Debt is becoming an epidemic in America. MONEY recently did a study into the Federal reserve’s Survey of Consumer Finances that examined how much debt and of what type Americans had, as well as at what age they carried that debt. The results are actually rather surprising in that the age group that carried the most debt is the group that was in their prime working age. The group that should be making enough money at the time to pay for things, is financing them instead.
Here is the breakdown:
Under 35: $67,400
75 and up: $34,500
So now you are sitting there looking at your screen telling me that you know this and want to know how to get out of this debt. Okay, this article is for you.
The first step is to have a frank and truthful conversation with yourself about how you got to this point and figure out if you are truly ready to begin this journey. It is not going to be easy and is going to take dedication and sacrifice. The one thing to keep in mind is that once you debt-free, you will be able to live life like you have not lived in years.
Step Two is to establish a small emergency fund of $1,000-$1,500. That range was chosen because it is the average of any major emergency that may happen and is an attainable amount within a relatively short period of time.
This emergency fund is here for things like medical emergencies, emergency car repairs, etc. This fund is not for planned medical expenses, vacations, eating out, etc.
If you have to use your emergency fund, replenish it as quickly as possible. That means putting all other debt paying activities on hold until your emergency fund is completely replenished. This is your safety net while you climb the Debt-Free Ladder. Without this safety net, a small emergency could derail your entire effort.
Step Three is to begin the journey up your Debt-Free Ladder. This involves gathering a list of all of your debts, except your mortgage, and sorting them by balance from lowest to highest. Don’t worry about the interest rate or any promotions. This also includes debts to relatives, friends, credit cards, student loans, personal loans, auto loans, etc.
Once you have your debts sorted, you have constructed your Debt-Free Ladder and can now get an idea of what your climb will look like.
To attack this climb, you will pay off the debt with the lowest balance first by throwing every extra dollar you can at it while still making minimum payments on your other debts. Once your lowest debt is paid off, you will take what the minimum payment was on that debt and add that to the payment for the next lowest debt to begin paying that debt off.
For example, if your payment on your lowest payment was $50/month and your minimum payment on your next lowest debt was $50, once you pay your lowest debt off you would add that $50/month to the next debt and pay $100/month.
By doing this, you are putting more money on the principal and will pay it off much sooner. You are, in theory, increasing the size between rungs to cover more distance on your way up the ladder. By the time you reach your last debt, you will be putting so much money on it per month, it will banish in no time. The impossible will seem possible.
Step Four is to establish three to six months worth of income as an emergency fund. This is important because now you are virtually debt free, except for your mortgage. You are no longer living paycheck to paycheck, however emergencies can still happen. You will want to be able to survive at least 3-6 months if you lose your job or become injured.
Step Five is to pay off your house! That’s right, get out from under that mortgage. Your house is going to be your biggest debt and now that you have no other debts and have a big enough emergency fund to survive for a little if something happens, start to throw every extra dollar at your mortgage. Once your mortgage is paid off, you will be well on your way to becoming a millionaire. Well, that is where the last step comes in.
Step Six is to invest in your 401k. Your 401k is your strongest tool to building wealth and eventually becoming a millionaire. If your employer offers one, contribute at 15% of your pay to it. It helps if your employer matches a certain percentage as well. Check with your benefits department for the details of your specific package.
As I said before, these steps are not rocket science and they have been implemented all over by people who have successfully become debt-free and have built wealth. They are common sense and not difficult in their theory, but they are very difficult if you do not have the dedication and willpower to stick with it and if you are not at the point where you are completely ready to turn your life around.
You can do this, I believe in you!
Please share your journey in the comments section.