Some of us reading this article may have been in debt at some point in our lives. It is a frightful, burdensome, overwhelming feeling that, without proper guidance, would leave you in a world of anxiety and despair.
This article is here to help you close out and block out all the noise. Tell that crazy monkey brain to put down his symbols because getting out of debt requires immense focus, discipline, and consistency. Being all of those things will allow you to accomplish this sometimes, it just takes a little time.
Where to Start
I will use the average United States citizen for my following example. The average personal debt, excluding the mortgage, is $21,800. The average American carries a credit card balance of $8000 per month. For those of you who are on the fence about Dave Ramsey, this is why he has become such a powerful figure in the personal finance industry.
So, you have roughly $25-$30,000 in debt. Where do you start? Let’s start with your income. You need to make sure that you are working consistently, you have money coming in every month, and, like Dave says you need to take care of the necessities. You must ensure you have shelter, transportation, food, and water. From there, we need to figure out how much is going to these debt collectors every month. This is because if you are going backward and barely making ends meet, you need to figure out ways to make more money. Whether that’s a side hustle, asking for a raise, or moving jobs, you must find a way to start going into the green each month.
From there, we can now take a look at the extra money that you have each month on a consistent basis. After you complete baby step one, which is to secure $1,000 in a savings account, we start to focus with Impala-like intensity to get out from under this burden. The focus must be directly centered on getting out of this debt. Dave likes to say rice and beans until it’s accomplished, but I like to say just rice.
Day by Day
This is where the focus, the discipline, and the consistency come in. All discretionary spending should be at the front of your mind during this period – do I need this? Additionally, we should consider pausing all retirement contributions, including your 401(k) at work and your “for fun” investment account. The reason for this is opportunity cost, which is something to discuss.
Depending on your interest rate, some might argue there will be opportunity costs from investing that money in the market. For example, if you have a 3% interest rate on a car, you could invest that same amount of money in the stock market and potentially make 8%, then your opportunity cost is that potential 5%. However, what this doesn’t consider is that debt equals risk so it is always best to pay off the debt!
In general, having debt means investing is not something to focus on because, without this debt, you could be allocating that entire debt payment to the market later on. This will reduce stress in your life and build patterns of discipline, which will translate into taking leaps and strides forward to accumulate more in retirement. That is why this is Baby Step Two. Nothing else should be focused on until that is complete.
Typically, the average person could take between one and five years with extreme focus on paying off their debts to get out of debt. Once that is done, it will feel like the greatest weight is off your shoulders, and you should celebrate such an extreme accomplishment that only the determined can do!
Now What?
The next step is to keep following the plan. You could meet with a trusted financial advisor to implement the rest of Dave’s steps. From now on, through baby step seven, it is rather smooth sailing. Build an excellent team of financial planners, accountants, and estate planning attorneys around you to have the healthiest financial situation possible. Here at Whitaker Myers Wealth Managers, we can help you do just that.
By accomplishing the toughest task of getting out from under the debt, you have built an element of focus and discipline into your life that will catapult you into saving for an emergency fund, which is baby step three, and continuing or starting retirement contributions, which is baby step four. Your future depends on your attitudes, goals, and willingness to do hard things. So, lean into your challenge and welcome it with sheer grit, passion, and determination. You got this.
Getting Out of Debt
December 20, 2023
Drew Hodgson
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