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Four Reasons Why We Stayed In Debt

Our debt story began when I was 19 years old and I got my first student loan and credit card. Fast forward 18 years, a marriage and two kids later, we had to come to terms with the four main reasons why we stayed in debt for all of that time.

 

At 37 years of age, I found myself staring at close to $59,000 worth of debt (a long way from that initial $500 student Visa card I had signed up for). Confronting the reasons why we had stayed in debt so long and changing our mindset about debt, finally gave us the motivation we needed to get it paid off.

We thought we had plenty of time:

My goal was always to be debt free by the time I retired. I understood at a young age that heading into your retirement years with debt wasn’t a wise financial decision. The problem was that in my 20’s and early 30’s, I still thought I had plenty of time to get my debt paid off.

I wasn’t in any rush, because I didn’t feel any sense of urgency. Not until I hit my mid-30’s. Once I hit that age, I realized that if we kept going the way we were, spending without a plan, and not putting a thing towards savings, my husband and I were going to be in deep financial trouble.

The other kicker came when I looked at what was being spent on debt-repayment. At the time our debt repayments totaled just over $1000 each month. Looking at the total amount paid, rather than just the individual minimum payments, forced me to see how much money we were throwing away and paying the bank each month, when if we had been smarter with our spending, could have been paying ourselves in the form of retirement investing.

We used our line of credit and credit cards as income:

Because we weren’t on a budget and had no idea where the money was going each month, we found ourselves relying debt to help us get through the month. If the bank balance was getting low, and I still needed to get some food or clothes for the kids, out would come the credit card.

After years of doing this, it really became a vicious cycle of using debt to either pay for the things that we needed, as well as the stuff we wanted. We also got into the trap where I would find that I was paying debt with debt (using Visa to pay MasterCard) if the money was tight at the end of the month and the bills were due.

In order to break out of this vicious cycle, we got on a monthly budget so that we could control our spending, account for our spending, and break the ties with the credit cards and the line of credit once and for all.

“At least we’re not as bad as…”

All of our friends had debt, so I found myself getting into the trap of thinking that debt was normal. Everyone seemed to have debt, so I wrote off the fact that we had debt as “No big deal; We’re just like everyone else”.

I also found myself playing the comparison game. One of my favorite shows on TV at the time was “‘Till Debt do us Part” hosted by Gail Vaz Oxlade. On this show, she would feature families who had gotten themselves into debt and were looking to get out of it.

Instead of being inspired to get out of debt ourselves, I found that I would compare our financial situation to the families featured on the show, and thought, “Well at least we have less debt than them”, as a way to justify and feel better about where we were financially.

Keeping up with the Jones’s:

american dreamThe last reason we stayed in debt as long as we did was our desire to keep up with the Jones’s. I would look at the lifestyles of those making a similar income to my husband and I and felt that we should be able to afford the same types of things.

Where we went wrong was that we didn’t plan or save for major purchases or vacations, we just went ahead and charged them. The down payment for the mini-van, new furniture, and our family vacation to Disney World were all courtesy of MasterCard.

What we have since learned is that we can have all of the things that the Jones’s have, we just need to plan ahead and save up for them first by budgeting and setting aside money into our sinking funds.

Your Turn!

  • What are some money mistakes that you’ve made that kept you in debt?
  • What mindsets did you have to change to pay off any debt you had?

Time for a Financial Check-Up

In order to make sure that we’re in good health, many of us will be sure to check in with our doctor for a yearly once-over. The same is true for your finances. If you want to make sure that all is well on the money front, it’s equally important to complete a yearly financial check-up.

I always do my financial check-up at the beginning of a new year, but any time of year will work. It doesn’t take long, and is relatively painless, but checking in with your financial big-picture once a year will give you a great reference point as to where you are now and how far you’ve come when you check in this time next year.

Step 1: Check your Credit Report

It’s important to check in with your credit report once a year just to make sure that everything that is listed there are debts that you yourself have signed up for. This will help to make sure that there hasn’t been any fraudulent activity under your name.

It will also give you a sense of where your debts lie. Listed you’ll see any loans that you’ve taken out and have paid off or in the process of paying off. You’ll also see the last reported balances on any rotating debts like credit cards or lines of credit.

Checking your credit report is fast, easy, and more importantly free. Equifax and TransUnion are two of the most popular websites that you can use. Just simply enter in your name, address, and social security number, and within seconds you’ll have access to your credit report.

Step 2: Calculate your Net Worth

When calculating your net worth, I always start with listing down what we own. I start off with the liquid assets which includes our checking account, savings accounts, and our emergency fund. I also list the current balances on any investments such as our retirement funds and education funds, as well as the current worth of my pension. The last thing I list are the major assets that we own including the resale value of our home and two vehicles.

Once you’ve figured out what you own, the next step is to add up what you owe. Included in this list should be any outstanding debts such as credit cards, student loans, lines of credit, or medical debt. The other debts to include here would be the outstanding balance that is left on the mortgage and car loans.

To calculate your current net worth you simply take the amount you own and subtract the amount you owe. Whatever is remaining is your net worth. I like to compare our net worth year over to year to see the progress that we’re making.

One thing I did notice this year was the substantial increase we saw in our net worth once we finished paying off all of our consumer debt. It’s amazing to see just how much your net worth grows when you can keep your money for yourself, rather than giving it to the bank in the form of payments.

Your Turn!

  • How often do you check in with your finances?

Staying Motivated While on a Budget

Regardless of whether you have just started budgeting, or have been budgeting for a while, staying motivated to make and stick with a budget month in and month out can be tricky.  Let’s be honest, putting self-imposed limits on our own spending isn’t always as glamorous as the vacations we see people taking and posting on social media. Not to mention we live in a society that is filled with temptations and surrounded by impulse purchase items that are strategically placed to part us with our hard earned money. achieving success

We always start budgeting with the best of intentions – securing our financial future. But keeping the big picture in mind can be difficult. Let’s look at some strategies that you can use to stay motivated to stick with that budget.

Track your Progress:

Paying off debt? Saving for a vacation? Paying off your mortgage early? There are plenty of printable charts and graphs that are available online that you can use as a visual reminder of just how far you’ve come, which in turn will motivate you to go even further.

Take it a step further and put that chart or graph somewhere where you will see it everyday. Watching the debt that you owe go down or your savings go up is a great reminder as to why you started budgeting in the first place and will motivate you to stick with it.

 

Treat Yourself Every Once in Awhile:

Now I’m not talking about going out and blowing the bank, you do want to keep it modest, but set an increment where once you’ve reached it you’ll give yourself permission to go out and treat yourself to something nice. So maybe after every $1000 of debt that gets paid off, you can pick up your favorite specialty coffee or treat yourself to a nicer cut of meat on your next grocery trip. The key here is that no matter what modest treat you choose, you are rewarding yourself for a job well done.

Read Some Financial Blogs, Watch Financial Vlogs, or Listen to Some Financial Podcasts:

Even though my husband and I have finished paying off all of our consumer debts and student loans, we still listen to Dave Ramsey podcasts to help keep us on track. There’s nothing I’ve found more motivating than listening to hard working people scream at the top of their lungs, “WE”RE DEBT FREE!!” While cooking dinner, I’ll also hop onto YouTube and see what my favorite financial YouTubers are up to and what financial progress they are making.

When trying to stay motivated, I’ve found that it always helps to surround yourself with like minded people who are also working diligently at either paying off debt or saving for their future. If you can’t find people in your everyday life who are motivated and sticking with a budget, we are lucky in this day and age to have such a great virtual community of financially like minded people that can motivate us.

Create a Vision Board:

Remind yourself of your budgeting why by creating a vision board of what your financial goal looks like. If you are saving up for a big vacation, find pictures of your destination and create a collage and post it somewhere where you’re going to see it on a regular basis. If you’re looking to pay off debt, create a collage of what your debt free future looks like. Having a visual reminder will help you keep the bigger picture in mind as you work towards reaching that goal.

Don’t Get Down on Yourself:

We are all going to have setbacks. Life is going to happen and sometimes that will mean that you have to go over budget or dip into that savings that you’ve worked hard to build. The important thing is that you don’t let it get you down to the point where you feel like giving up altogether. Yes it’s painful when you are faced with expenses that you weren’t anticipating, but don’t let that stop you from keeping your head up. Keep moving forward knowing that it will get better and that the end goal is still achievable, even with the occasional setback.

Your Turn!

  • How do you keep yourself motivated while on a budget?

How To Get Out Of Debt

What would your life be like if you didn’t have any debt payments? How would your financial picture change if you weren’t tied to those payments month in, month out? Let’s break the cycle and finally get out of debt.

Three years ago, my family had close to $60,000 worth of consumer and student loan debt. I had been in debt since I got my first credit card at 19 years of age and after spending close to 20 years in the debt trap, never thought we could climb out of it.

After feeling fed up and tired of juggling nine different debt payments on top of the rest of our monthly bills, I knew we had to make a change. Using these 5 steps, along with focus and determination, we were able to pay off our consumer debt in 25 months. Here’s how we got out of debt, and you can too.

5 Steps to Debt Freedom

 

1. Stop Using Debt:

Seems obvious right? If you want to pay off your debt, you have to stop using debt. It’s time to cut up the credit cards or at the very least put them on ice (literally). In order to get out of debt you have to commit to using cash for your purchases from here on out. This means being patient, saving up, and planning your future purchases. If you’ve been relying on debt, this will be the hardest step, but this is the first step in finally freeing yourself from the mountain of bills.

2. Establish your Emergency Fund:

Inemergency fund order to have a bit of a financial cushion between you and life, and cut ties with the credit card or line of credit, you’ll want to make sure you have a starter emergency fund. For most of us $1000 set aside in a separate savings account will cover most emergencies that arise while getting out of debt. You must commit though to keeping this money in case of emergency only (and no, that pair of boots that you’ve had your eye on and have just gone on sale for 75% off are NOT an emergency).

3. Get on a Budget and Stick With It:

If you want to get out of debt, changes in how you behave with and manage your money are key. The biggest change you can make that will see the debt gone once and for all is to get on a written monthly budget and stick with it. If you’re new to the budgeting process, this article will help you get started.

4. Organize Your Debts:

Time to take out those debt statements and organize them in the order that you’re going to pay them off. There are two ways to organize your debt. Both work because they force you to focus your attention on one debt at a time, and the power of focus is key. 

Snowball: Organize your debts from the smallest to largest, regardless of interest rate. Pay the minimum payments on all of the debts, except the smallest, and throw every extra penny you can at that debt. Once the smallest one is paid off, you take what you had been putting towards it, plus the minimum payment, and start attacking the second smallest debt. By the end, you’re putting a significant amount of money towards your largest debt, making that disappear faster than you could have thought possible.

Avalanche: A second way you could organize your debts is by using the debt avalanche. In this method you are lining up your debts from the largest interest rate to the smallest interest rate. Like the snowball, you’ll keep making minimum payments on the other debts while you pay off the debt with the largest interest rate first and then keep working your way down the line.

5. Throw Every Extra Dollar at Debt:

In order to get that debt paid off as quickly as possible, you want to make sure that you are throwing every extra penny you can at the debt. This means revisiting the budget and seeing what can be trimmed in the short term so you can free up money to add to your debt payment. It may also mean making some extra income.

Getting out of debt requires making some short-term sacrifices, but they payoff is well worth it. Your paychecks become yours again so that you can save for retirement, help pay for your children’s education, and save up for that vacation you’ve always wanted to go on.

Once you start living a debt-free life, I promise you’ll never go back to using credit again.

You Turn:

  • What are you willing to cut from your budget to pay off debt?
  • What would you do with your income if you didn’t have debt payments?
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