When it’s time to sleep, do you count sheep… or your debt?
If you have anxiety from debt, the best place to start is with a plan. Set spending thresholds using the following strategies, and you’ll enjoy much sweeter dreams:
Step 1: Figure out where you want to be. It’s crucial to envision yourself debt free on a particular date in the future. Imagine yourself looking at your financial statements and knowing you’re in control. Remember that feeling the next time you think about charging an unnecessary item to your credit card.
Step 2: Map out where you are. Take an evening, pour a glass of wine and make a list of every debt you owe and the interest rate. Include overdraft, credit cards, department store cards, bank of Mom and Dad, student lines of credit, personal lines of credit, home owner’s lines of credit, auto loans, RRSP loans and mortgages. Make sure to include if you have a “don’t pay now until later” loan too.
Step 3: Determine which of your debt products have the highest interest rate. This can be emotional interest too. If Auntie Gertrude makes you jump every time you’re at a family event, then prioritize that she needs to be paid off first. The killer interest rates come with department store cards and credit cards. Department store cards have up to 30% interest and credit cards are around 20% interest. If you buy a $1,000 sofa on a department store card and only make minimum payments you'll have paid $1,000 MORE in just over three years at 30% compounding interest. You could have had two sofas if you paid cash. Crazy, right?
Step 4: Figure out how you are going to bust that debt. Everything is on the table now. Remember how amazing you felt owing no one anything? First, holster the cards. Put them in the freezer or bury them in the living room fern. Next, figure out how much you need each month to pay all essential bills, minimum payments on all of your cards, and eat. If you don’t need it, don’t spend it. Deduct that from your monthly after-tax salary. With the extra income you now have, throw it on your debt – highest interest first. Make it a game. Try to live on as little as possible for one month. Brown bag lunch, drink office coffee, eat at home, watch TV, play board games or have a date night at home instead of going out. Be creative for 30 days, and make a huge dent in your debt. It’ll feel incredible.
Step 5: Make more money to throw on the debt. Put everything you don’t want on eBay and craigslist, take it to a pawn broker or have a garage sale. Old comics, jewellery, coins, toys and collectibles can make you a tidy sum. Old furniture, cars, boats or trailers that you never use can get you a quick cash hit too. Ask for a raise or try to get extra cash doing something that you love to do anyway. Collect as much money as you can from selling your services or items that you don’t need and put it right on that debt. Be sure to celebrate your success every time you see that balance drop. Hard work deserves a pat on the back.
Step 6: Find out what can you live without. Commit to an amount that you want to allocate to the debt and every pay transfer the money in chunks to pay down the most expensive debt first. Use cash for everyday variable spending, and limit it by taking a tiny set amount out each week for the entire week. When it’s gone, it’s gone. Calculate based on your payments when you’ll be debt free and mark your “liberation” day on a calendar. Write the date on your day timer or on the back of a card and carry it around in your wallet. It will motivate you every time you look at that date, so post it everywhere. Tell your closest friends and family to crystallize how important the date is for you.
Step 7: Dream how you’re going to reward yourself for that hard work. When you’re debt free of all of your consumer debt (not including investment loans or a mortgages) you’ve turned the tables. The consumer shackles are off and you need to be treated well for your discipline and industriousness. Think of a how truly sweet it will be to get you through your weak moments and think of how extra sweet that prize will be when you’re there.
David C. Lester is a Professional Financial and Life Coach and author of the popular Canadian personal finance lifestyle blog, iheartmoney.ca. Throughout his career he’s gained his personal finance expertise from holding advisory positions within various financial institutions. David currently resides in Toronto, ON with his family dearest friends never far away. In his spare time Lester is an active equestrian and is passionate about art.