Part 2
How to Get out of Debt – The Step-By-Step Plan
If you are ready to become debt-free, here is an effective, proven strategy that will help you get out of debt in an organized way. Following the step-by-step plan will get you out of debt in record time.
Step 1- You have to absolutely, totally, 100%, commit yourself to getting out of debt - and commit yourself to following your plan, no matter what happens.
This may seem obvious, but the only way you are going to succeed is if you are 100% committed to your debt elimination plan. Anthony Robbins, well known motivational speaker, says that it's in the moments of decisions that our destinies are shaped. Decide TODAY you are going to make it happen. Do not take this step lightly. You will not succeed unless you commit yourself. It may help to get a buddy to keep you on track.
If you ask a successful dieter how they lost the weight and kept if off, they will tell you that it was not by starving themselves, but by committing to a sensible plan. It is that commitment that gets you back on the horse if you fall off the wagon.
Step 2- Stop charging your credit cards as of today!
Your main goal right now is to get out of debt as soon as possible. So you must cut your spending. I know this is tough to do, but you have to cut your credit cards. (Keep one in case of an emergency.) If you are truly committed, stop reading and start cutting. To get out of debt, you will need to change your habits. Your old habits will not work!
The sacrifices you make now will have an incredible benefit in the long term. From now on, if you cannot pay cash for something, don’t buy it.
Step 3- Find out where your money is going.
You need to know exactly where your money is going and what your expenses are.
You can use a program like Quicken, AceMoney Lite (free), or similar software to track your money. Use a notepad, a pen and calculator if you don’t have a computer.
You must write down ALL your expenses so you can determine exactly where your money is going. Carry with you a piece of paper where you can write down all your cash expenses. They are usually the hardest to track but add up very quickly. Did you buy candy and a soda when you filled up your tank? Write it down.
Example of a Daily Record
Thursday, February 12
| ||
Coffee & pastry
|
$3.50
| |
Lunch
|
$7.90
| |
Magazine
|
$5.00
| |
Soda
|
$1.00
| |
Vending machine
|
$1.00
| |
Groceries
|
$76.85
| |
The benefits of this log will be fantastic. Have you ever wondered what happened to that $20 bill you had in your pocket yesterday? It will never happen to you again, when you start to track your daily cash expenses.
At the end of the week, you will add all the numbers up so you can come up with your weekly expenses. This will be easy, once you have all your daily logs filled out.
Example of a Weekly Record
February 8-14
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Breakfast
|
$17.50
| |
Lunch
|
$42.00
| |
Office Depot
|
$25.00
| |
Entertainment
|
$14.00
| |
Snacks
|
$12.00
| |
Groceries
|
$126.85
| |
Gasoline
|
$41.00
| |
At the end of the month, add all your weekly records to come up with exactly how much money you spent that month.
Example of a Monthly Record
Spending Record - February
| |||||
week 1
|
week 2
|
week 3
|
week 4
|
TOTAL
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Rent / Mortgage
|
1200
| ||||
Groceries
|
140
|
87
|
95
|
120
|
442
|
Lunch
|
42
|
46
|
53
|
30
|
171
|
Breakfast
|
17.5
|
22
|
16
|
18
|
34
|
Laundry
|
6
|
6
|
6
|
6
|
16
|
Gasoline
|
60
|
45
|
70
|
40
|
215
|
Gas & Electric
|
80
|
0
|
0
|
0
|
80
|
Entertainment
|
30
|
0
|
45
|
15
|
90
|
Cell Phone bill
|
0
|
0
|
80
|
0
|
80
|
Cable TV
|
76
|
0
|
0
|
0
|
76
|
Magazines
|
5
|
0
|
0
|
5
|
10
|
Newspaper
|
2
|
1.5
|
2
|
2
|
7.5
|
Office Depot
|
25
|
0
|
0
|
0
|
25
|
Fast Food
|
22
|
0
|
16
|
26
|
64
|
Pizza
|
12
|
12
|
0
|
0
|
24
|
-Eating lunch out: at $8/day, it is around $200 per month. Some people spend $10 or $12 every day on lunch. Bag your lunch a few times a week.
-Going to Starbucks twice a week: if you only spend $6 a week, it would amount to $25 a month. Maybe you could skip it every now and then?
-Cable TV: Maybe you spend $80/month or more, when you could be paying $40 to $60 by eliminating channels you seldom watch.
-Occasional fast food: $25/week would mean $100/month.
-Magazine subscriptions you seldom read: Cancel them! Same with newspapers, music services, etc.
-Enjoy movies and popcorn at home instead of going out.
-Use coupons for groceries and buy store brands. Don’t be tempted to buy something you don’t need just because it’s on sale. Also, beware of “bargains”. If you are the type of person who is attracted to a “Sale” sign as if by a magnet, be aware that they are responsible for much impulse spending.
- Shop at consignment stores & discount stores like Ross or Marshalls (their clothes are usually good quality and people won’t notice!)
- Cut down (or eliminate) sodas and snacks. They only make you fat, anyway.
- Eat frozen pizza at home instead of ordering out.
- Use your creativity! Where else could you save money? Remember, you do need to change your lifestyle if you want to make it happen.
- Call two or three car insurance companies and get new quotes. If you can lower your insurance payments through another company, then go ahead and switch! I saved over $600 a year with a 5 minute phone call.
Step 4- Develop a budget.
Consider this: most people spend more time planning a 3-day weekend than they do planning their life. By making a budget, you are committing yourself to getting out of debt, in writing. Use the budget spreadsheet you will find at the end of this book (under Resources) to prepare your budget.
Step 5- Make a list of ALL your creditors (credit cards, department stores, etc) and call them.
You are going to ask them to lower your rate. This has worked amazingly well for many people, including myself. Here is a simple script you can use: "Hi, my name is [Your Name]. I am a good customer, but I have received several offers in the mail from other credit card companies with lower interest rates. I would like to see if you could lower the rate on my card, as it is a little high”. If they say no, then say something like “I would hate to have to switch to another company after being with you for __ years… could you please check again, or could I please talk to your supervisor?” You can also ask to eliminate any fees they may have charged you recently (late fees, yearly fees, etc).
If your credit card company doesn't want to lower your rate, just try again a few days later. You can also say things like "What can you do to help me out?" or "Can you do any better?" For this strategy to work, you have to be polite, but firm. Never threaten, raise your voice or get angry.
Step 6- Open a savings account if you don’t have one, and deposit money in it every month.
“A part of all you earn is YOURS to keep”George Clason, “The Richest Man in Babylon”
You have to pay yourself first. This is how you will start building wealth, and it will also be your emergency fund. Every time you get paid, deposit some money in your savings account.
You need to consider two things:
1- Treat it just like any other bill. Deposit money every month, even if it's only $25. Deposit more when you can. Once you make it a habit, this account will grow very quickly;
2- NEVER withdraw money from this account (unless, of course, you have a real emergency that you cannot cover with your income). If you do make a withdrawal, make sure you “pay yourself back” as soon as possible. Hold a garage sale, sell stuff you no longer need, do whatever it takes to replenish the money you took out, AS SOON AS POSSIBLE. Otherwise, let it grow at least for a few years. Once you are debt-free, you can use this money as a down payment for a house, or any other investment. This is critical! Note: a birthday present is NOT an emergency. The idea is to have money in case you need to repair your car, for example, so you don’t deviate from your debt elimination plan.
Step 7- Fill out the debt elimination chart, and put the Debt Elimination Program into practice right away.
You will find a copy of the debt elimination chart at the end of this book. You will need it for this exercise. During your Debt Elimination Program you will be focusing on one account at a time and making minimum payments on all others. This is crucial to your success.
When you send an extra $40 to a credit card company, an extra $25 with your car payment and an extra $20 to another account, you are only diluting your efforts. If you tackle many accounts at once, you may feel like you are not accomplishing much because you don’t see tangible results. And you will feel discouraged. With this program, you will be focusing on one account at a time until it’s paid off. In this example, you will send an extra $85 to one account instead of $40, $25 and $20 to three different accounts.
Now proceed to fill out the debt elimination chart as explained below to determine the order in which the accounts will be paid off.
Look at the chart below as you follow along. The concept is very simple: You will determine the order in which your accounts will be paid off based on a simple formula, and you will pay off one account at a time.
By now you should have determined how much extra money you can dedicate every month to your Debt Elimination Program (we’ll call it your “Power Payment”). If possible, I strongly recommend you dedicate 10% of your income as your "Power Payment”. For some people this will be easy, for others it may be a little harder. Try to do it at least until you have paid off a few accounts.
As an example, we will use Jonathan and Tracy’s chart, from San Diego. They are using $400 as their Power Payment. Their combined yearly income is $70,000. This is the chart that they filled out, based on their financial situation.
NOTE: if your budget only allows $100 or $200 a month it will still work, it will just take longer. The higher your Power Payment, the faster you will get out of debt.
1
|
2
|
3
|
4
|
5
|
6
|
7
| |
Debt
|
Total Owed
|
Minimum monthly payment
|
Column 2 ÷ Column 3
|
Priority
|
Power Payment
|
Months to pay off 2 ÷ 6
| |
1
|
Mastercard
|
$3,150.00
|
$126.00
|
25
|
5
|
959+126= $1085
|
3
|
2
|
Mastercard
|
$8,200.00
|
$328.00
|
25
|
6
|
1085+328= $1413
|
6
|
3
|
Visa
|
$2,200.00
|
$76.00
|
25
|
4
|
883+76= $959
|
2
|
4
|
Discover
|
$800.00
|
$32.00
|
25
|
3
|
851+32= $883
|
1
|
5
|
Dept Store
|
$630.00
|
$26.00
|
25
|
2
|
825+26= $851
|
1
|
6
|
Car 1
|
$10,200.00
|
$425.00
|
24
|
1
|
400+425= $825
|
12
|
7
|
Car 2
|
$15,000.00
|
$480.00
|
31
|
7
|
1413+480= $1893
|
8
|
8
|
Heloc
|
$30,000.00
|
$350.00
|
86
|
8
|
1893+350= $2243
|
14
|
9
|
Mortgage
|
$150,000.00
|
$1,079.00
|
128
|
9
|
2243+1079= $3322
|
45
|
Total
|
$220,180
|
Total
|
92
|
- On the first column of your chart, write down the accounts in which you have outstanding balances.
- On column #2, write down the current balance. On column #3, enter the minimum monthly payment.
- On column #4, divide column #2 by column #3, and enter the resulting number here. This will be the approximate number of months that it will take you to pay off the loan by paying only the minimum payment. The amount is NOT exact but it's here only to determine the order in which you will be paying off your accounts. Now look at this column and look for the lowest number; this will be the account you will pay off first. For credit cards, please note that banks usually require a minimum payment equal to 2% to 4% of your balance (there are exceptions); that's why in this example the number is 25 for all credit cards on column #4. If this is your case and you also have more than one account with the same number, just focus on the account with the lowest balance FIRST.
- On column # 5, enter the priority based on column #4, lowest numbers first.
- Now, column #6 is where you will enter, for your first account (in this example, the one highlighted on column #5), your "Power Payment" + the minimum payment for that account. In this case it would be $435 (minimum payment) + $400 (Power Payment) = $835 total payment. Now this account will be paid off in just over 12 months.
Then proceed to send the minimum payment to all accounts, and the minimum + your Power Payment to your #1 account (on column 5) until this account is paid off. Once it is paid off, then you are going to target account #2 (also on column 5), adding your Power Payment + the minimum payment you were sending before to your first account. In this example, for account #2, it would be $835 ($400 Power Payment + $435 minimum payment you were sending before to account #1, now paid off) + $27 (minimum payment for account #2). Keep working this plan until all accounts are paid off. You will get out of debt, all accounts paid off (including your mortgage) in record time! How will you feel once you are debt-free?
A few things you can do that will help you with your plan:
- Put your debt elimination chart in a place where you can see it often
- As soon as an account is paid off, use a red marker and cross it off, or write PAID OFF (and the DATE) in big, red letters
- Also, every time you pay off an account, go celebrate! Take your spouse (or significant other) out to dinner and feel the power of your determination and persistence.
- As you see the progress you are making on your chart, think (with emotion) “I am becoming debt-free”. Feel how it feels to be debt free. Pat yourself on the shoulder for a job well done! (Do it, it works!)
- Remember that extreme situations require extreme solutions and sacrifices, so if you need to, work extra hours, get a second job, hold garage sales, sell stuff you can live without, unsubscribe from services you don’t really need, etc. If your car is paid off, resist the temptation to buy another one (for as long as possible). You get the idea.
- Make sure your savings account has at least $2000 as an emergency fund. Add any extra money you can to your Power Payment and to your savings, but do not withdraw from your savings except for an emergency. If you do, replenish it ASAP.
- Every day, several times a day, say to yourself: “I am wealth, I am abundance, I am health, I am joy”. Feel it deep inside, feel the abundance surrounding you. This was taken from an excellent book called “A happy pocket full of money” . Or pick a phrase you believe in, and repeat it to yourself, with feelings, several times a day like a mantra.
Remember, keeping up with the Jones' (other people who are in debt) will only make you a slave to debt for life. Now you know you can control your debt. Once you start your debt elimination plan, you will feel the power that comes from being in control of your finances. You can live your life by design and create a bright future for yourself and your family.
Now that you understand the step-by-step plan to get out of debt, commit yourself to doing it. You deserve to be debt-free!
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