20 Things I’ve Learned While Getting Out Of Debt

by Ron Haynes


peace

I’m so close, so close to being debt free (except the mortgage). In the last 18 months, my wife and I have paid off over $53,000 in consumer debt. We’ve paid off two car loans, two major credit cards, two store credit cards, and my daughter’s braces. All I have left is the mortgage and my student loans, and the student loans should be paid off by the end of the summer!

I was thinking about what’s different this time. If you’ve read this blog since last year, you know that I’ve been debt free before, but I botched it by going BACK into debt. It is like the truffle story I wrote about a few days ago. Even though I had struggled greatly to get out of debt, once I reached that goal, I didn’t’ set another one to remain debt free. After living on a budget and paying off my debt before, I abandoned the budget and re-started my old habits again. Just like the people who lose weight and then gain it back (plus some), I went deeper into debt than before.

This time it IS different. My wife and I are on the same page. We’re tired of being shackled by the payments and we both want the options that come from being in control of our money. Here’s a few other things I’ve learned:

1. You must have a plan
Don’t even think about getting out of debt without a plan. Bankruptcy isn’t a plan. Calling all your creditors to set up a workable repayment schedule IS a plan. Writing and sticking to a budget IS a plan. If you spend until there’s nothing left, there will NEVER be anything left.

2. Have a plan for AFTER the plan
This was MY fatal flaw before. Before you hit your goal for getting out of debt, make sure you have a plan for the day after, and the day after that, and the weeks, and months, and years after that. How WILL you spend your money. How will you handle emergencies. How will you handle the urge to spend? Just for fun, write out a spending plan that will go into effect the day after you make that last payment.

3. Your emergency fund is wimpy
Your 3 to 6 month worth of expenses emergency fund may not cut the mustard. Lots of people are finding themselves unemployed for 6 months or more, so if your emergency fund only has 3 months worth of expenses in it, now what? I’m working to fund mine with a years worth of after tax living expenses, just in case.

4. Pay cash, but maybe not with a debit card
I’m finding more and more places that place a hold on my debit card for more than I actually spend. Sure the hold is released after a day or so, but if you cut things close in your checking account, you could end up with some bounced checks. Have you seen the charges banks are levying for bounced checks lately? $35? Yikes!

5. Banks are not always your friends
Float time is a thing of the past. Not only for depositors, but for the banks themselves. Many banks (though they claim they don’t do this – yeah right) will sort your debits and credits in such a way that it’s to their advantage. Before the bankers out there send me a nasty email, I used to work at a bank. I know how these things work. The more a bank can collect in fees, the more profitable they are. The lesson: don’t cut it too close.

6. Pay your mortgage or rent first
Don’t allow the roof over your head to financially collapse. Your car loan is secondary. You can always buy a clunker at a “buy here pay here” lot. Food is secondary. Cell phones are secondary. Credit cards are secondary. Your mortgage should be first on your list of payments.

7. Don’t use a second mortgage or home re-finance to prop up your lifestyle
Sure you might be able to “roll your car note” into your home, but you probably re-financed for 30 years. Now, instead of paying another 4 years on that new Camry, you’re paying for it for 30 years. It works the same way for that “dream” vacation, or that entertainment system, or that wedding reception. If you decide to re-finance your mortgage, don’t pull out any cash. Take the smaller interest rate and give yourself some monthly breathing room.

8. Stop digging the hole
If you find yourself in a hole, the best thing you can do is stop digging. A debt problem isn’t solved by going into more debt, so cool it with applying for more credit. If you’re already in real trouble, all you’re doing is damaging your credit score anyway. Too many times, I applied and re-applied for credit, thinking I could borrow my way out of my problems. THAT never works!

9. Balance transfers aren’t the cure-all for your credit problems
Most of the time, people that transfer their old credit card balance to a new credit card (for the fabulous rate) just charge up the old card again. They didn’t have a plan for after the plan and they didn’t change any behaviors. I know. I made this mistake myself.

10. Slow down the purchase process
In my personal experience, most bad financial decisions I made were because I was in a hurry. When I slow down my decision making process (when it involves spending significant amounts of money), I make better decisions. An old, rich guy told me one time: “Once in a lifetime deals come around about every two weeks,” so I don’t worry that I’m missing out on that “once in a lifetime deal.”

11. Pay your bills on time
With the interconnectedness of credit issuers, making one payment late — on ANYTHING — could rate your rates on EVERYTHING. Sure you can probably plead your case long enough and loud enough to get things changed back, but do you really have time for all that? Pay your bills on time.

12. Live significantly BELOW your means
Really, this one should be higher on the list. It isn’t enough to live within your means, you’re just breaking even then. If you want to get ahead and build wealth, you’ll have to live below your means. The further beneath your means you’re living, the more wealth you can build. My personal goal is to live on 50 percent on what I bring home after taxes.

13. Watch your statements like a hawk
After signing up for Cash Crate (which I DON’T recommend), I was zinged for $30 in fees on my phone bill they claimed I authorized. Hogwash. If I hadn’t been watching that bill, I would have paid another $360 this year. Lesson: watch your statements on utility bills, credit cards, and anything or anyone that claims you owe money.

Note: Cash Crate may be a legitimate company but they seem to associate with some that are not. Many of their “opportunities” are a bit devious and force you to choose an offer, ven if you really don’t want it. You find yourself in loop after loop and then you find a charge on your phone bill. Beware.

14. Freebies aren’t free
Those offers may sound great, but someone pays for everything, even the free stuff. Freebies are designed to get you hooked on their product or service. The reason there are so many great “introductory offers” out there is that they work. All too often people get sucked in by the low initial price and never bother to opt out or cancel the service. Beware of freebies.

15. Avoid co-signing for anything
One of my readers, Gary, sent me an email about his experience co-signing for a car with his brother.

“It was a 36 month loan and to be honest, I forgot about it. My brother always made the payments and there was never a problem until he lost his job. Now, I’m on the hook for HIS car. I just wish he had told me he was 3 months behind so MY credit wouldn’t have been hurt.”

16. Always make sure you and your spouse are on the same page
I know I mentioned this before, but if you and your spouse aren’t on the same page with debt elimination, you’re swimming upstream. My problem was that she was always anti-debt, I was the one with no self control. Have a talk. Listen. Make a plan together.

17. Changing your finances means changing your personality
Your personality isn’t written in stone. You CAN learn to change and be different. Don’t fall into the trap that you’re “not good with money,” or that “you just don’t have any self control.” You CAN change for the better. To do so, get a mentor, study what you want to do or be, take steps that direction, and reject those pessimistic beliefs. Regularly read The Wisdom Journal or any site on my blogroll, read sound books on personal finance, and hang out with people who share your desire to live a debt free life.

18. Approach your personal finances like you were a CEO
Dave Ramsey tells people to look at themselves as if they were hired as the CEO of their personal financial situation, cut expenses, make extra money, do whatever it takes to shore up the “company.” The key is to take action, sometimes drastic action, and take it NOW.

19. Credit produces an artificial prosperity
Too many times, the big house, the fancy car, the huge entertainment system, is “purchased” on credit. I have a friend who lives in the hoity toity subdivision back home who says, “The big houses around here are more indicative of the size of the mortgage than the size of the bank account.” I’d rather have the big bank account than the artificial prosperity that’s bought with debt. Don’t think you can make extra money by borrowing it.

20. Paying off debt gives me more options
By freeing up so much monthly income, I can now use that cash to invest in mine and my family’s future, to invest in the lives of others, to invest in organizations and causes I believe in. And I’ll be able to teach my children the importance of STAYING out of debt so we CAN do these things.

photo credit: jnewland

About the author

Ron Haynes has written 1000 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 7 comments }

Mary

Great post – having a plan after the plan truly resonates with me! It’s easy to “take a break” and before you know it …

Another big thing we learned was how much fun you can still have when you can’t spend money! We got really creative, had a blast and drew much closer.

It is so worth it!

Pilgrim

This is good advice. I made some of the mistakes you mentioned and work at not making them again, often failing. Then I start over with good intentions. My parents as far as I know lived debt free, most all their lives. They did not always have THE BEST of every thing, but I do know they laughed often and were very happy.
Thanks for the reminder of how good it is to be debt free.

Ken

I have a minor quibble with #6. I spent 15 years as a Bankruptcy and debtor defense lawyer and when my friends would ask me what I learned about finances from dealing with hundreds of people in severe financial distress I would tell them my 3 rules of financial survival.

1. Pay Uncle Sam first.

2. Pay your mortgage or rent second.

3. Hang on to the first wife.

I believe your #6 assumes that the reader has their taxes deducted from their checks and or has no arrearage to the IRS. You have a lot more avenues of relief and leverage against a mortgage holder or landlord then you do against the treasury.

Admin

Ken→

That’s not a minor quibble and your point is well taken. But these were things I learned and I’ve never been in trouble with the IRS! Thank goodness.

But I agree with you 100 percent. Pay your taxes unless your ready for an extended vacation in the “big house.”

Great comment.

Jan

Ron!!!
How did your wife handle the fact that you were not on the same page about finances???? It is obvious….you can’t change a person….but you can influence them! This is a biggie for me…I am not the spend thrift…..hubby is and always has been! You have heard the expression “The money is burning a whole in his pocket!” That’s him! Literally…at least it seems that way at times!!! :???:

Dan Massicotte

Having a plan for after you get out of debt is good. But don’t forget to have a plan for the long-long run (aka life).

Going on a food diet is a lot like trying to get out of debt. Problem is, most people don’t have a plan for after their diet is over, and they gain it all back. What I found works best for me is having a long-term plan that entails small amounts of action, but that last for my life. Like, working out 2x per week for years, rather than 4 times for just a few weeks and then getting sick of it.

Carla

This is really good advice thats simple to follow. I am working out of $5K of medical debt and #20 is the goal.

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