Reduce/Eliminate Debt: Module Overview

By Leo Babauta

There’s a stress that comes from struggling with finances that’s unlike most other stresses.

It’s the constant stress of worrying whether you’ll be able to pay the bills, of avoiding creditors because your debt is so large you can’t even make the minimum payments, of worrying whether you can pay rent or if you’ll be evicted, of worrying whether you’ll have money for gas or for food for your family.

That’s a stress that doesn’t exactly go away when you work out or talk with a friend. It’s embarrassing if you hang out with people who don’t have that stress.

I’ve been there, and I didn’t enjoy it.

But I got out. If you face financial stresses, I’d like to offer some strategies to help you as well.

How We Get Into Debt

For those of you with debt, you know it can be a major stressor. It can make life difficult. Even if you just have a mortgage payment, a car payment, and some credit card bills (pretty typical), it’s hard to do much because these payments take up a lot of your paycheck.

I got into debt simply because:

I thought a mortgage and car loan(s) were normal (now I have neither). So I got them, like everyone else.
When I couldn’t afford something I thought I needed, I would put it on a credit card.
When I needed something else, I took out a personal loan.
When some medical bills came that I couldn’t pay, I shoved them in a drawer.

You can see that things go from reasonable to less reasonable as we move down that list, but that’s the nature of debt — it starts out fine, but spirals because the first few debts make you less able to pay for other stuff.

We get into debt because it seems perfectly reasonable to get a loan or use a credit card to pay for something we think we need. But the truth is, we don’t need it right away — not the first few debts at least. We think we do, but we can do without for a little while. The later debts we might actually need (food and rent and stuff) but the first ones are borderline at best.

For example: do we need a nice car, which we can of course afford just because we got a new job? Well, it might feel like we need it, but no. We could live within biking distance for a year while we save up for a used car. We could rideshare or commute. If we do really need a car, we could get a cheap used one and pay that off quickly. But we tend to get more than we need, because we can afford to pay the payments.

We get into debt because it’s easy, and the interest payments eat into our income. Interest payments on debt are killer — only 5% on a 30-year fixed-rate mortgage, maybe, but that adds up to somewhere in the neighborhood of the cost of the house in interest. So you’re paying double the cost of the house, because of interest. Other loans are shorter term, but higher interest — credit cards can have interest rates over 20%!

We get into debt because we don’t want to face them. We push them to the back of a drawer, because who wants to think about crappy things like debt?

We get into debt because we spend without thinking too much about it. We order online on impulse, or shop because it’s comforting (“therapy”) or social, we eat out with family and friends and travel and so on, without thinking about it. It’s easy to spend. Harder to spend consciously.

I’m not saying any of this as judgment. It’s a problem, and I’ve done it myself. We can address this with better habits.

A Better Way

Before we get into habits, let’s look at some best practices:

Spend less than you earn. Save at least 30% if at all possible. If that’s not possible yet, save 20%. If you can’t, save 10% or 5% to start.
Cut back on big ticket items if you aren’t out of debt & saving. Items like house, car, travel, eating out, shopping. If those can’t be cut any more, cut back on small things, or increase income by doing something on the side.
Get a handle on debts. Make a list of all your debts. Make a snowball plan, where you focus on paying the smallest debt first, then the next, then the next. Eventually: pay off credit card balances in full each month.
Maximize savings & investments. Start an emergency fund, max 401K or other employee contribution plan, buy inexpensive, diversified index funds (don’t buy individual stocks or other securities), maximize tax-advantage savings vehicles.

Those are best practices, and we’ll get into them as we explore this module.

Now, how do we get started? What habits are we going to create?

Head on over to the Reduce/Eliminate Debt Plan to find out.