Five Essential Steps to Get Out of Debt

As discussed in our article on Five Tips to Survive the Economic Crisis, reducing or eliminating your debt is critical to surviving an economic crisis, because if you have no debt payments, you can use more of your monthly income for essentials like food and shelter. Here is an action plan on how to reduce debt:

1Start by making a family budget. This step is critical, and is not as hard as it sounds. Start by making a list of everything you spend money on each month. You may need to review your bank statement or credit card bills or old statements to get accurate numbers. Write all of the numbers on a piece of paper, or use a spreadsheet or a computerized budgeting program. It will be easy to include your regular monthly expenses, like rent, but don't forget to include irregular items, like Christmas and birthday presents, car repairs, and other one time items.

2Now that you have a list of your expenses in front of you, get out the scissors and start cutting. Trim expenses wherever you can; even a cut of a dollar or two will add up to big numbers over time. Here are some expenses to chop:

• Housing Costs: Rent or mortgage payments are often our single biggest monthly expenditure. Here are some ways to cut your housing costs:
  • move to a smaller place; you won't have as much room, but you will have more money in your pocket;
  • get a roommate or a boarder to share costs;
  • if you own a house, consider selling it and renting. This may seem like a drastic move, but as house prices decline, owning a house may not be a great investment over the next few years. Your rent payments may end up being about the same as your mortgage payments, but you save on property taxes, repairs and maintenance, and all of your upkeep costs.
• Car: The second most expensive cost for many people is transportation. If you financed your car, you have a lease or loan payment each month, plus insurance, gas, and repairs and maintenance. Could you survive without a car? Could you take public transportation or get a co-worker to drive you to work? Giving up your car may also seem like a drastic move, but you can always rent a car or take a taxi when you need them, and the costs savings each month can be significant.
• Food: Groceries and eating out are probably your next biggest expense each month. Here are some ways to reduce what you spend on food:
  • Make your own meals. Eating out or ordering in is convenient, but very expensive. Learn to prepare simple meals, and you will save a significant amount of money.
  • Plan your meals in advance. If you know what you will be eating, it's a lot easier to buy only what you need, and to avoid the temptation to order in at the last minute.
  • Eat seasonal and fresh. Food is least expensive when it is grown fresh and in season, so vary your meals based on the time of year. Farmer's markets and roadside stands are often a great source of fresh and inexpensive food.
  • Have an inexpensive food night, so you can splurge another night. For example, on Tuesdays have "macaroni and cheese night", so that you can have a steak on Friday night.
  • Brown bag it. Buying lunch every day is expensive. The easiest lunch to make is leftovers from last night, so make an extra big supper, and have it again for lunch the next day; it's two meals for the price of one.
• Telephone: Do you need all of those extra features on your phone? If not, cancel them. In fact, do you need both a home phone and a cell phone? Many people who never spend any time at home have actually cancelled their home phones and only use their cell phone. If you have an unlimited minute plan, this may be much cheaper than having a land line.
• Cable TV: Do you need 500 channels? If not, only pay for the channels you actually watch. You probably watch more TV in the winter than in the summer, so consider reducing your channels in the summer, and adding them back during the times of year you actually watch TV.
• Coffee: How often do you visit the local coffee shop? What do you spend each week at the coffee shop? To save money, buy a coffee maker (you probably already have one) and some coffee, and make your own. Before bed each night fill up your coffee maker, then when you wake up in the morning, push the button. Fill up your insulated coffee cup or thermos, and you can drink lots of coffee at a fraction of the price.

3Now that your expenses are under control, look for ways to increase your income. If overtime is available at work, take it. If not, consider getting a part time job in the evenings or on weekends. You will burn yourself out if you work 12 hours a day, seven days a week, but most people can handle an evening job one or two evenings a week, or one day on the weekend.

Another great way to increase your income is to start your own home based business. If you have a hobby or skill, consider using that as the start of a small business. If you like gardening, start cutting lawns or planting gardens for people in your area. If you do start a business, start small, start part time (don't quit your day job until your business is making lots of money), and start with as small an investment as possible (start by using your own lawn mower; don't start by buying a big lawn tractor).

To review: you made a budget, and then worked to reduce your expenses and increase your income. Now, you get to reap the rewards of your hard work:

4Start paying off your debt the smart way. If you were successful in cutting expenses and increasing your income, you can now use that extra cash flow each month to start paying off your debt. Here's how:

Make a list of every debt you have, including credit cards, bank loans, lines of credit, payday loans, car loans and mortgages. On your list, write down the total amount owing, the minimum monthly payment, and the interest rate you are being charged.

Each month, pay the minimum payment on each debt, and pay extra on your high interest rate debts. If you have a department store credit card at 25% interest and a line of credit at the bank at 10% interest, pay off the high interest credit card first, because you will save on interest payments, and get out of debt faster.

A common mistake people often make is to pay off their smaller debts first. It's tempting to say "I only owe $500 on that credit card, so even though it's a low interest card, I'll pay it off first". If you only owe $50 then feel free to pay it off so that you have one less payment to manage each month, but in general you should pay off high interest rate debts first.

And now, the final and most important step:

5Avoid new debt! This step is critical. Over the years the professionals at Hoyes, Michalos & Associates have met with thousands of people who had debts, got them paid off, and then got into debt again. Here's a common case study:

So here is the most important tip: once you pay off your credit card, cancel it! You don't need five credit cards. Keeping one credit card with a small limit for emergency use is fine, provided that you pay it off every month. Use cash or a debit card for your daily expenses. Once you pay off your card, call the credit card company and cancel it, then cut it up so you won't be tempted to use it again.

Bonus Tip:What can you do if these five debt elimination steps don't work? What if your debt is so large that cutting expenses and increasing your income isn't enough? Then you need a different plan. You probably need professional help.

You may need to file a debt management plan, a consumer proposal, or even personal bankruptcy.

You can read more about making a get out of debt plan or you can e-mail us or call us today at 310-PLAN (that's 310-7526, no area code required) and one of our professionals will meet with you and help you work out a plan to become debt free.