Debt Reduction for the Willfully Stupid

Photo by: kainr

People get into debt in a variety of ways.  Some people have medical problems or other things that are largely beyond their control.  Others have simply traded their future earnings for current creature comforts.

While the ways in which people get into debt are varied, the ways out really aren’t.  A lot of people try to make debt reduction complicated.  It isn’t.  There are a few basic moves that will get you out of debt, but they’re predicated on being realistic, accepting that you’ve already had more fun than you’ve earned, and it’s time to redress the balance.  Even if your debt is the result of things beyond your control, here’s some basic advice for those who feel like it’s time to be realistic about how to get out.

Cut Your Expenses

So you have a certain standard of living you’d like to maintain?  Too bad.  When you’re in debt, every dollar you spend costs you that dollar, plus all the financing costs until all your debt is paid off.  Let’s take a simple example.  If you have a 20% APR credit card and it’s going to take you 3 years to pay down your debt, every dollar you spend is actually costing you over two dollars.  That’s without taking into account the fact that a penny saved is more valuable than a penny earned after taxes.  That five dollar burger is now going to cost you ten dollars.  While this ignores the effect of inflation, you get the point.  Putting that dollar towards debts was the better move.

Get a Second Job

Many people are very concerned about their free time.  If you have debt, you’ve already spent your future free time.  When you bought that flat screen TV on your credit card, you were trading your future free time for a TV.  Doesn’t seem like such a good trade now?  Imagine the impact of another twenty hours of work on your ability to pay off your debts.  Assuming you’re at least in the black and slowly paying down your debts, you can put every penny you make at your second job toward your debts.  While you’ll lose some free time, you’ll reduce the stress that all that debt is putting on you.

Sell Some Stuff

This never seems to occur to people.  They usually look at that $250 duvet cover and think if they sell it for $75 they’re losing $175.  The simple fact is that when you sell it, you’ll get $75 on which you don’t have to pay taxes, and which you can apply immediately to your debts.  In our example from before, with 20% APR and a 3 year pay off window, that $75 will have saved you another $75 by the time your debt is paid off.  That means you didn’t lose nearly as much as it seemed when you sold it.

Don’t Get Too Sold on Emergency Funds

This probably isn’t your fault.  Right now all the talking heads on TV are telling everyone to worry about having an emergency fund.  They advocate making sure your emergency fund is well stocked before you start paying down your debts.  I think there’s some merit to this, but there are a lot of other considerations:

Your credit card can be your emergency fund. Assuming you are below your credit limit every dollar you pay towards your credit card can be used to pay for things later on if necessary for an emergency.  If you can get a cash advance then you can even use it to pay things like rent or other things that require cash.  There’s a small risk that your credit card company will reduce your limit, but if you’re being wise that risk is diminished.

While I can empathize with the importance of an emergency fund, try to keep it as low as possible.  It’s a very questionable decision to be paying 20% APR on your debts, while you have cash earning 1% or less in a standard savings account.

Make More Money and Spend Less

Ultimately getting out of debt revolves around this one simple formula.  Spend less, earn more.  That can be daunting–and easier said than done.  At the end of the day however, that’s what you’re going to have to do; so it’s time to get out there and show some hustle.  Grit your teeth and get your debt paid off as quickly as possible, and then look at all the finance charges as an education expense, since you won’t let yourself get in that position again.

6 Responses to “Debt Reduction for the Willfully Stupid”

1. Rosh says:

   July 12, 2009 at 9:02 pm

   As simply as it can be told ‘Make more money Spend Less’. Fantastic tips

2. JT @ Redeeming Riches says:

   July 13, 2009 at 9:15 am

   Thanks for the post. I agree with you about selling some items to help pay your debts. My wife and I made some decent money selling old clothes, cell phones and jewelry on ebay!

   As far as the emergency fund, I would suggest what Dave Ramsey suggests, which is getting at least $1,000 into an EF while you are paying debt and after you have your debts paid worry about building up that EF. I think having a little bit for emergencies is better than having to rely on credit.

3. FinanciallySmartServices says:

   July 14, 2009 at 12:01 pm

   Yes spending less and earning more is the ultimate goal to diminished debts. We should always plan ahead before we begin spending as well.

4. Deb says:

   July 15, 2009 at 12:14 pm

   It’s all well and good to say “get a second job”…but how, exactly?

   Right now, with 14.7 million people out of work (people with 15 and 20 and even more years of experience). Of those, 45.9% have been looking for work for 15 weeks or more.

   You can’t exactly walk into a Wendy’s and get a job these days, and Craigslist is a desert, too.

   Any recommendations?

5. Brad says:

   July 16, 2009 at 11:02 am

   A lot of people, I think, exclude certain jobs because they’re “Worth more than that.” Even if it’s mowing the neighbor’s lawn, every little bit helps. I might start by looking around online and seeing what kind of opportunities there are there. Things like taking surveys online may not pay what you’re used to per hour, but it can help get your debt under control.

6. Gustav says:

   January 2, 2010 at 1:18 pm

   I agree with your suggestions in your post to obtain funds to reduce and/or eliminate debt. I did just that many years ago and now am totally debt free. Instead of a large contingency fund, I have a large equity line as well as open credit cards that don’t cost me anything should an emergency arise. Good post, thanks.