Debt is one of those things that’s very easy to get into and much more difficult to get out of. I spent 14 months getting out of debt, only to find myself right back in a similar place about a year later.
Like me, you probably didn’t even notice debt was piling up until you were staring up at the mountain. This is exactly what I experienced when I got out of debt the first time.
I had just gone through a bad divorce at the age of 25 and had to start my financial life over from scratch. I could no longer depend on anyone else to take care of my bills or be the breadwinner. Because of this, debt started creeping up on me for the first time in my life.
Getting Out of Debt the First Time
After realizing I wanted to stand on my own two feet, I made a plan to pay off all my consumer debt as quickly as possible. I was working as an accounting assistant during the day, so I was only bringing home a gross income of $42,000 a year.
In order to pay off the $14,000 in debt, which consisted of a car loan and credit cards, I started working at night and on weekends to supplement my income.
That was the only way I could afford to pay off debt with a relatively low salary — I was living on $3,000 a month. After setting myself a monthly budget, cutting back expenses, and changing my spending habits, I finally became debt free within 14 months of starting my journey.
It was liberating and exciting to be in control of my money again. No more payments to the bank for stuff I no longer had or couldn’t afford!
Life After Debt Is Different
Once I celebrated being out of debt, nothing much about my money changed. I was still spending less than I earned, but I didn’t have any other financial goals. I didn’t understand that getting out of debt is just the first step in the plan toward financial freedom.
You have to be more aware of the money that’s going out because you’re no longer using debt products to fund your lifestyle. I never thought about my life and finances after paying off debt. For me, being debt free was the ultimate goal and I couldn’t wait to buy all the things I previously couldn’t afford.
But life after debt is different than being in paying-off-debt mode. You either have to live a life without debt, or decide to take on a certain amount of debt (a controlled risk).
In most ways, living a life free of debt is more restrictive in terms of instant gratification than having debt, because any time you make a big purchase, you have to plan for it months in advance through careful spending and saving.
Of course, I didn’t realize this at the time and didn’t change my mindset about how I dealt with my money. So nearly two years after paying off $14,000, I was back in debt to the tune of $9,400. How could this happen?
I worked so hard to get out of debt, only to find myself right back where I started. Does your story sound similar to this? Where do you go from here?
If you’re back in debt after swearing off it, here’s a strategy for paying it off for good.
Find the Root Cause
Debt is just a symptom, but of what? You’ll have to find that out for yourself, but it’s likely a lack of discipline or motivation, a mindset barrier, or even simply not paying attention. In my case, it was both a mindset problem and the fact that I wasn’t watching my financial situation.
I quit my job and started a new business within the time I was debt free, but spent too much money “investing” in my business in order for it to grow quickly. Naturally, that blew up in my face and now I’m still paying for it — literally.
So, what’s the root cause of your debt problems? Do you need to address your spending habits again? Are you suffering from lifestyle creep? Or do you need to increase your income so it’s consistent and something you can depend on?
A great way to determine the root cause of your debt redux is to challenge yourself. I did this by going on a 60-day cash spending challenge. I limited myself to only using cash and a debit card (directly attached to my checking account) for two months. If I didn’t have the cash for something, I didn’t buy it.
This helped me do three things:
- Uncover my true priorities.
- Determine if my debt was from a spending problem.
- Prove that my spending was fine, but that I needed to make more money.
What I discovered during this time was that my root cause was my income. I simply wasn’t making enough to sustain my minimalistic life in the area where I live. I either had to move and give up quality of life (since I had downsized so much already) or start making more money.
If a 60-day cash spending challenge isn’t your thing, consider a monthlong shopping ban where you only buy things on an approved spending list. Or join other financially savvy people in a spending fast. You can even enlist your siblings, spouse, or kids to join you in a savings challenge to see who can save the most money at the end of a certain time period.
The point of a period-specific challenge is to assess your priorities and review the cause of the core problem with debt. And at the end of one of these challenges, you’ll understand why you’re back in debt again and how to avoid it going forward.
Pay Attention to the Financial Signs
The financial signs are everywhere if you simply pay attention. As Mad Eye Moody says in the Harry Potter books, “constant vigilance” is also something you can apply to money. Your finances require constant attention to make sure you’re handling them properly.
If you want to get out of debt again — and stay debt free — you need to implement monthly and/or quarterly reviews to assess the signs. Create a spreadsheet, or check out one of these debt repayment plan tools, and schedule an ongoing session in your calendar.
Make notes in a spending journal, or review your expenses at the end of each week. You have to be more deliberate about your money and pay attention to where it’s going. Then figure out steps to scale back, change them, and avoid them in the future.
There’s no way you can continue doing the same things and expect to remain debt free. You’ll just end right back where you are now, if you don’t pay attention to the signs.
Create a New Debt Payoff Plan
Now that you understand the signs of getting back in debt, and the mistakes you made in the past that landed you here, you can create a plan of action to change your habits for good.
I view my previous getting-out-of-debt experience as a Band-Aid fix on my finances. It was a quick shot of motivation (that lasted 14 months) so I could wipe the slate clean and start spending however I wanted again. That is NOT a smart strategy if you want to remain debt free for the rest of your life.
Here’s what I’m doing now to be more deliberate with my finances.
1. Diversify Streams of Income
Without a doubt, finding new ways to leverage the time and resources you have is the best way to bring in more money. Remaining debt free is very difficult to do and takes a certain level of commitment (especially since debt products are so easy to get hold of and misuse).
What can you do now to expand your streams of income? Can you start freelancing on the side of your day job? Perhaps you can offer consulting services, or take on a weekend job.
If you’re really ready to get serious, then consider real estate investments that you can easily afford. Start small with your streams of income with the goal that you want to build up over time. Aim to create consistent income from reliable sources in order to add more stability to your finances.
2. Find a Money Accountability Partner
A smart way to ensure you stay on the path this time is to work with an accountability partner who is in the same position. You don’t have to go through this process alone, and you’ll have more success if you find someone who understands and can hold you accountable to your goals.
If you’re not comfortable talking to your friends about your finances, consider a sibling, parent, or your spouse. I’m working with my sister, who’s in a similar situation with being in debt after having been out of it once. We have weekly check-ins (even though we don’t live in the same city) via Skype to talk about our budgets, mistakes, and general progress toward our goals.
Another way to stay accountable but have a bit more privacy is to join an online community. There are lots of awesome blogs, like this one, that offer debt wisdom and stories, where you can interact and comment with other readers.
3. Work With a Financial Advisor to Craft a Custom Plan
In the past, you may have been able to go through your debt journey alone, but success in the future means you need to have a professional on your team. A financial advisor will be able to understand your personal situation and craft a custom plan for staying on track.
Reaching goals is often a lot easier than life after that goal. You have to change your mindset from building to one of sustaining and maximizing, which isn’t simple to do on your own. Talk to someone who’s been there. A financial advisor can be your personal mentor or even business coach, you just have to choose the right one.
If you’re part of Gen Y or Gen X (like I am), check out the XY Planning Network community where you can find the perfect advisor for you, or check out their resources aimed at younger investors.
Debt Freedom Is a Long-Term Goal
Don’t view getting out of debt as the end goal. Think of being debt free as a long-term goal that you work toward and accomplish for the rest of your life. Choose to make decisions based on staying debt free. How can you meet your goals quickly without depending on a financial institution?
The answer to this will help you take less financial risks and value money a lot more because you worked so hard for it. Purchasing a car (or even a new home) that you saved up for years and paid cash for will be a lot more rewarding than the instant gratification from borrowing the money from the bank.
You’ll also tend to take better care of your stuff, knowing the amount of effort and time that went into purchasing it. Viewing your goal of remaining debt free will be easily reachable if you simply view it through the lens of being a long-term goal that’s ongoing.