1. Get the Right Mindset. When it comes to debt, the only mindset is one of ruthless opposition. We need to see debt as the very enemy of our financial lives. If we begin to say, "Well, a little debt here and maybe a little debt there," we will soon see a lot of debt everywhere. In the same way that finances can compound positively when we save and invest, debt can also multiply and push you deeper and deeper into debt as each month passes.
The right mindset is that we need to get out of debt and stay out of debt. Is this your mindset? Many times we are a product of the environment we were raised in or we associate with currently. Have you thought lately about what mindset you have toward debt?
One interjection here, because I hear it regularly when I say that we should have no debt: It is the question of a home mortgage. Most people believe that their home is not a debt but an investment. The fact is that in this day and age, homes cost four or five times the annual income of the people who live in the average neighborhood. And while there is the potential that you could lose money on your home, historical analysis shows that a person who lives in a home for quite some time will generally end up on the plus side of the financial equation. So for the basic understanding, a home mortgage can be considered an investment rather than a debt, though there is debt involved. But, it can be argued either way--an investment or a liability--and you would be right. Now, if you want to pay your mortgage off, there is no harm in that and it would certainly be the conservative way to go!
Besides the home mortgage exception however, we should remain diligent about staying out of debt.
2. Get an Understanding. Some people do not even know how much debt they have. Some people do not know whether or not they have a positive or negative net worth. With many couples, one spouse knows the real financial situation while the other is relatively "in the dark." This isn't good. You can't plan your future if you do not know where you currently are. Think of it this way. Let's say you wanted to visit a friend and needed directions to get to his home.
When you call for directions he would ask you where you are coming from. Typically we would tell him our town or address and he would then give us directions on how to get there from the starting point we give him. Imagine however, if we told him that we didn't know where we were! He couldn't give us directions because he wouldn't know whether to tell us to go north or south, east or west.
The same is true with knowing where we are financially. If you have a goal to save one million dollars, your plan is going to be different if you already have $750,000 saved than if you have $100,000 in consumer debt. Figure out where you are financially - get an understanding. In this instance the old adage, knowledge is power, is true. There is power in knowing where you stand financially, because only then can you map your financial future!
3. Get Some Help. When you are sick, you go to the doctor. When you want to improve in a sport, you get a coach. When you are in debt, you need to get some help. Depending upon the amount of debt you have, you will have to get varying degrees of help. If you have two to five thousand dollars in credit card debt you may just need a friend who will help keep you accountable on monthly spending. If on the other hand you are over your head in debt, for instance $50,000 in credit card debt, you may need to bring in the help of a financial advisor who can help you with your creditors. Do not be proud. Everybody needs help sometimes and smart people get the help they need. If you have debt and need help managing it, get the help. Your future depends on it.
4. Get Control. Think about the concept of debt for a minute; especially the specific action of going into debt in order to purchase something you want but don't have the funds on hand to pay. Now, you may not ever articulate it this way, but what you are really saying is, "I don't have the money for this, but I want it so much that I cannot go any longer without it. And not only that, I am willing to pay ten to twenty percent more for it than it costs" (ten to twenty percent is a typical yearly percentage rate on a credit card).
What this boils down to is an issue of control. Can you control your urges? Better than that - will you control your urges? Will you take control of your life? Will you take responsibility for your actions and decide for yourself that you will no longer buy on credit and dig yourself deeper into debt, imperiling your financial future?
5. Get a Plan. To get out of debt you need a plan. It needs to be simple, effective, workable and tailored to your life individually. There are some basics you can follow but everyone has different incomes, different levels of debt and are at different stages of life. A fifty year old couple who has an income of $125,000 with $50,000 in debt is going to have a different plan than a single male, age 25, who has an income of $30,000 a year and a total of $10,000 in debt.
The key is to have a plan. And once you have a plan that will work for you, then work the plan with all of the discipline you have. Your plan should include detailed strategies for spending, income, saving, investing, etc.
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