Getting Out of Debt–Hard and Fast Rules

Okay, based on yesterday’s post I came up with what I’ll call my three unbreakable rules for getting out of debt. My thought process went beyond just getting out. I think these rules also apply to STAYING out of debt.

1) Don’t borrow any more money

Absolutely the most important rule–didn’t even have to think about it. Although it seems obvious, I read and hear from people all the time you say things like, “I was doing well getting out of debt, but then my TV went out. I didn’t have the cash to buy one so I had to get the new one on credit.” The next month when the first bill comes for the new TV they will realize that they have taken a step back from the previous month and get frustrated with their plan, maybe even abondon it.

If instead they approached getting the new TV (or whatever it was) with the hard and fast rule that borrowing money to do so is completely out of the question, their whole approach would be different. Maybe they’d try a pawn shop. Maybe they’d look in the classifieds or yard sales. Who knows–maybe they’d decide that they should spend the time they’d previously spent watching TV working to pay off their debt instead.

2) Have a budget. Don’t bend it. Don’t break it. But be willing to REVISE it.

Your budget is your day to day map that ulimately takes you to your goal. Using the marathon training analogy from yesterday’s post, our set of strategies (debt snowball, increase income, etc) is the training program. The budget is the day-by-day IMPLEMENTATION of this program. In a marathon training program this would be the daily workouts to be completed.

If you’ve never run before and set out to run 26.2 miles (a daunting task), you are very likely to fail. However, by taking the training one day at a time beginning with workouts you know you can accomplish, you inch toward your goal. In debt reduction, it is best to keep a week to week or month to month perspective, trusting that they have you headed towards your goal. Sure, it’s nice to look up every now and then to see how much closer you are and how much progress you’ve made, but keeping focused on the small, attainable, day to day stuff is what ultimately gets you there.

3) Find a way to reward yourself for good behavior to reinforce good habits

I was helping a friend set up his get out of debt plan about a year ago. He’d heard Dave Ramsey and read The Total Money Makeover and was excited about getting started, mainly needing help setting up a budget and getting organized. He was contributing 3% to his retirement (he’s 32) and asked what I thought about Dave’s advice of stopping all 401k contributions.

While I understand Dave’s rationale of “gazelle intensity” in paying off the debt, I also realized that this was the ONLY positive money habit my friend had. It didn’t make sense to me that he should stop doing the only thing he was doing right. Instead, we kept his retirement contribution at 3% and stipulated that he would get a “raise” of 1% every time he knocked out another debt.

This ended up working out better than I thought it would for him. He was already very proud and excited about the money that he had saved so far. Not only did we keep him on that path, but we also gave him a vehicle to enjoy it even more. He became very focused not only on eliminating a debt account, but also on the 1% raise he would get when it was finished. This motivated him to tighten his budget and work extra to get the raise.

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