Realizing you’re in debt is one thing, actually taking the steps to do something about it is a whole other ballgame. I knowingly put myself into debt for four years before I came to terms with it and actually found the motivation to make a change in my life. Some people know they are in debt, and would like to change this, but either don’t know how to get started, or lack the motivation to get started. Here are the steps that I took to really get my butt into gear:
Tally Up Your Debt and Interest
Knowing vaguely that you are in debt is one thing, seeing the cold hard numbers in front of you is another ball game. I really started to get concerned about my debt when I started running the numbers. At my peak debt level, I owed $26,825.38 in student loans. I also owed $11,282.45 on my newly purchased car. But that’s not what really motivated me. What motivated me was the fact that if I took the maximum amount of time possible to pay both of these debts off, I’d end up paying an extra $7675.72 in interest on my student loan, and an extra $869.27 on my car loan. To top it off, I wouldn’t be debt free until I was 31! The true cost of those debts was actually a lot higher than the sticker price, and I have better things to spend my money on than crummy old interest. It’s a waste of money.
Figure out Your Opportunity Cost
Opportunity cost is the cost of the foregone option. It’s basically what you are giving up when you make one decision over another. A great motivator to get out of debt is figuring out what you’re giving up by not getting out of debt. So if I decide to take as long as possible to pay off my student loans, I have to pay $7675.72 extra in interest. If instead I invested that amount in monthly instalments over the 10 years at a return of 6.5%, I’d end up with $10,889.88 in the bank. Not only would I be wasting over seven thousand dollars by paying my loan back slowly, I’d be giving up the opportunity to invest that money and have it work for me.
It’s hard to get motivated to do stuff all on your own. That’s why there are run clubs, yoga classes, weight watchers, etc. When you have community, the gruelling uphill battle isn’t quite so difficult. For me that was the PF Blog community, I can’t even begin to say how much of the progress I’ve made is directly related to being able to shout my accomplishments from the rooftop of the twitterverse and have someone actually hear me. Whether you need a pick me up on a rough day of setbacks, or maybe you need to crow about your accomplishments, having a community of like minded individuals to share your experiences with is a huge motivator. If you aren’t the super share-y kind of person, maybe you need to:
Find an Accountibilibuddy
Yeah, it’s a real thing, look it up. An accountibilibuddy is kind of like a community, except it’s just one person. Your accountibilibuddy is a single individual that helps keep you on track, and shares in your triumphs.
Start Tracking Your Spending
I use Mint.com to track my spending. In my experience it’s the easiest and most convenient way to keep my finances in order. Some people prefer paper and pen, I say, whatever works! As long as you are doing SOMETHING. Knowledge is power, you can’t control your spending if you don’t even know what you’re spending your money on.
Make A Plan
You know where you are(in debt), now where would you like to go? I suggest starting with your end goals and working your way backwards. If you strike out with no particular direction in mind, how will to get where you want to go? My goal is to be debt free three years after I started paying my debt back. It seems crazy, and I’m not sure if I’ll make it, but it’s what I want, so that’s what I’m shooting for.
What really motivated you to get your finances in order? What were the first steps you took towards financial freedom? I want to know!