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Get Out of Debt: 12 Steps to Master your Finances and Breathe a Little Easier

by Vishnu

Get out of debt

You may have grand schemes of hitting the lottery or marrying George Clooney Leonardo DiCaprio to pay off your mounting debts.

Who doesn’t?

In the meantime, you need to get out of debt, sort out your financial life, and start having some sense of control over your finances.

I’ll be honest—I’ve never had the best financial systems in place. Even when I was a practicing lawyer or had other high-paying jobs, I didn’t seem to get how finances worked. My money seemed to disappear pretty quickly every month.

It sure doesn’t help a marriage when you’re constantly in debt, juggling money from one account to another, and trying to stay current on everything that you owe.

No one ever teaches you about money.

How do you save it, how do you manage it, how do you have enough of it to feel comfortable? How do you not look out your window every morning, hoping that the auto dealer isn’t going to swing by and take back your car?

During my divorce, I experienced my greatest uncertainty about money. Not only did I have debts that I had accumulated during my marriage, I had new expenses sprouting every day, thanks to the fact that I was now living on my own and setting up another household.

I had to start over financially because I had no choice. I was tired of not having enough and constantly feeling behind on my finances.

I read books, got disciplined, and picked up an invaluable tip from my bro, Ramit Sethi. (No, we’re not related in any way, but I did grow up in Sacramento and went to a slightly better high school in town than he did 🙂 ) Go Eagles!)

Since that time, I’ve been able to cut my debt, save money, and take months off at a time to travel. Being financially responsible and being able to manage my finances took sacrifice and discipline.

But with sacrifice and discipline came the ability to breathe easier. So did peace of mind.

I don’t know where you are in your life right now, but if you’re facing a major shake-up, such as a divorce or being kicked out of your parents’ home to fend for yourself, you’ll want to follow these 12 action steps to get your finances back on track.

1. Know how much your monthly expenses are.

The first thing I would suggest that you do is to gain some idea of what you’re spending every month.

Yes, you should keep track of all your expenses, but more importantly, you should know which expenses you are absolutely required to meet. I’m talking critical expenses that you have no choice but to pay, such as your car loan, rent or mortgage payment, student loans, and basic utilities like light and electricity.

Know what your required financial obligations are every month. Staying in the dark about what you’re expected to pay will only keep you in the dark about your finances.

2. Count up your debts.

Similarly, figure out how much you owe. What is the total amount of your current debts? Count up the balance of every credit card you own, the outstanding loan payment for your car, and your student loan payments. Try to get as accurate a number as possible.

Also, what is the minimum amount that you have to pay on your debts every month? What is the total of all the debt payments due? For example, if you’re required to pay $200 on a credit card, $300 on a student loan, and $400 for your car payment, your monthly required debt obligation is $900.

3. Determine how much you have left.

After calculating your monthly expenses and becoming aware of your monthly financial obligations (in other words, your debts), the next factor to consider is how much money you have left.

If you don’t have any money left after paying off your basic financial obligations, you have a problem. If you have met your basic financial obligations but you aren’t attacking your debt, you also have a problem, one that, though less urgent than the first scenario, you’ll still need to work on.

Either way, knowing how much you have left for spending money every month will give you a better idea of where you stand.

4. Plan your spending.

Some people would call this a budget, but many other people hate the word “budget.” So how much are you going to spend every month and for what? At the beginning of every month, or even for just one month, determine how you will distribute your personal salary. Organize and plan your spending ahead of time!

How much are you going to pay for required monthly expenses? How much will go toward your debts? How much will go toward your rent or mortgage? Know exactly how much money will go where, and how much you will have left over to spend.

5. Reduce your lifestyle.

You knew at some point that you were going to hear this. You may not like it, but here’s one of the most important things that I did to reduce my monthly expenses.

I reduced my lifestyle.

What does this mean? It means that you might have to move out of your current home, move in with someone else, or even get a roommate. It means lowering the cost of your lifestyle. It means paying cheaper rent in a less desirable place. It means a more modest car. It means less eating out and more cooking in.

You have to look at your finances and seek alternatives to scale back your life. If you’re living a $100,000 lifestyle on a $75,000 income, you have a problem. Cut back your lifestyle to meet your expenses. Move. Buy another car or take public transit if possible. Shop at grocery stores that are farther away from home, but where the food is cheaper.

6. Cut out expenses.

The rebuilding and repairing stage of your financial comeback is also a time for sacrifice.

It’s time to cut out expenses for things that you don’t absolutely need. Bottled water service—cut. Cable—cut. Dry cleaning your clothes—cut. Paid gardeners or landscapers—cut. Eating out several times a week—cut. And sorry, Ramit, but if you have a regular coffee habit or daily frozen yogurt habit—cut. Manicures and pedicures—cut. Well, okay, fine, maybe just reduce the number of times that you go to the beauty salon.

What are your pleasurable habits, unnecessary expenses, and things that you can live without every month? Whatever they are, if they’re not required and not absolute necessities, cut them out. How much will the act of reducing your expenses put back into your pocket every month? How much of that additional savings can you put toward paying off your debt?

7. Automate.

This is the Ramit Sethi tip that changed my financial life. Ramit has a 12-minute video that you can watch here. In a nutshell, Ramit encourages you to set up automatic payments every month with every paycheck so that you essentially can’t touch the money that you’ve designated for your monthly expenses.

Automate so that on pay day, your money goes directly to your landlord, your utility companies, your student loan payment, and your car payment. Before you get a chance to figure out how to blow your money for the month, automatically make the money disappear so that it covers your required financial obligations. Use your computer and online payment systems to meet all your monthly obligations.

With this strategy, you won’t make your financial commitments your last priority, but your first priority.

One super-effective thing that I did was to include my credit card debts in this automated system. At one point, I had $500 of every paycheck going strictly toward paying off credit cards.

If you get disciplined about this system, you’ll dramatically improve your financial picture. You’ll know, on the day that you receive your paycheck, how much money you have left over to pay for other things after you pay your expenses. You’re less likely to waste your money when you know exactly how much money you have.

8. Stop splurging and start cutting your spending.

Here’s the thing. Most of our lives, we are not going to find the discipline or motivation to stop spending because it’s just too easy to buy stuff.

We are constantly teased, marketed to, and sold to by ever-hungry retailers and marketers. They’ll tell you that you should look more stylish, that you should drive a fancier car, or that you’re “thinking different” because of the laptop that you’re using.

The best time to stand up to these marketing ploys and to your own inner desire to spend money frivolously is when you’re at rock bottom. When you’re in a desperate situation and your finances seem out of your hands, that’s the time to reign in the spending and stop buying the things that are unnecessary in your life.

Promise yourself that you will commit to spending nothing frivolously. You’ll spend money only if absolutely necessary for your health and well-being. Commit to ending the spending on clothes, shoes, bags, and Apple products.

A question to ask yourself before a purchase: “Is this purchase required for me to stay alive, have a roof over my head, or be able to eat?” I know, it’s kinda drastic, but if the answer is “no,” don’t buy it!

And you’re not going to live like this for ever – just until you get on solid financial ground.

9. Spend your time and energy on “no-cost” activities.

You might say, “All this sounds great, Vishnu, but should I just call it a day and quit living my life?” If all of these measures sound absolutely boring and stringent, and it seems as though I’m sucking all the fun out of your life, here’s what you can do.

Start taking part in activities that don’t cost money. There’s no better time to start reading those books that you’ve bought in the past, to renew your library card, or to nurture your writing habit. There’s no better time to research, learn about, and get creative about ways to make money. There’s no better time to read blogs that help you simplify your life, get a freelance gig or get a better job.

Instead of dinner out with your friends, how about Netflix and a potluck? Instead of a fancy night at the theater, how about a high school play for a fraction of the cost? Instead of a 49ers football game, how about a Friday night football game at Paly High School?

Free museums and cultural shows? Beaches and parks that don’t charge admission? Free tourist spots in the town where you live? Now you’re getting the idea!

10. Cut up your credit cards.

This might be the last straw for you. How dare I ask you to end the credit card spending? Okay, fine, you don’t have to close your credit card. I’m just asking you to cut it up. Huh?

Here’s the theory—keep your credit card open. You can always call and order a new one whenever you need it. You’ll get a new card in the mail in about three days. But when you cut up your credit card, it won’t be readily available for use.

What if you really need to purchase something that you don’t have the money for? Exactly.

You don’t purchase it.

I know this is extreme, but if you’re trying to get on solid financial footing, you’ve got to take extreme measures. Cutting up my credit card was one measure that I found useful. If you can take it to the next level, close your credit card completely. For sure, close your credit cards at Macy’s, Nordstrom, and Debenhams.

Whatever you might need to purchase from those stores is not essential for you to live!

11. Spend less time with friends who have expensive tastes and habits.

You might decide to start saving money, but are finding it difficult because your social circle likes expensive things and eats at fancy restaurants.

If you’re serious about cutting your spending, you’ll have to cut back the time that you spend with friends who have expensive habits. The people you spend the most time with are the ones who encourage you to spend. And it’s so hard to say “no.” However, even though saying “no” requires a high degree of discipline, it will help you straighten out your finances.

Even worse than dining at an expensive restaurant is going to an expensive restaurant for a celebration, such as a birthday or engagement party. Not only are you picking up the tab for others, you’re splurging on dinner for yourself. You’re also required to bring a gift.

There’s no better time to reprioritize your friendships and the people you spend time around.

Similarly, at work, think about whether your spending is centered around your colleagues. If you’re spending money on daily lattes and lunches out to maintain friendships at work, you might want to hang with a different set of friends (or let your current friends know that you won’t be able to join them for their daily coffee breaks).

12. Start a savings habit.

In addition to the automatic savings plan that I described above, you might consider setting up a savings account into which you transfer money every month.

Although this might make no sense while you’re in debt, here’s how this strategy helped me. It got me to look past my debts and helped me focus on growing my money. I started thinking about what’s possible. I found out that I could actually have a positive bank balance in my account. I knew that I was saving up for the things that truly mattered to me.

So even if you are in debt and all hell is breaking loose with your finances, automatically sending as little as $25 a month to a savings account can remind you what all of this is about.

It’s about getting rid of your debts, getting control of your finances, and getting control of your life. And when you get your finances under control, you’ll have more independence and freedom in terms of what you can purchase. You can do more things that will help you live a more fulfilling and happy life.

I hope that you’ve found these tips useful and that you will start on the path to financial recovery.

Although hitting rock bottom financially can be painful, there’s no better place to start rebuilding your finances and your financial habits.

Only after you’ve realized all the things that don’t work are you prepared to implement the financial habits that do work.

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* Photo credit Splitshire