How to Reduce Debt and Have Financial Stability

In this article I will write about how I found my path to financial stability, in hopes, although I know my path is not a one size fits all, that some readers may find it useful enough to help them also find their own path of financial stability and eventually debt freedom.

Debt is consuming many of us during these financial hardships. Debt has such a strong hold on society and the economy that many people are finding themselves in holes so deep that they fear they may never again be able to get out. I was one of them. My great debt started roughly about 7 years ago. Like most young adults, I saw my future filled with possibilities. Everything looked bright. I was in my final year of college about to graduate with a teaching degree specializing in Literature and minoring in speech and sociology. My finances were, for someone so young, very good and modest. I grew up in poverty, so I understood the importance of working hard and saving. I only bought the things I needed and turned away from the things I wanted. In this way, I always ensure to have enough to pay for some of my education and basic necessities, while also helping out my parent. Then as surely my future was bright it quickly became consumed in debt.

After getting married during my last semester of schooling, I became so sick that we went from a two income to one. My husband, unfortunately, had a job that was based on assignments, so eventually we found ourselves on zero income for months at a time. It was during these times that we learned and depended on credit cards and any other loans we could think of. Due to ill health I had to drop out of school which caused yet another financial burden because not only was I not getting a career, but I also lost the job I had through my school, and being of ill health we faced the reality of piling medical bills. In less than a year we accrued a debt greater than $70,000. This debt consumed us; it even threatened to tear my husband and I apart. Things did not get better either when we went from two, to a family of three, four, or eventually five. Eventually my husband had to quit his schooling and lost his very good job offer, and settled for a job that barely covered our expenses. We began to live paycheck to paycheck, and even with that it seemed as if it still was not enough.

After 3 years of getting harassing calls from debt collectors from morning peek till the middle of the night, we knew something had to give. We needed to change our lives and its pattern if we ever meant to be free. Eventually we found ourselves working 12 to 18 hours shifts, and our children barely even saw us. Although it was breaking my heart to not be there for the first word, and step and eating and those entire first that I will never get again, I thought that getting money was the only way to ensure their future would be better. But still, we struggled and still we lived paycheck to paycheck. It seemed as if the more money we made the more we struggled. Nothing made sense.

Then came the recession and our lives fell apart. No longer did we have jobs. We found ourselves begging for assistance to which to my surprise we did not qualified because we needed to be struggling for 6 months. This I thought was absurd given that we were one month away from homelessness. Then as if by miracle my husband found a job. It was not a high paying job, but it was a job, and to us that was enough. I knew that if we were to survive on such a small income, we needed to take a really deep look at our budget and our spending. We knew we had to bring balance to our lives and finances. And as much as we hated to do it, we knew that we had to accept the fact that we were living out of our means.

Step One: Writing your Monthly Spending on Paper

This step was the hardest. Most of the time, we like to ignore and even pretend that we do not owe so much, but this step forced us to really look at what we were spending our money on. This list included all bills and spending (food, clothes, unnecessary spending). The list was so long that we covered three pages. It did not take us long to realize that the highest spending was on useless unnecessary spending. This I was surprised given that I never till then noticed how much stuff we bought that we did not need. So in order to remedy this spending we decided on a limit spending that must include food, clothing (when necessary), and other needed only items. This amount would be the amount that we would try not to go over, and if any was left over, it would “transfer” into the next month and thus gives us more spending money for food. For our bills we called all collectors and negotiated to a very low minimum payment and if possible we try paying any small amount extra on credit cards. This provided us with a more visual, steady monthly spending.

Step Two: Be realistic

Let’s face it, we can budget till our hands go numb, but if we are making unrealistic demand on ourselves we just won’t go through with it. So be real with yourself, especially in the beginning, if you know you like to go out on the weekends then budget it in ahead of time. Don’t stop yourself from doing everything or else you will make yourselves nuts and not live your life; just keep in mind not to over spend. Rather than spending 50 to 100 dollars, keep your limit to a minimum of $20 for each weekend. It may take some changes, but in the end you are still having some fun, and you are still going out. We, thank God, found a movie theater that charges only $1.50 per person. True the movies are a month or two old before they get to that theater, but still we get to enjoy a night out and not emptying our wallets in the process. In restaurants, we skip appetizers and sometimes desert, instead of soda we drink water, that keeps the prices low, and ensure we can tip the waitress and again keeps us within our budget. However, we also learned to keep restaurant dining to special occasions only. The point is to be real with yourself. Don’t try to start denying yourself everything, just put a limit, and slowly try to wean yourself out of spending for the things you don’t need, until one day, you find yourself being able to have fun without going broke and without thinking about it, staying within your budget.

Step Three: Ghost and Savings

Many people like to put money in the saving if they ever have any money left over, but let’s face it we are struggling and usually we need every penny we earn. However, we learned that the best way to save money was to budget it in every month like we would our bills. That is right, every month we schedule an automatic transfer of $5 dollars in our savings account. It is not much, and it definitely won’t let you go house shopping anytime soon, but it does get you on a saving pattern, and eventually, as more of your debt gets paid off, the savings amount can slowly start increasing.

Ghost money is money that you don’t spend but you don’t acknowledge it’s there. Basically if you buy an item that cost $1.03, on your budget subtract $2. This will provide you with a .97 cents ghost money. This money will soon, upon increasing become your safety net and friend. Some banks offer something like this and they transfer it automatically to your saving account. I think if that is the way you want to do it, then good for you, any saving is good savings. However, since we lived paycheck to paycheck we could not afford that in fear that a check would bounce, or an emergency arrived and given strict withdraw policies from the savings, we could not afford to pay for fees in order to prevent bouncing and/or emergency. So decided to schedule ghost money and also increase our savings by learning to wait till the end of the month, and when we start budgeting for the next month, we subtract the total of money we will need for the spending from the total of money we have in our checking account, and whatever the difference is left over we then deposit it in the savings account. For example, if you get got paid on a 4 week pay a total of $2000, and you have $2030 at the end of the month and you only need $1950 to pay for the bills and expenses of the new month, then you are left with $80 in ghost money, and that you can immediately transfer to your savings, leaving you with a perfect $1950 on your checking account. However, this remedy is only good if you are good in NOT going over your budget. If you, like us tend to over spend at times due to emergency and/or necessity, then you can use the same technique to create a checking ghost money. Basically it is the same technique as earlier, but rather than transferring all to savings, you keep it in your checking and NEVER use it. Example: You got a total of $2000 on a 4 week pay, but in your checking account at the end of the month you have a total of $2600, and then create a safety net of $500. So you would only transfer $100 to your saving and leave ghost money every month of $500. This money is never to be used; it is to help ensure that nothing bounces. This amount can be smaller or it can be larger, just remember that once you decide on a ghost money amount, you keep it the same amount every time at the end of the month and the rest transfer to the savings, this way your saving also grows; not to mention that once you reach $500 of ghost money, every month after that you can then count on that full $600 to go towards your saving account.

Step Four: Tax refund

Every year many of us wait for that tax refund, but if you are like we were, that money would be gone before we ever even got our hands on it. Right after we got it we were so excited with the extra money that we would go and get items on credit knowing that it can be paid off once we got the check. The problem, we made new debt, paid off all or some of the new debt, but still found ourselves stuck with the old growing debt. So, we learned to ignore the tax refund check. We do our taxes and mail it in, and forget it even exist until it arrives. Once it does, we look for any debt we can pay in full with the refund, and once we pay at least one debt in full, then we see if we can pay anything else. Furthermore, if there is something we know we might need or want, such as putting some money aside for the coming birthdays of our children, and/or budgeting for car registration and/or anything else that needs or we want to take care off, we also try to use our refund for. Keep in mind, that unless what your saving for falls on the month you get your check, I suggest you put that money into your savings; otherwise it will become too tempting to spend. However, if possible, ensure you keep a very small something for yourself as well. Every year, my husband and I have a goal. If we can save a certain amount throughout the year, and we get enough to pay off one debt with the tax refund, we give ourselves $25 to $50 dollars to spend on anything we selfishly want. It may not seem like we can buy much, but it does make us feel a bit happy to buy something we want rather than need, even if only once a year.

Step Five: The Five Week Paycheck

We all get those months where we get what feels like the extra paycheck of the month. Our budget is only based on a 4 week paycheck, thus leaving that wonderful extra paycheck, technically at our disposal. However, before running to spend it, we realized that that extra paycheck are great to start saving for the next month bill money. For example: say we saved enough paychecks on a 4 week month to get the $2000 at the end of January in order to pay the bills budgeted in the month of February; however, since now we have an extra $500 what we do is use that $500 to start saving for the month of April. This will put us a bit ahead on the savings, and it will also begin to take us off that paycheck to paycheck scenario. By the end of the year, we then find ourselves with $1000 ahead of the month, and within two years we will be a full month ahead of the month, meaning that by the beginning of January, not only will you have the money in full to pay the bills for February, but every paycheck you get in January will be saved to pay for the month of March. Thus, you are no longer living paycheck to paycheck, and if something should happen, an emergency, you have that extra $1000 on top of your pre-set ghost money to help see you through. Ideally two to three months would be magnificent, however, it is also much harder to do, so I suggest once you have a month advantage, put the extra paycheck into your savings account and save it there, it gains interest, and also reduces the temptation to spend it.

Step Six: Set a Goal

I find that in order for us to really save we must have a high goal. In our case, we truly hope to have a house someday. It may happen, then again it may not, but it is our dream, our goal. Every penny we save we believe might put us closer to owning a home where our kids can play in the backyard and my husband and I can grow old only paying for utilities, yearly taxes and insurance. It is this dream, and also being debt free that keep us sacrificing on our selfish desires and only live on our needs. Although it took us a year and a half before we finally got into the habit of truly saving and paying off debts, we are still grateful that we began to change our spending patterns. In our adjustments of living within our means, we found many free events we can attend, and started having family days. Rather than going to the park and then eating at fast food, we now make and pack lunches and have picnics. We spend more time playing sports at the park then we do arguing over how we are going to make it next month. Although, still a while away, we are now feeling hope that within the next couple of years we might finally become completely debt free, and begin saving for a down payment making this all worth the while.
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Although we are still in debt, we have gone down from over $70000 to a bit over $30000. It may still seem like much, and it is, but the hope that eventually it will be gone keeps us going forward. If we continue to follow our path and pattern we are hoping to be completely debt free in 3 to 4 years. However, in the mean time we still find ourselves living within financial stability to where we are not going paycheck to paycheck and no longer feel so controlled by debt and its collectors.

Visual Examples of Budgeting by year and by month (each is to be made on an individual page): The yearly budget must be updated once a bill is paid in full such as elimination of credit cards, and/or loans.

New Monthly Payment Plan for the year 2010

Rent

$800

Due on the 1st of the month
Credit card #1

$150

Due on the 4th of the month
Credit card #2

$150

Due on the 8th of the month
Light Bill

$70

Due on the 17th of the month
Cable Bill

$20

Due on the 17th of the month
Phone Bill

$30

Due on the 18th of the month
Loan #1

$100

Due on the 18th of the month
Food

$200

Due on the 1st of the month (to be used throughout month)
Gas

$100

Due on the 1st of the month (based on a $25 per week fill)
Transfer to Savings
$5

Due on the 1st of the month
Other
(Fun, or extra)
$50

Due on the 1st of the month (to be used throughout month)
Total expenses

$1675
Total bring home pay for the month $2000
2000 ‘” 1675 = $325 left over to be transferred into savings.
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January Monthly Budget after paying Bills
Food

Gas

Other
$200

$100

$50
-195 Groceries on 1/5/10

-25 on 1/5/10

-20 Movie Night on 1/20/10
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——-

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$5 Total Left over

$75 Total

$30 Total

* Make sure to always write and subtract what you spend to help you not go over. And if at the end of the month you have left over $ such as the $5 dollars from food or the $30 dollars from Other, transfer it to Savings, or use it to give yourself extra food money the following month. This way you always and only use money you already have and don’t depend of money you do not.

* Also, if like me you find yourself at times over spending on food, ensure you subtract it from the money that you were putting into savings. Try really hard not to let this happen often, but when it does, keep it at minimum, the importance is to keep up with your learning on how to budget and live within that budget and save.

Remember this is not a one size fits all budget and financial stability plan. What works for me and my family may not work for you and yours. However, if anything that we do you find useful, then use it and mold it to better fit your family and your needs. Remember that the goal here is to save and gather financial stability while slowly but surely paying off debts by teaching yourself to live within your means, even on the smallest income. As you get extra money to spend you can either send it to the savings or increase your minimum payments on your credit cards and/or loans. And even when the path seems hopeless, do not give up, just keep holding on to your dreams, your major goal, and eventually you will find that it is more attainable and closer than you imagined.

Good Luck, and Happy Savings and Financial Stability to you all!