work that way. All we're going to do is simply tell you our experience and point you to the resources we used to climb out of our debt. Yes, we'll give some examples but those will only be there to provide illustration. The only way you can truly help yourself is to make the choice to take the tough steps necessary to dig out. It's not easy and it requires painful discipline. But if you're interested... read on. It IS possible!
So, where do you begin?
The first thing we did was set up an appointment with a financial counselor. In our case, we used a faith/charity-based service, but there are many different types available. Make sure you contact a reputable non-profit organization that isn't out to make money at your expense.
Financial counselors provide many benefits:
1. They are your support system.
2. They are educated professionals who have seen it all and know how to help you.
3. They can help you negotiate with credit card companies. Often times these companies will be more willing to freeze your compounding interest or lower your minimum monthly payment if they know you are being helped by a financial counselor.
4. They make you accountable to someone other than just yourself.
5. They work!
At the advice of our counselor, we read The Financially Confident Woman* by Mary Hunt. In this book, Mary provides a clear blueprint for getting out of debt. Guys, don't be put off by the title of this book. She named it this way to appeal to the female demographic because studies show that women struggle with financial confidence more than men. But this book is a no-nonsense tutorial that is useful and effective for everyone.**
Change your lifestyle
The only way you can pay down your debt is if you make an immediate and severe lifestyle change. Becoming debt-free is NOT easy. It takes time and requires sacrifice from the whole family - but it IS possible. You just have to make a commitment that you're going to do it and then you have to stick to it! There simply is no magic button you can push that will make it easy or do it for you.
Stop the bleeding
Acknowledging your problem and seeking help is the right way to start, but will do nothing unless you are willing to end all unnecessary spending. Here are a few major steps you should expect to take along the way.
ELIMINATE your credit cards. Literally. Cut them into microscopic pieces and throw them in the garbage. They are the reason you are where you are right now. Instead, start using cash (or a debit card) for everything. Of course you'll still need one major credit card for things like reservations, but do not under any circumstance use it for everyday purchases.
ELIMINATE the fast food. Sure it's convenient, but it's also one of the largest drains on your disposable income. We calculated that by simply not eating fast food we saved $200/month - money we were able to apply directly to our debt reduction. Of course it's not a straight 1-for-1 elimination of expense because you still have to eat, but when it costs $35 to feed a family of 5 at McDonalds, you can easily see how not eating there can save you mega McDollars.
ELIMINATE the unnecessary junk food. Your kids don't need chips, cookies, pop and 8 different kinds of expensive cereal. Sure they like all that stuff an awful lot but it's certainly not required and it sure as hell isn't good for them either. Remember, you're on a mission to get out of debt. Things need to change now and everyone in the family has to help.
ELIMINATE waste. This is pretty self explanatory but until you start looking at just how much waste you produce in a month, you'll be surprised at how much you can save.
ELIMINATE impulse buying. Go to the store with a shopping list and only buy what's on the list. Resist the temptation to buy those cute pants you don't need just because they're on clearance. Ignore that funky new set of tumblers, your old mismatched cups will work fine for now. Put that Enquirer magazine back on the shelf. Right now you don't need to know. One rule of thumb that is helpful is to ask yourself every time you pick something up... "Do I want this or do I need this?" I guarantee you'll be surprised by how many times you answer "want."
Oh, and by the way... if you're really smart, you won't even step foot in Target ;-)
Rapid Debt Repayment
Our financial counselor told us that if we had continued to only pay the minimum monthly payment on all of our outstanding credit card debt, it would have taken us 237 years to pay it all off. Believe it or not, that didn't sound like a good plan to us.
But fortunately, Mary Hunt's book shows you how to exponentially reduce that debt burden through what she refers to as her Rapid Debt Repayment Plan.
In a very high-level summary explanation, it works like this:
- With the help of your financial counselor, have all your credit card minimum monthly payments reduced as low as possible. I know this sounds counter-intuitive to paying off your debt, but it will make more sense in a minute.
- Calculate your leftover income every month after paying off all essential expenses such as groceries and utilities as well as your long term debt such as your mortgage and car payment etc.
- Sort your credit card debt from smallest balance owed to largest.
- Apply the minimum payment possible to everything but the smallest balance, and then apply everything that is leftover to that. This will pay off your smallest balance the fastest.
- Once the smallest debt is paid off, use that extra money and apply it to the new smallest balance. With each bill you eliminate, you have will more money to eliminate the next largest one much sooner than if you just paid the minimum amount due. This process eventually creates a snowball effect over time that, just like the name implies, rapidly reduces your debt.
Why does this work?
It works because this method provides for small victories (paid-off debts) much earlier in the plan which helps to increase confidence, gain momentum and strengthen your commitment to stay with the plan, which is the most important aspect of rapid debt repayment.
Some people will undoubtedly flinch from this idea because it defies logic to not pay down the credit card with the highest interest rate first. But with this plan, the gratification you receive from watching your low hanging fruit get picked right away provides the incentive to keep going and far outweighs the conventional wisdom of aiming for the most expensive debt - which could in some cases take months or even years to eliminate.
Stay out of debt
It doesn't do any good to clean up your mess only to turn around and create the same mess again. In addition to her debt repayment plan, Mary also provides an excellent system for managing your ongoing expenses for the future... with cash! Using a method of pre-allocating your monthly income to pre-established expense and savings accounts, you will never be surprised by a bill again. In addition, you will be able to save for things you wouldn't normally consider saving for.
For example, how many birthday and Christmas gifts do you buy every year? And what do you do when those times come due? If you're like most people, you run out at the last minute and spend money you weren't planning on spending. Or worse, as in the case of the holidays, you ... (yes, you guessed it)... you CHARGE IT! Instead, this method has you go back in time and add up all the everyday expenses you don't normally consider and then has you fund little virtual accounts every week so that when these expenses occur later on, they're already paid for. It really works and is vital to keeping yourself debt free.
Getting out of debt is a journey. For two years we dialed back on unnecessary expenses, bit the bullet and got'r'done. It wasn't fun and it wasn't pretty but it worked. And it can work for you too.
Again to summarize:
1. Seek help
2. Educate yourself
3. Change your lifestyle
4. Stop the bleeding
5. Get out of debt
6. Stay out of debt
One last thing. Please feel free to send us an email if you have specific questions or would like further details on anything we've written. The whole point of this post is to share what worked for us, and we are completely open to talking about it further with anyone.
Also, if you feel other people could benefit from this post, please feel free to Digg, Stumble or Smiley it. Thanks.
*Re-released in 2008
**This is not a paid endorsement