Breaking the Debt Cycle!
People ask this question all the time- “I have all these debts how can save any money?"
The debt cycle: Run up credit card debt- worry- plan on paying it off in with one big payment- run up debt- worry- deny yourself and your family any entertainment or discretionary spending- make a dent in the credit card balance- emergency comes up- you don’t have any available moneybecause every nickel you made in the last 3 months paid your debt- pay for emergency on your credit card- more debt- more worry -repeat process;
Worrying about Credit Card debt all the time can drain the fun out of life. All that worrying makes you a distracted parent or partner. It’s hard- your kid wants or needs something and you don’t want to say no or there are the times when you don’t have a choice and don’t have cash and you add to that credit card debt. Most people in these situations don’t tell anyone how they’re paying for these things, their debts remain secret and they live with the worry and the debt cycle continues.
Everyone knows deep down that they need to begin saving for retirement and rainy days as soon as possible but they’re trapped in the debt cycle. How do we break the debt cycle?
Here is the 6-step process to break the debt cycle:
1- Commit to yourself that only emergencies get paid for on the credit cards.
2- Pay yourself first. No matter how humble it is --- start saving for your emergency fund.
3- Pay only minimum payment amounts
4- Get enough in emergency fund to cover at least 6 months Housing/ Food / Insurance /Car Payments
5- Double down on debt payments
6- Stick to step 1.
Believe it or not, the hardest part of the process isn’t the 1st Step- the hardest part is sticking with step 2. No matter how humble or minimal the amount you put aside each month it's more than you had the month before and you’re that much closer to freedom.
The cycle keeps us trapped because a common way of thinking is I starve my myself of fun and I’ll pay the debt down in a shorter time period. What usually happens is an emergency comes up and we don’t have cash reserves and we incur more debt or we feel the need to reward ourselves with something we need to charge and the cycle repeats again. Remember the opposite of “debting" is saving. That’s why we need savings!
Our priorities need to become
1-Save up a 6-month emergency reserve for the family
2- Pay down debt with minimum payments while we’re building the 6-month reserve
3- Once the 6-month reserve is set up begin accelerated payments on your debt
4- When the debt is satisfied- begin saving for retirement 10% per month.
We’ll talk about retirement saving and investing strategies in future posts.