80% of Americans are still in debt and making efforts to become debt free. Student loans, mortgages, credit card debt, car loans, these are just few of the loans they need to pay off.
Paying off debt needs a good planning and constant effort, but it can be done.
But what’s next?
For many people, self included, once all loans are cleared, there’s a moment when you just don’t know what to do with all the money left each month.
Buy more stuff? Travel more? Start aggressively saving for retirement? Investing?
Without a plan it’s easy to get swept away and either get back in debt or just squander money like there’s no tomorrow.
How can you life after finally becoming debt free?
Sit down for a moment and think about your goals. Short term goals, long term. What would you like to accomplish next? And more importantly – what got you in debt in the first place?
Understand your debt triggers, so that you don’t repeat your past mistakes
I got into debt 2 times:
- in 2004, I bought a laptop. My salary was small back then and I was trying to make it as a freelance web designer on the side. Not having a proper PC slowed down my learning and business, so I decided to buy a laptop and pay for it the next 3 years.
- in 2008, I bought a new car. The monthly payments were way bigger than before (about 13 times more) and, after about a year, I was also jobless. It was a shockingly hard time and I barely made it out of debt that time.
The lesson has sunk in: save money and get yourself gadgets or cars, don’t get into debt for them.
The only debt I’d consider now would be a mortgage, if needed, since I’d rather pay for a house 20 years and be left with it, then pay rent 20 years and get nothing afterwards (only the chance to have used the house to live in).
If you don’t have a budget, it’s time for it
Lifestyle inflation is not just a fancy finance expression, it happen to most of us, when we get too much disposable income each month.
Chances are you already had a working budget (it really helps speed up debt payment), but, if you didn’t use one, don’t wait another day.
Write down your main income sources and your main expense categories.
Keep track of your money (income / spending) and see a pattern. Create a budget based on these findings and then see if you can save any money in any of these categories.
Which brings us to the next HUGE step:
Create an emergency fund
Few years ago my old laptop ‘died’, so I had to replace it. Because all my work is done on it, I can’t wait for days or weeks to buy a new one, usually it’s something happening on the same day.
The frugality gods with frown upon this, but, if my laptop breaks today, I’ll get a new one in under 2 hours.
It doesn’t matter if I could have saved a hundred bucks from elsewhere, I just buy it, because otherwise I lose more money not being able to work.
The good news is I didn’t get into debt again, our emergency fund covered the costs nicely. And I was back in business few hours after, as soon as I could install my software and move all my archives.
The car had to be repaired few times already, we got the emergency fund to rely on.
The same with any medical issues or new travel plans.
Your emergency fund can make the difference between staying debt free or getting back into debt.
Just as you diligently paid your creditors each month, pay yourself first now and save money as much as you can.
Medical emergencies, unemployment, house repairs, anything unexpected should be easily covered with your emergency fund.
Start slow, by building savings to cover all your expenses for 3 months (should you become jobless). Then 6 months and even a year.
Save money for retirement
Paying off debt has probably slowed down your retirement savings, but now it’s time to get back on track. Invest in your company 401(k), an IRA and any other retirement funds you consider appropriate.
In most cases, you can have deductions from your paycheck automated and put into your 401(k) account. This simplifies the process and many companies will even match your contributions to your 401(k) account.
If you are self-employed, go with an IRA account.
Try to max out your contributions each year, you never know how retirement will look like and it’s always a good idea to be prepared.
Go enjoy life
We used to travel a lot, even when I was still in debt. Getting my web design business off the ground allowed me to pay off my car loan and also enjoy quite some traveling.
As soon as you have paid off debt, are set for retirement savings and have an emergency fund up and running, you should look into more ways to have fun.
This doesn’t have to be overly expensive, there are many travel opportunities on the cheap. You don’t have to stay in 5 star hotel rooms, there are many great apartments at a fraction of the cost.
Cheap flights are everywhere, you can literally fly with only few bucks.
There are no limits to what you can achieve once you are debt free. Are you in this position right now? Working towards it?
Debt. The biggest financial problem of many people around the globe. From maxed out credit cards to huge mortgage and student loans, the modern man has it all.
It doesn’t matter how big or small your debt is, if you don’t make a big effort to pay it off, you’ll never become debt free and enjoy a debt free life style.
Let’s see what keeps you from paying off your loans completely.
Here are the main 5 reasons you can’t get out of debt
You still don’t have a budget
I know budgeting can be tedious and I’ll be honest with you. I don’t track all my spending anymore, since it seems like a waste of time. Instead I budget in a simpler way.
But, mind you, I’m debt free, so most of my expenses and income are taken care of and I don’t have to stress out with monthly payments anymore.
Until you can get your spending under control, it’s time to actually get a budget working and, even more importantly, track all your spending and income.
If you don’t know how much you make on a monthly basis and have no clue on what you are spending this money, you’ll be in debt forever.
Cutting costs and saving more money is the BIGGEST step to make, in order to push all this newly fund income into kicking debt’s arse.
You shop for fun
I have another confession to make: I love shopping. There are few stores in Europe (Lidl comes to mind), where I could spend a thousand bucks and not even ‘feel’ it.
This is why we limit our shopping time and try to use a list, not only to remember what we need to purchase, but also to keep from buying useless crap.
Shopping shouldn’t be a ‘social’ event. If you want to connect with your family, go out on a picnic or spend time playing board games. Anything that doesn’t mean carrying cash or, worse, a credit card you can max out.
Remove all store subscriptions from your email inbox, if you are constantly bombarded with ‘sale’ messages, chances are you’ll feel compelled to go and spend money.
Ignore Black Friday as well. If you spend money you don’t have right now for some junk just because it’s for sale, you’ll stay in debt longer than needed.
I personally like to buy stuff when I need it, not when the stores consider I should buy. Of course, I might not ‘lock in’ such an awesome price, but at least my cash-flow doesn’t have to suffer.
You have a costly vice
Do you find yourself drinking too much? Maybe you smoke, or, worse, use drugs? Gambling is what’s keeping your wallet and bank accounts empty?
Whatever costly vice you have, it’s time to get rid of it. Smoking is very expensive and does absolutely no good for your health. Consider stopping it.
Same with drinking too much or wasting time on stuff that’s not getting you any real benefit.
Cut back on your clubbing as well, if you tend to spend more time in the clubs than getting a good night sleep.
You purchase too much crap
I’m starting to become more of a minimalist these days, seeing how much crap we gathered all these years and how useless most of it tends to be.
You really don’t need 20 pairs of shoes or 5 new iPhones every year.
Try and understand how much stuff you REALLY need and cut back on further purchases. Removing clutter from your home and life will make it all easier and less costly.
You make friends with people who overspend
I know that overspending shouldn’t be such a huge flaw in a friend, especially if you tend to get along great, but try to get some more frugal friends as well.
If you are the person who can easily get convinced to spend more just to impress, make time for people who are not pushing your ‘wrong’ buttons.
Of course we know it’s stupid to keep up with the Joneses, but not all people can actually stay away from this. Hence the idea of surrounding yourself with people who are doing very well, financially speaking, so that you can get a great example and inspiration.
These are 5 of the reasons you cannot get out of debt. What else would you add?