What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?— Adam Smith
Eliminating and Reducing your Debt
Debt is one of the most stigmatized, socialized, loathed, and talked-about words to have ever graced the English language. No matter where you are in the world, debt is something that follows us all. It evades our thoughts like an army come to wage a battle in an endless war of fixed, revolving, and recurring payments. Sometimes we feel like we just can’t escape its shackles.
So, is there a way out of debt?
How do we free ourselves from the seemingly eternal servitude of being obligated to pay out a large portion of our monthly income for the pleasures that we’ve already enjoyed in life? How do we get rid of our debt, and is it really possible? Or, are we just puppets in a very calculated zero-sum game of financial chess that leaves us as mere pawns on the playing field?
Well, the answer is that it is possible to be debt free. It’s possible to escape debt, but it isn’t easy. The accumulation of debt is something that’s habitual. It plays on some of our most basal instincts of the mind that push us towards avoiding pain and gaining pleasure. And, money is merely a tool in our virtually endless quests to constantly gain pleasure.
The Psychology of Debt
For the large majority, the most unforgiving debt is debt that’s accumulated from impulsive behavior. It’s those I-need-to-have-it-now moments in life that help us to balloon and max-out credit cards until they’re ready to burst. This behavior stems from deep down within our psychic apparatus, which is the driver of the thing we call our minds.
The psychic apparatus contains three parts:
- The Id – This part is purely subconscious and its what controls our impulsive behavior. The id is instinctive; we’re born with the id. It’s part of our selfish survival and it operates on the pleasure principle. It’s what makes us want to eat, procreate, and defecate. If we were only controlled by our id we would do what we wanted to do always without thinking about the repercussions.
- The Superego – To balance out the id, the superego forms as we grow and mature into adults. It’s a partly subconscious and partly conscious part of our minds. It develops through the moral guidance of our parents, guardians, and community. It helps us to determine right from wrong and institutes feelings of guilt when we know we’ve done something that we know we maybe shouldn’t have done.
- The Ego – This is the referee. It lives in the conscious and subconscious mind, similar to the superego. The ego decides between the impulsive desires of the id and the reasoning of the superego. And, the ego operates on the reality principle. It wants to give us what we want within reality. It knows that certain things aren’t attainable, but it tries its best to reason how it can attain those things in the easiest way possible.
Why is this interaction in the mind important to getting out of debt? Well, so much of our behavior has a lot to do with what’s going on in our minds. That impulsive buying habit you have comes partly from this subconscious interaction. So, what we have to learn to do is create some awareness to this interaction and learn to override it.
Now, understanding debt is one thing. We can talk about it all we want. We can extrapolate, analyze, criticize, theorize, and do a slew of other things related to the concept, idea, and reality of debt. But how do we get out of debt? How do we free ourselves from living a life that’s imprisoned by a cycle that seems like it’s never going to end?
Escaping from Beneath Mountainous Debt
Recently, Business Insider chronicled the story of a woman, Anna Newell Jones, who escaped from beneath $23,000 of debt that included student loans, a personal loan from her parents for college tuition and fees, and credit card debt. How did she do it? She went on what she likes to call a “Spending Fast,” followed by a “Spending Diet.”
So, what’s a spending fast? Well, as Jones put it, it’s a way to life where “you spend money on the basics needed to live.” Now, this is certainly an extreme measure for getting out of debt, but for those that are willing to jump headfirst into a debt-free life, it’s certainly an option. For Jones, she laid out precisely what she those “basics needed to live” were on her Website. They included:
- Cellphone without Internet
- Groceries (only necessities)
- Gym membership (low cost)
- Medical costs
- Car payments & gas
- Bus pass
- Boxed hair dye
- Inexpensive photography exhibits for her side business
Now, not everyone can pull this off, but as Jones put it, when you’re absolutely ready to be debt free, that’s when you’re ready for a spending fast. For Jones, she spent one year on her spending fast, eliminating approximately $18,000 of her $23,605.10 of debt. After her first year she switched gears from a spending fast to a spending diet, which allowed for only $100 of extra spending on non-necessiteis per month. After three more months, she paid off her entire debt.
The Millionaire Method
In a book that I published not too long ago entitled, The Millionaire Method – How to Get Out of Debt and Earn Financial Freedom by Understanding the Psychology of the Mind, I discussed not only a plan to get out of debt but also the reasons why we get into debt in the first place. I spoke in great detail about the psychic apparatus and just how the resultant interaction can lead us down one path or another.
And, as you may already know, it’s easy to have a plan. Most people can come up with a plan that they don’t ultimately stick to. So, what separates a person like Jones, who can go on a spending fast and eliminate her debt within 15 months, and everyone else? As she stated herself, she was absolutely fed up with her situation. She was sick of being in debt. But, other people are sick of being in debt and don’t do what it takes to get debt free, so what gives?
5-Step Plan for Escaping Debt
Not everyone can be as committed as Jones and go on a spending fast; most people can only muster up a spending diet where they institute some basic rules that govern their financial lives. And, getting out of debt isn’t impossible. In fact, everyone can do it if they really try. So, what are the 5 steps to getting out of debt and living a financially debt-free life?
Step #1 – Analyze your Debt
You can’t escape from beneath debt without first understanding how much and what kind of debt you have. The biggest problem is that most people don’t want to look. They turn a blind eye. They’re too afraid to see just how much debt they’ve racked up. It’s frightening – I know. However, if you can’t analyze and understand your debt, there’s absolutely no way you can emerge from beneath it.
So, how do you understand your debt? Organize all of your bills on the table in front of you for the past 12 months. Calculate all of your debt from credit cards, to car loans, personal loans, student loans, mortgage, insurance, and everything else. The past 12-month history is important because you’ll want to average everything that you’ve been spending since revolving debt can change from month to month.
Once you have all of the numbers write out all of the figures on paper or a spreadsheet and calculate the interest rate you’ve been paying per month. This will also be important because, for revolving debt, we’ll want to tackle the highest-interest rate cards first in order to wipe those out.
Step #2 – Set a Debt-Free Goal
Now that you understand your debt it’s time to set a debt-free goal. Will you go on a spending fast like Jones did? Or, will you merely go on a spending diet? Depending on how badly you want to get out of debt, your situation will be different. However, if you’re truly committed to becoming debt free then get ready to make some drastic changes in your life.
When you set these goals it’s important to not only understand what you want but also why you want it. So, you want to be debt free in 24 months? What are you willing to do to become debt free? And, what are the reasons why you want it? If you don’t have a strong enough reason why you want something it becomes remarkably difficult to achieve it.
So, write out your debt-free goal. If you want to be debt free in 24 months, why do you want to do it? what are the specific reasons why? You have to be incredibly specific here. The more specific you are and understand your goals, the more likely you’ll be able to pursue them and not give up.
Step #3 – Create a Budget
Once you have your debt-free goal in hand, it’s time to create a budget. This is where you’ll decide just how much fat you’ll cut away from your spending. Will you only do the bare minimum spending like Jones did, or will you go on some type of spending diet? You have to decide here and be very clear. If you decided that you’ll be debt free within 24 months, then you know just how money you’ll need to pay down your debt every month.
This is why analyzing your bills from the past 12 months is so important (step #1), because you can actually get to see where you spent your money. Most credit cards help to break down categories of money spending. How much did you eat out in the past 12 months? How much did you pay in things like bank fees that might have been avoidable? When you create a budget, you create a plan to help meet your goals.
It’s your job to stick to your budget if you want to get out of debt. Being in debt is one of the biggest burdens that any one person can face. When you’re merely working tirelessly just to pay down your debt and not getting ahead in life, it can cast one of the biggest nets of frustration on just about everything that you do.
Step #4 – Find your Debt-Free Inspiration
Oftentimes, like any other goal, we find it hard to stick to our plan and see things through. We tend to give up. We throw in the proverbial towel and say things like, “Enough,” or “I’ve had it,” or “I can’t take this anymore,” and, of course, “I quit.” You can’t do that. You have to see your debt-free plan through so you need to find a sense of inspiration. What’s going to inspire you when you’re feeling down and out?
We all know that getting out of debt is difficult, so you have to find a sense of inspiration that’s going to help see you through it. Whatever your debt free inspiration is, you have to find it and place it somewhere that you can prominently see every single day. Maybe you want to get out of debt so you can save for your future, start your own business, or start putting away money for your childrens’ education.
Find your debt-free inspiration and remember it when you start to feel down and out. Reference and come back to it when you need a pick-me-up to help you over some hump or plateau that you’re experiencing. You’ll be much more likely to overcome debt if you do.
Step #5 – Track and Measure Everything
One of the most important parts of any goal-setting activity, including that of becoming debt-free, is to measure and track everything. You want to see all of the money going in and out. This is very basic stuff but not something most people adhere to. Take the time, every day, to measure what you spent your money on. How much did you spend in gas, on groceries, and so on. How closely did you stick to your debt-free goals this month?
The best part about setting goals is being able to determine your milestones. For example, if you want to be debt-free in 24 months, then you know just how much debt you have to pay down each month to get there. Then, you can see just how closely you’re coming to that goal each day, week, and month.
Try to stick as closely to your plan as possible and don’t get discouraged. It’s going to take time to get out of debt and sometimes it can feel like you’re fighting a losing battle. But don’t give up! Stick to it and see things through. When you finally emerge from debt you’ll be relieved and feel like the world has been lifted off your shoulders.