Life’s major financial equation is simple: Either you control your finances or your finances will control you. The one area of personal finance where people allow themselves to be controlled is debt.
Debt tends to be cyclical. You pay away and make progress only to find that after considerable time, you are back where you started. Let’s be clear: This is not an indication of exercising considerable control over the situation.
There must be a reason so many people find themselves in this pattern of debt followed by more debt. Something is going wrong. Often, the problem is nowhere near catastrophic. But it's annoying and an obstacle to real financial progress. It's hard to go forward while you're going backward to pay off debt. Thankfully, there is a solution to this debt cycle — actually, a number of solutions.
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Not everyone needs to do everything here. Those in dire straights or whose problems have persisted for a very long time might. And you can’t do too much of the right thing! It’s better to do more than the minimum than to shoot for the minimum and end up with less. Here are a few strategies to get you out of the debt cycle and into a healthier relationship with debt.
1. Gather the Info
To fix something, you need to know what is broken. Gather all your debt statements: credit cards, student loans, car loans — all of them. And get a copy of your credit report.
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Once you have gathered the information, calculate a couple basic numbers. Add up the totals of all the debt and of your monthly payments. These two numbers are extremely important.
Review the credit report to make sure you didn't missed anything. Unmanaged debt has a sneaky way of slipping through the cracks.
Make sure that your credit report ties out to your new debt list — that you have a clear explanation for any discrepancies. Once you have this all sorted out, you are in position to put an action plan in place to get out of the debt cycle.
2. Track Meticulously
Tracking is a great tool to help you reduce debt. It employs the powerful strategy of guilt to help you hold yourself accountable. Take whatever budgeting system you’re using and make sure it tracks balances, or else put a system to track balances in place. Monthly is often enough, but less frequently is not.
Keep a chart or running list of your monthly debt totals. Calculate reductions or (gasp) increases. Celebrate the decreases. Understand what caused any setbacks so you can do better next month. Think about your tracking when you consider purchasing anything that is not a true need. Do you want to explain this one to yourself when reviewing your tracker?
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3. The “Just Say No” Plan
While the Reagan administration’s “Just Say No’ anti-drug plan didn’t seem to produce results, yours can.
Frugality isn’t a great long-term strategy, but it can work wonders as a short-term tool.
The idea is to say no to every expense, then convince yourself whether it is truly necessary. For example, food is often necessary, but ice cream isn’t.
Rent is necessary. A new rug is most likely a luxury that should wait until the debt is gone. The key is to question every expense. Use this questioning to reduce your expenses to free up money to pay down your debt.
4. The Cash-Only Plan
The cash-only plan is another form of frugality — a forced form. Take your expenses for a short period, such as a week. Set aside cash for these expenses, groceries, fuel, everything. Use only this money, and only for its intended purposes.
It can help to remove the temptation of using a credit card. Some people put their cards into a plastic container, fill the container with water, and put it in the freezer. That certainly puts some time to think in between the urge to use a card and actually using it! Even putting a rubber band around your cards can be a helpful reminder that you can no longer use them for whatever you wish.
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Naturally, you need to have a plan for some things for which you may not be able to use cash. Don’t go mailing an envelope full of cash to your landlord. But also don’t let this be an excuse. New shoes are not a reason to dig out a card — not unless you want to stay in the debt cycle.
5. Save As You Go
Debt doesn’t always come from unnecessary spending. It often comes from real needs — a car breaks down, some other unforeseen expense pops up.
The thing with unexpected expenses is that we actually can expect them. We don’t know when or how much, but we know they will come.
In this scenario, the solution is your emergency fund, which most people with debt problems don’t have. At the risk of overstating the obvious, there is a connection here.
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An emergency fund is a financial buffer between you and debt. With no buffer, some debt will, at points, be inevitable. Part of the cyclical problem is that new debt crops up before you are done paying off the old. That’s what makes it a cycle.
The save-as-you go plan has you build a buffer as you are working at paying off your debt. Instead of allocating every available cent toward debt reduction, you budget a monthly savings amount to build your cash reserve or emergency fund.
This strategy works amazingly well. Building your buffer in parallel with reducing debt will help your debt go away faster because you won’t add to it. And you build the habits of saving and of using your own money for emergencies without using debt.
Breaking the Debt Cycle: The Bottom Line
The debt cycle will only change if you make it change. There has to be some form of intervention. You can choose the methods that most appeal to you. Try them out. If they work, then keep doing them. If they don’t, then try others. There is no debt situation that can't be improved.
But the change isn’t going to come on its own. You need to make it happen. Debt does not need to control you, and it won’t if you control it.