Debt Free Living Tips
This is a two-part article on getting control of your finances. It specifically deals with eliminating consumer (credit card) debt. You can read Part 2 here.
The Federal Reserve (as of April 2016) reports consumer debt at $3.6 trillion dollars. That’s TRILLION.The Federal Reserve (4/16) - consumer debt at $3.6 trillion dollars. Here's what to do about it! Click To Tweet
If you break that down to individuals, it means each person owes almost $12,000 a year in debt.
This is credit card debt. They call it ‘revolving debt’ becasue it doesn’t go away.
Why doesn’t it go away? When a person makes a payment on the debt, they turn around and purchase something else or credit. This causes it to revolve.
That data is over 16 months old. And it doesn’t look like it is getting lower.
If we continue this trend, personal consumer debt will reach $15,000 per person before long.
Think about it like this. According the Census Bureau, the average income is $46,409 per year.
If $12,000 of that income goes to revolving consumer debt; that’s over 25% of your income is unnecessary debt.
If the number is closer to $15,000 now, that’s almost 33%.
One third (1/3) of your money is wasted on revolving debt.
Think of what you could do with the extra money you’re spending on revolving debt.
Why getting out of credit card debt
is your best money decision
Since getting rid of this debt is so important, what is the best way to get rid of credit card debt?
There are some ‘mechanics’ or techniques that are important. But before we launch into too many ‘how to’s’ (which we will cover), let’s lay a good foundation for a better life by looking at some key principles to live by.Why getting out of credit card debt is your best money decision Click To Tweet
Money Principals To Eliminate Debt
Here are six money principles you must live by if you are to be debt free and reclaim your freedom.
1. Debt Free Must Be Priority #1
If you are going to tackle getting out of debt fast, you must make it your number 1 priority. Nothing else can make it to #1 UNTIL you are free from debt.
This is the mindset part of the game. You have to get the right mindset if you are to get rid of debt.
How’s your commitment? Are you really ready to do what it takes to get out of debt?
Until you can answer that with a strong ‘YES’ you might as well move on to something else. Commitment to your goals is one of the most important parts of success.
Do you value a debt free life more than your desire to consume?
Big question. You must be honest with yourself. Only then can you move forward.
2. Increase AND Elimination
Many people approach debt reduction with one or the other: either increase your income, OR eliminate your expenses. But the reality is, it takes both to truly be successful.
You must not only cut out and cut down on your expenses (stop spending money), but must also seek ways to increase your income.
That may mean getting a part time job in the evenings. Delivering pizza, driving for Uber or Lyft. Start an online business (just be careful not to fall for some of the hype and ‘money grabbing tactics’ of unethical online marketers).
The options are unlimited (depending on where you live). There are ways to make extra money, you just have to look for them. It comes back to your level of commitment. If you want it bad enough, you will find a way.
Increasing your income is just as important as cutting your spending. If you do both, you will hit your debt with rapid fire punches and get on the fast track.
3. A Balanced Life
Let’s face it. Most credit card debt is the result of an unbalanced life. Desire for stuff overcomes need for control.
If you are to build the life of your dreams (and have the stuff you desire) you must learn to say ‘No’ to immediate gratification.
Simply put, you must say ‘No’ now, so you can say ‘Yes’ later.
This is the essence of a balanced life. The ability to put off gratification until you can truly afford it.
I have counseled people who are addicted to spending. Counseling is the prescription. You must deal with the inner ‘stuff’ going on so you can regain power in your life.
4. Live Beneath Your Means
I know you’ve heard a thousand times. But this is the key. If you spend more than you make, you will always be behind. It’s simple math.
But here’s the problem. Some people spend more than they make. Do it on a regular basis and you get swallowed in debt.
Other people spend AS MUCH as they make. They too get swallowed. The first time an emergency comes up, they are not prepared, so they ‘put it on a credit card.’ Because they live pay-check-to-pay-check they can’t get out from under the debt.
You must be committed to living BENEATH your means. That means if you make $4000 a month, you cannot spend $4000 a month. You must spend WAY LESS if you are to build a better life.Financial Success...You must be committed to living BENEATH your means. Click To Tweet
Here’s a rule of thumb I try to live by…
1) Save 10% (more if possible, but this is a starting point).
2) Give 10% to charity. (I’ve never met a successful, happy person who didn’t ‘give back’ to others. The entrepreneurs I know ALL give more than 10% back to charitable organizations. There is a psychology and science behind this that creates success. We’ll address that in a future article.
3) Build a slush fund for emergencies. Dave Ramsey says you should have 6 months or more of living expenses set aside. That seems unrealistic to many, but it is a safe goal for the future.
Even if you start with setting aside 5% for this special fund, at least you will be moving forward instead of backwards.
4) You must get your lifestyle below the remaining 75%.
The unfortunate truth is most people live at 100% expenses. They spend all (or almost all) of what they make each month. This keeps them from ever getting ahead.
How do you live beneath your means?
Start by cutting out any and every expense that is absolutely not necessary.
You have to be honest here. Most people play pretty loose with the term ‘necessary.’ Let me spell it out.
If you have consumer (credit card) debt, you can’t afford to eat out every night. Even every week. It is much cheaper to cook at home. I’ve done the math a thousand times. If you shop smart you will save by eating at home.
There are hundreds of things we usually do each month that are not essential. Get ruthless. Remember, this is priority #1. So get forceful about it. You can reward yourself when you achieve victory. Not before.
This may mean you need to start liquidating. Sell things you don’t need. Stuff is your enemy. We all have a ton of things around the house that can be sold. That money is to be put toward your debt. Nothing else.
What do you have that you can sell?
Take 30 minutes and walk through your house. Make a list of things you don’t really need. Open an eBay account and sell them. Or put them on Craigslist. VarageSale. Or whatever internet platform is available to you.
Note: I just bought a freezer from a guy who was trying to pay off debt. It was a win-win. He received money to move him toward his goal, and I got a great deal on a household item that we desperately needed. (I can do this because I am debt free).
So what do you have you can sell?
A extra car you don’t need? A motorcycle? Boat? Extra refrigerator?
Remember…stuff is your enemy at this point. Debt free is your priority. NEVER let the stuff you have get in the way of becoming free from debt.
5. Kill the ‘Jones’!
Ok. Not literally. But I hope you get the point.
If not, here it is. When I was young I use to hear my dad talk about people who lived in debt. They spent all their money on luxuries they couldn’t afford. Stuff they didn’t need.
They did it because their neighbor did it. Dad called it, ‘Keeping up with the Jones!’ It was a ‘No No’ in our house.
My father preached against doing something just because someone else did it. It taught me to never buy something just to look good, or appear to be something I wasn’t.
With that in mind, you have to ‘kill the Jones.’ You have to put to death the desire to have stuff just because other people have it. That’s lust and greed. It will destroy your life.
My wife read a few books over the summer. They all were about millionaires and their lifestyles. She discovered that the majority of millionaires in America are people who live modest lifestyles.
You would never know they were rich unless you really knew them personally. Why? They lived beneath their means. And they didn’t live to keep up with the Jones.
She discovered that most millionaires were actually pretty frugal. They did not care that people knew how much money they had. They just enjoyed living comfortable and stress free.
Quick question: Do you have a desire to have stuff just because your buddy at work has it? Do you try to drive a nice car (even though it means loads of debt) so people will think you are ‘well off’?
If you are serious about building a better life…serious about getting rid of debt for good, you have to kill the Jones. You cannot let the spending habits of others dictate what you own and what you spend.
Put that death!
6. Live a Budget Lifestyle
This is related to #4 – live beneath your means. But this is ‘how’ you do it.
I’m amazed at how many people I counsel simply do not control their flow of money. They do not live on a budget.
Dave Ramsey says:
You will either tell your money where to go (with a budget), or your money will tell you where it went!
My wife and I have lived on a budget our entire marriage. When I get an increase in income, we don’t automatically change our lifestyle. That has been one of the keys to our success and freedom.
Too many people automatically increase their spending when their income increases. This is a recipe for disaster. Sure you can enjoy the fruit of your labor and hard work, but do not indiscriminately raise your lifestyle with every increase in income. Make sure your increase produces more increase. We will talk about this some in Part 2.Make sure your increase produces more increase. Invest in yourself! Click To Tweet
Back to our budget…
A budget determines ahead of time what you can spend. It’s that simple. If it’s not in the budget, don’t do it. No matter how much you want it.
If it is important to you, then budget for it.
Here’s how a budget works.
1) How much to you make?
Write it down. Create a spreadsheet (paper or excel document). This is the number you will work with. It’s the magic number. All expenses MUST be lower than this number.
Remember my helpful suggestion above? Try not to let your expenses be more than 75% of this number.
For example, if you make $4000 a month, your monthly expenses should fall below $3000.
I realize that when you are in deep debt this may not be possible. But the goal is to get out of that debt as fast as possible. So we will have to do surgery on the following numbers.
2) What are your monthly expenses?
Write these down. Include everything. I mean everything.
Why? We will attach these numbers and eliminate what we can, lower what’s possible, and work with what’s left.Expenses: eliminate what we can, lower what’s possible, and work with what’s left. Click To Tweet
Read that sentence again. Read it slow and let it sink in. It is the essence of what follows.
Here’s what I mean.
You make $4000 a month.
Your household expenses are $3000.
You have $1000 in credit card debt.
Here’s the strategy…
Review all your household expenses and determine what category they fall into.
A. Can it be eliminated?
Can you cut out cable? Netflix? Hulu? Amazon Prime?
What expenses in that group can you eliminate and still survive?
Be ruthless. We are attacking this like it’s an enemy. Because it is.
Water. Electric. Mortgage or rent. Those are things you can’t eliminate (unless you have serious debt and you need a do-over. If that’s you, you probably need profession counsel on what to do.) We take a look at what to do with them in a minute.
Things like Netflix, Hulu, Cable, dining out, etc. These are things you CAN live without. You can. You may not WANT to, but you can. Question is, what’s more important to you? Freedom or those things?
This is the ‘eliminate what we can’ phase.
B. Can it be reduced?
I mentioned the things that can’t be cut out completely above. What can you do with those things? Cut back or reduce them!
Can you cut back on your electric bill to save? Run the AC less? Use less water?
I know these sound like petty things, but those expenses add up.
You can’t live like you have unlimited supply. So cut back.
What can you reduce? Take a hard look at all those expenses on list and determine what you can lower.
Maybe it’s fuel. You can carpool with co-workers.
Perhaps it’s groceries. Don’t buy ‘name brand’ items. Truth is they cost more. You may have to sacrifice what you like, but you can do it.
Do not buy indiscriminately. Make a list BEFORE you go grocery shopping. Cut out the impulse purchases by knowing ahead of time WHAT you need, and HOW MUCH you can spend. This is the essence of a budget.
So the second phase is to determine what can be reduced?
This is the ‘lower what’s possible’ phase.
Once you have done that, move on to the third category…
C. Manage the Rest
Anything left on your list should be things that are ABSOLUTELY essential to your life.
These are usually the fixed (or relatively fixed) expenses.
Mortgage payment. Phone. Electric. Water and gas. Groceries.
As I mentioned before, if you can reduce these, do it. That money can temporarily be used to wipe out your debt. You can always add items back once you regain your freedom. But not until.
This is the ‘work with what is left’ phase.
Now the real work begins. Make a budget and live within it.
You need to set a specific amount for each item.
For example, groceries.
Do not just go shopping without a list (mentioned above) AND the amount of money you have to work with.
If you know you only have $500 a month to work with, buy accordingly. It may mean you eat Tofu or beans and rice for a few days (or weeks), but if you are serious about freedom, you have to pay the price.
There is no easy way. At least not in terms of implementation. The plan is easy. Simple. But doing it takes work, determination and commitment.
When you set a specific budget amount for each of these items, you can pre-determine what is spent. Remember Dave Ramsey’s advice about money?
You are either telling your money where to go,
Or it is telling you where it went!
Trust me. The former is better than the latter.
You will never have the life you desire if you do not learn to control your money. It will always control you.
Mastering your finances is one of the first things you must conquer to build a better life. Almost everything else revolves around this.You will never have the life you desire if you do not learn to control your money. Click To Tweet
Understanding and making these principles a part of your life is the starting place. If you are not committed to these, no amount of practical advice will work. No strategy will work until you decide that these principles will guide your life.
For more information on mastering your money, check out our FREE offer, ‘Mastery of Money and Romance: Secrets of Attracting Greater Wealth and Romance in Your Life!‘
For practical help in how to deal with creditors, card companies, and collection calls. Offers tips and templates for letter writing and correspondence. Also provides practical advice on how to get out of debt.
This is a course teaching how to use little known laws to your advantage to retire your debt. Note: I have not personally reviewed the entire course. I include it here because of the technical legal information, and others have used it to their advantage. Proceed with caution.
In part two we will look into a few practical ways to get rid of credit card debt.
Before then, what do you think?
What is your biggest money struggle?
Have you tried a debt solution that worked? If so, tell us about it.
Leave a comment below and let us know what you think.