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Debt

Do you think the best option to get out my debt would be to go through a debt relief program?
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Level 15

Debt

Personal option here. (We all have them!)

No. The "best" way to get out of debt, is to pay it off as fast as possible. Of course, that takes a plan. Here's a simple 7 step plan. Now I say "simple", not easy. While it's easy to wander in to debt, one does not just wander out of it. It takes two things.

1) A plan
2) Commitment

If you're not willing to do both, then stop reading. It's just a waste of your time.

Step 1 - When you find yourself in a hole that is to deep to get out of easily, the first thing you have to do is STOP DIGGING! In other words, get out the scissors and cut up the credit cards. Immediately. Right now. This very instant in time. Don't just talk about commitment. Practice it and prove your commitment. You're not proving anything to anyone else. The only person you have to answer to when it comes to commitment on this, is *YOU*. 

Now debit cards you can keep, since those will only work if there's actually a balance in the account that card is tied to, for the amount you're trying to spend. But all credit cards have to go. Once they're cut up, call the bank or credit card company and close the account - permanently. You will still get your monthly bill for that card and will still have to make at least the "minimum payment". But it's kinda dumb to keep a credit card if your intent is to not use it in your efforts to get out of debt. That would be like buying a spare tire for that old Ford Model-T rusting away in the backyard, because you "might" fix it up one day in the future. Either you make a total and complete commitment to get out of debt, or go home.

Step 2 - Separate "need" from "want". For example, you "need" to put gas in the car every week so that you can go to work every day to earn the money that will get you out of debt. You "need" electricity and water in the house. You "need" food in the kitchen. But you don't "need" to go out to eat on Friday. The only way you see the inside of a restaurant, is if you work there.

Step 3 - Stop ALL retirement fund contributions.yes, *ALL*. So stop contributing to the 401(k) and work, and no more contributions to the personal IRA or ROTH accounts. Now you may think this will hurt you in the long run. It won't. On average, most who follow this method will be able to restart their retirement contributions in 2-3 years - sometime even earlier. Look at it this way. If you don't pay off your debt NOW, then you "WILL" pay your debt later with that money you have set aside for retirement. I don't know about you, but I plan to use my retirement savings for *ME*, and not use it to pay a debt I incurred a decade or two before I retired.

Step 4 - Establish a $1000 emergency fund. The money should be placed in a regular savings account that is "NOT" tied to any debit card, and the account should "NOT" be accessible over the Internet making it to easy for you to get that money. This is an emergency fund. It needs to be a situation where, if you need any of that money you have "no choice" but to physically walk into the bank and withdraw it. Now-a-days, we've all become lazy in regard to accessing our money. So setting up your emergency fund my way, means it's going to have to be a "reaL" emergency before you're gonna take the time to physically go get it. having to physically go get it, gives you time to think about things such as "is this really an emergency?". You may change your mind - and that's to your benefit.

Now what do I define as an emergency? For me, basically if my next meal will be coming out of the dumpster behind McDonalds, then I am in the midst of a "real" emergency.

Step 5 - List all of your debts smallest to largest. (Do not include your mortgage on the house, but *do* include the HELOC if you have one.) This is referred to as your "Snowball Debt List". For items #2 and higher you make the minimum payment on those each month. Then you take every single penny  you can spare and throw all of it at the #1 smallest debt.  You'll find that smallest debt paid off in no time. Then the #2 item on your Smowball Debt List becomes your "new" #1 item. You continue to make minimum payments on all the other debts, while throwing every spare penny at  your "new" #1 item. Now that  your "old" #1 item is no longer on the list, that amount adds to what you're throwing at your "new" #1 item. So things are moving faster than you may have anticipated.

Now there is one, and only one exception to this "smallest to largest" approach. If you owe the IRS back taxes, I don't care where it falls in your Snowball Debt List. You pay the IRS ***FIRST***. The IRS is the monkey on your back that *WILL* turn into an 800lb gorilla rather quickly and will absolutely crush you. So for taxes, if you owe the IRS (and your state if your state taxes personal income) get that monkey off your back ASAP, before it becomes the 800lb gorilla that crushes you!

I found it helpful to keep a graph on the refrigerator of my total debt which showed the line in red for my total debt at the starting point. Then as I paid that debt down, I'd lower that red line by filling in the paid amount on the graph with a black marker. As more debt was paid, I was able to pay the remaining debt that much faster. Actually "seeing" that movement on a graph was highly motivational to me, very encouraging, and helped a lot be allowing me to "see the light" at the end of tunnel, knowing that it wasn't the headlamp of an oncoming train.

Step 6 - Once all that listed debt is paid off (on average, 2-3 years) you need to build up an emergency fund of 3-6 months of living expenses. How many months exactly, depends on the stability of your income. For example, if a majority of your income is from self-employment, then if you have a "slow season" you'll want to have at least 6 months of savings on hand, for those times when the he slow season may go longer, or produce less income than anticipated.  Whereas if you work as a salaried employee in a job that you're not likely to lose any time soon, 3 months of expenses may suffice. You just have to figure how long it would take you to find a new job or start another business if your present source of income just "disappeared" for whatever reason. Like, what if you're in an accident on the way to work tomorrow, are involved in an accident and end up in the hospital for the next 6 months?

Step 7 - At this point, you re-establish retirement plan contributions, maxing them out if you can. If you have kids, time to start that college fund. If you've been renting, time to start saving up for the land/house you want to buy.