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The Get Out of Debt Challenge

Debt Strategy Series

Getting out of debt isn’t fun, nor should it be, however it is life changing. There are multiple methods you can follow to pay off your bills, including the debt avalanche and debt snowball, however no matter which option you choose to follow, you need to follow through to the end.Our challenge is extreme, and intended for those who are in debt not due to student loans, but solely based on consumer purchases via auto loans/credit cards. The G.O.O.D challenge will be ideal for someone not interested in building a FICO score as much as alleviating the monkey on their back from carrying debt they may not be able to afford.

GoodMoneyAdvice.com is proud to present the G.O.O.D (Get Out Of Debt) challenge.

The Plan: You are ready to take a bite out of your debt? The very first two steps could take you out of your comfort zone.

First, identify an accountability partner, someone you know will check on you to make sure you haven’t slipped back to your consumeristic ways.

get out of debt cut up credit cards

Second, you need to cut up all your credit cards. Yes – cut them up, as in take some scissors and chop em. If you don’t trust yourself that merely cutting them up is enough for you, then take it a step further, and log into all shopping websites you frequent (i.e Amazon, Walmart.com), and REMOVE the saved payment source if it is a credit card. Sounds a bit extreme? Yes. Did I have to do this myself? Yes. It really works.

Now that you are serious and have a friend/family member to hold you accountable, and have eliminated the temptation of putting yourself in more debt, it’s time to communicate your reason for change. Writing down your why is a good first step, and for the next 21 days and 21 nights you should look at that before you go to bed, and as soon as you wake up. Make your WHY personal and clear. Share it with your accountability partner, and ensure they help celebrate as you progress through the first 21 days.

Now that you have the foundation set, it’s time to budget. We are starting with 21 days, because ideally you will get paid at least once in that time frame (possibly twice). You want to live on your debit card if possible for all purchases, and review your week at the end of day 6, 13, and 20.

Step One of the G.O.O.D Challenge has not mentioned anything about paying debt off, yet that is our goal, right? Yes it is. The reality however is if you struggle with the steps mentioned here you will almost certainly come off the rails at some point in the first three weeks. If you gain momentum living within a budget on just the funds you have in your checking account, that will help as you enter the next 21 days, which is solely focused on building up savings.

This is where I and Dave Ramsey’s Baby Steps slightly disagree. Without question, you should have some funds in the bank for a rainy day/emergency no matter where you are in your personal finance journey. I however believe $1,000 for some is a stumbling block that many mentally cannot succumb, so they don’t even try. It’s the equivalent of someone needing to lose weight stop trying because the mandate is they lose five pounds in three weeks. It’s not that they can’t do it, it just seems impossible when you haven’t been tracking it.

So what do we do next?

Step Two is set aside $500 in the next 21 days. For some, that will be very easy. For others, you may have to start delivering for Postmates, driving Uber at nights, and sell some shoes on Craigslist to raise those funds. How serious are you about making a difference financially in your life? This goes back to that why, and WHY it is vitally important for the previous 21 days you have engrained your reason as part of your personal mission statement. You must make a change, and you will not stop until you are. So, once you secure $500 for savings, you place those funds in a savings account (or potentially a CD) at your local credit union. Yes, I mentioned credit union, for a few reasons. A relationship with a local credit union will help you as you are rebuilding your credit, and the $500 you store away in a certificate of deposit could eventually stand as a security deposit for a secured credit card (we will touch on this in a later post).

So six weeks or 42 days in, and you have an accountability partner checking in on you once a week, while you have cut up all credit cards, have lived on a budget solely on cash/debit card, and have stowed away a starter personal security deposit (a.k.a emergency savings).

Step Three is here, and that is lining up your debt, from smallest to largest. Paying the debts in this order will provide the momentum needed to see this through, and will allow you to celebrate the small wins. Essentially if your debt looks something like the following:

  • Medical Bill $800
  • Credit Card $1200
  • Credit Card $3000
  • Student Loan $8500
  • Student Loan $14000
  • Student Loan $15000
  • Auto Loan $24000

You are knocking out the medical bill first, and then the $1200 credit card, etc. Yes, it may take a while to pay off the final three debts, but you will be surprised that much like working out/dieting, once you begin to gain momentum, you are able to push through the tough times so much easier.

As a recap, You have done the following on your journey so far:

  • Identified your WHY, and found an accountability partner to assist in keeping you honest
  • Destroyed all physical credit cards, and removed cards as payment sources for frequently visited websites
  • Saved up $500 for your personal security deposit (emergency fund)
  • Paid off non-mortgage debt off from smallest to largest

The time to complete Step three will vary based on your income, the amount you allocate toward your debt payoff, and how much you are willing to cut into your lifestyle temporarily. I had friends who literally did not go on vacations of any kind for two and a half years as they plowed through their debt. As someone who personally loves to travel, that would be tough, however if the payoff is being financially free, it is worth it.

Step Four is now to ramp up your personal security deposit from $500 to 3x your monthly expenses. Going back to earlier where in Step One you established your budget, take that bare bones number ($2000 in our example) and multiply that by 3 = $6000.

Now that you have no non-mortgage debt, you will be able to build up savings much faster.

Step Five is for those who aspire to purchase a home, which is to begin saving a down-payment for your first(or next) home purchase. You should take time to brainstorm how much house you can truly afford, and multiply that purchase price by 3 percent as a minimum. In case you were wondering, Most FHA loans require 3 percent down for purchases (assuming you don’t have a current FHA mortgage).

If you are not interested in buying a home, Step Five is to catch up on retirement/investments. This is where you go back to your HR department, and ramp back up your 401(k) match to the max allowed. You may also want to consider speaking with your tax professional about the pros/cons of creating a Roth IRA before year-end.

If you have made it to Step Five, congratulate yourself. You have taken control of your personal finances, and in turn taken a huge step in taking control of your future. Share your success stories, your challenges, or other comments below if you decide to take on the G.O.O.D Challenge!

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