Most of us have sat around on a lazy afternoon and day dreamed about getting out of debt. We imagine a debt-free budget, tons of disposable income and the freedom only debt freedom can bring.
Unfortunately, few of us actually take action on those dreams, for one reason or another.
- It’s too hard.
- It will take too long.
- I don’t want to sacrifice my (insert guilty spending pleasure).
The truth is that getting out of debt is hard, it will take some time to dig out (depending on how deep the hole), and you will have to make sacrifices. There are no short cuts to debt freedom.
Those who do choose to draw a line in the sand and make a stand against debt often ask, “Where to I even begin?”
It’s a great question; it’s the right question.
The very first step towards getting out of debt is to take an inventory of where you stand.
- Grab a pencil and a notebook (I recommend personalized notebooks with pictures that motivate you to get out of debt) and make the following column headings: Debt, Amount Owed, Minimum Payment, Interest Rate.
- Call, go online or review your latest paper statement to determine the amounts owed for every single debt you owe and complete this sheet.
- Order the debts from smallest balance owed to largest balance owed. This is referred to as the Debt Snowball method of repayment, and it is the method I’ve used the last couple years.
- Transfer your debts to a lower interest rate.
The debt snowball method of paying off debt ignores interest rates because, for the most part, they are irrelevant.
Sure, you might pay a bit more in interest over the length of a loan at a higher interest rate, but if you are committed to paying off your debts in a quick manner then the rates won’t make that much of a difference.
What will make a difference is the emotional boost you get from paying off a debt with a small balance. It’s a “quick win,” and it provides momentum, financially and emotionally, necessary to pay off your remaining debts.
This first step, taking inventory, is most important for a couple reasons.
First, you must size up the enemy. You have to fully appreciate the monster you are going up against.
It may seem demoralizing to see the numbers on paper, but trust me, it is empowering to know where you stand and where you want to go.
Secondly, it’s nice to have a baseline so that as you pay off debts you can track your progress. It’s this progress, the official record of this progress, that motivates you to continue.
If you are ready to become debt free then I urge you to do something radical tonight.
Turn off the television and sit down to record each of your debts.
I know it is an anxiety-causing action to even think about getting your number, but once you have the exact number you can begin mapping out a strategy to begin shrinking that number.
Be sure to check out the rest of our series, How to Get Out of Credit Card Debt