Everyone wants to get out of debt. No one likes having too much debt siphoning off so much of their income every month. Now, we have all seen stories of people who were once tens of thousands, or even hundreds of thousands of dollars in debt, and now find themselves completely debt-free.
They all tell compelling stories about how they did it, and many of them imply that getting out of debt is so easy, anyone can do it.
While that may be true in many cases, however, everyone’s debt situation is different, and their reasons for having so much debt hanging over them tend to be as individual as the people we’re talking about.
In some cases, debt is health-related; perhaps someone has a sick child or an elderly parent who needs a lot of costly care. In other cases, maybe the debtor took out a significant amount in student loans to get their college degree. Perhaps another just had to have the most excellent sports car in the world.
Still, another is a family man, who wants the most beautiful home in the most family-friendly neighborhood they could find, and their home loan approval hinges on their ability to reduce their debt-income ratio to an acceptable level.
One thing is for sure; if you have accumulated so much debt that loan approval for something you need hangs in the balance, you will have to formulate a plan, and you have to execute that plan to the extent possible. In many cases, that may mean a significant change in lifestyle.
Whereas eliminating debt is fundamentally a math problem, doing the things you need to do to reduce and then remove that debt requires a long-term plan that will serve that purpose. In many cases, that can mean a lifestyle change that may be difficult for many to take.
The adjustments can include downgrading your home, whether that means living in a cheaper apartment for a while or moving into a smaller house with a much lower mortgage payment. Or it can as well mean staying home and not going with everyone at the bar, or driving a more practical car (and buying it rather than leasing that vehicle) and keeping it for a longer period than you planned.
Those who can handle a change in lifestyle have a built-in advantage over those who are stuck in their ways and can’t feel a few years of evolution. If you want to get that home loan approval and that requires you to reduce your debt-to-income ratio, you may have to be willing to sacrifice.
Those who are ready and willing to sacrifice to get where they want to be more likely to be successful at reducing or eliminating their debt.
If you want to get out of debt the right way, you need to know exactly where you are at the very start of your debt relief venture. The first thing you need to do is gather all your statements for all of your loans and credit cards, and determine how much they cost you every month.
If you have student loan debt, go into the National Student Data System and gather all of your information from that. Then, get your credit score and then acquire your free annual credit report from each of the primary reporting agencies. You can’t know where you need to go unless you know where you are.
Then, for 30 days or so, keep a journal of everything you spend. Leave out nothing. Write it all down or keep it in a note-taking app on your smartphone; whatever works, but keep track of every pack of gum, a cup of coffee, candy bar or newspaper you buy. Keep track of all the lunches you buy at work, how much you spend on groceries, not just during your regular trips, but every journey in between, too.
Keep track of how many times you buy gas for the car, and how many pizzas you buy every month. Once you have that information, go over it, along with your credit reports and other information and determine how much spending you can afford not to do.
If your office has a coffee machine, you can quit stopping at the coffee shop across the street for your morning latte.
If you can buy the ingredients for pizza and make one in the oven, you can eliminate the delivery charges and much of the cost of “Pizza Friday.” If you can read the local newspaper online, you can save the dollar you spend every day buying it at the newsstand. If you go to the bar once a week, you can perhaps cut that back to once a month and save a lot there.
More than anything, getting out of debt involves being honest with yourself and making sacrifices. Being in debt does not necessarily mean you did something wrong. Sometimes, things happen, and debt sometimes occurs as a result.
However, getting out of debt is a conscious choice that often requires a change somewhere in your life. In many cases, that means a considerable change in your lifestyle, and that’s okay.
John has been a freelance writer for the past 3 years. He worked for 4 years as a Mortgage Consultant and a Financial Advisor. He also worked for 2 years as a Loan Manager for a medium sized company that handled bad credit loans, car loans and personal loans. We are excited to have John in our team!
John writes about Finance, Philosophy, Money Saving Tips and much more. He is a proud Member of Financial Advisers Australia (AFA) and has Cert IV in Financial Services.