If it was easy to get out of debt, no one would have credit-card balances, student debt or personal loans. No one would be in debt.
It’s not easy to get out of debt. But it is possible. And if you are using the correct method, possible becomes highly probable.
Granted, there are several methods for getting out of debt but only one that offers you hope of success.
I’ve gone down every road that promises a way out of debt and have discovered that most come to a dead end. Others are filled with impossible twists and turns. But there is a way out. I found it. And that is what makes me uniquely qualified to tell you the best way to get out of debt.
But first let’s identify the roads you should avoid and the reasons why.
Fast and aggressive
This way out of debt is very inviting because it promises a quick and easy shortcut. It goes like this:
What it is. First you make sure you have $1,000 in the bank to cover emergencies. But that’s all you need, so stop saving. Take every dollar you can squeeze out of your life and send it to your debt. Hurry! Fast! And if you pass Go and collect $200, send that in, too.
The rebate check you got in the mail? Off it goes. Tax refund? Birthday check? You know the routine—apply it to your debt.
Why you should avoid it. This plan makes an assumption that $1,000 will be adequate to cover all of your unexpected emergencies until you are debt-free. But what if they are greater than that? What if after say six months of aggressively throwing every nickel you can possibly spare against your credit-card debt, your tires and refrigerator both die at the same time—and just when you are facing other expenses for which you are unprepared? Or what if you lose your job?
Stuff happens, and if you are not prepared to fund your own emergencies while you are getting out of debt, you will run back to the credit cards for a bail-out.
The bigger the bail-out the more likely this method is to fail because it will be easier to justify another bail-out next time. And the next.
Tap the equity
What it is. First you add up all your unsecured debt—credit cards, student loans, personal loans, upside-down auto loans. Once you know how much you need you apply for a home equity loan for that amount, plus as much as you might need to fix up the house, start a savings account or take the kids to Disney World. You put the money into the bank account and write out checks to pay off every one of your unsecured debts. There. Paid in full. Wow. Feels great.
Why you should avoid it. To say this is a way out of debt is very misleading. You don’t get out of debt. You create new debt to fix old debt, and that hardly ever works.
Your new home equity loan comes with a monthly payment. If you miss a payment you will be looking at foreclosure. Yes, they will take your home if you miss payments on a home equity loan. And when things get tight you will see the paid-off credit cards as an easy way to fund emergencies. Within about two years you will have all your credit-card debt back again—plus the home equity loan.
Slow and steady
What it is. Get out all of your non-mortgage debts and look at the minimum payment required this month. Now lock in that payment—pay the same amount every month until you are out of debt, even if your creditor would accept less. Add up your payments. That is the total amount you will pay every month to your debt—no more, no less. Creating your Rapid Debt-Repayment Plan will illustrate this for you and give you a simple payment schedule and road map to follow.
Next, start saving aggressively by building a Contingency Fund. Save ten percent of your check faithfully. Add all rebates, refunds and other unexpected money you get so your CF reaches three month’s living expenses—the amount you would need to live for three months without receiving a paycheck.
As you have an unexpected emergency—or even if you lose your job—your CF will be there to cover things so you do not have to look to credit for a bail-out.
Why you should do it. Fast and aggressive is enticing because it promises speed. Tapping your equity is tempting because it looks like free money. But both methods are risky—too risky. Slow and steady takes longer but it is doable. And that is what makes the journey
This reasonable, low-risk, get-out-of-debt method has the greatest potential for success because of this one thing—hope!
© 2007 Debt-Proof Living. All rights reserved. Used with permission.
"Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.