Personal Finance Basics - Getting Out and Staying Out of Debt

This is a series about the basics of personal finance. In this post, we're talking about how and why to get out of debt and stay out of debt.

Before we talk about how, let's talk about the reasons to get out of debt and stay out of debt.

I don't borrow money anymore, with the possible exception of getting a mortgage someday. I hate debt and I don't use it, not even credit cards, which we'll talk about more later.

Using debt is borrowing money, which adds more risk when so many things are risky already. That money has to be paid back and even if you used debt to start a business and that business was making money, you would have to pay your debt back before anything else. Borrowing money only works when everything goes perfectly and nothing ever does.

Borrowing money also changes the decisions you make. You would maybe take a job you didn't want or make a business decision you wouldn't normally make, but your first thought is always paying back your debt.

It's the same issues on a more personal level. You might take a job you didn't want or postpone plans because your trying to pay off debt, while keeping up with regular bills at the same time.

Debt changes things. It adds more risk and causes you to make decisions you might not normally make.

Debt changes the future too. Debt will screw up your future life in ways you can't even imagine.

The biggest personal finance mistake I made was buying a new car with debt. When I started changing my mindset and the way I thought about money, I started to feel like I had done something wrong because I was driving a car that I didn't pay for and didn't own. I almost felt like I had stolen something.

I'm not saying people should feel ashamed or they should feel like I did, but from then on I decided I wasn't going to borrow money to buy anything again. If I can't pay for it then I can't afford it.

By the time I was close to getting my car paid off, the government started sending out checks because of the pandemic. I used that money to pay off my car faster. I also felt like that money wasn't even mine because I was in debt. I was in the hole with money and had to get back up to zero.

That's another thing about debt. You might get a bonus or come into some money another way, but if you have debt then that money goes right back out of your bank account to pay off something you bought maybe years ago.

If you have to borrow money for something it means you can't afford it. That's why you have to borrow the money. But someone will say, I can afford the payments. So you get a car loan but then you get hurt or sick and can't work. Or you lose your job for some other reason. I don't mean to be a pessimist, but life is unpredictable enough. Adding debt just makes bad situations even worse. And since this is life, we will go through bad situations now and then.

Those are some of the reasons to avoid debt. If you have made a decision to get out and stay out of debt, let's talk about how to do it.

The first step to getting out of debt is to stop borrowing more. This includes using credit cards, because using a credit card is using debt.

It doesn't matter if it's $5 or $500, using a credit card is still borrowing money. You think you paid for something when you use a credit card? No you didn't. You took out a loan that has to be paid back later.

Some people probably pile up credit card debt because they're not paying attention to how much they spend. After a month the credit card bill is due and it's more than they thought. They're not budgeting and planning anyway, so they don't pay the full balance. This keeps happening and then they are deep into credit card debt.

Another reason credit card debt gets out of control is because people use them for unexpected expenses. They might have the best of intentions to pay off the balance every month, but they don't have an emergency fund so when something unexpected happens they use a credit card. All it takes is one unexpected event and you can't pay off the full balance on the credit card.

We're going to talk more about the emergency fund in another post, but once you build up a cash emergency fund, there is no reason to hold on to a credit card just for emergencies. If your emergency fund is a credit card, that's a bad financial plan.

To stop using credit cards is also a mindset shift. You are making a decision to get out and stay out of debt. You say I'm never borrowing money for anything ever. That goes for credit cards, even if you intend to pay off the balance every month, even if you don't want to lose your reward points, just stop using them, because they are still debt.

Don't get a car loan, that's another one. We pay so much for cars and they go down in value. Instead of getting a car loan, start setting aside money every month until you can buy a car with cash. It'll be a used car but you won't have a car payment. If you know you're going to need a another car in two years, start right now. Start putting that money aside every month so that in two years you buy a car with cash.

Basically stop buying anything with debt. That's step one to getting out of debt, stop adding more.

You decided to get out of debt and there are basically two ways to do it faster: decrease expenses and increase income.

This means unsubscribing from streaming services, not going out to eat, stuff like that. It means putting up with the old sofa a little longer.

But don't worry. Doing these things is only temporary. I'm not telling you to cancel Netflix forever. It's just for a short time while you're getting out of debt.

Increasing your income might mean a second job, or overtime, or starting a side hustle. Again, it's temporary. I'm not telling you to work extra forever, just until you're out of debt.

Doing these things might be hard, but you can do them if you decide they're important.

There are lots of different options for side hustles. Do a search on YouTube and see which side hustles sound good to you. If you find something you like you can have fun and make extra money too.

While you're doing all of this, keep $1,000 to $2,000 in the bank. Don't go to zero in your checking account. Keep at least a thousand and throw everything else at your debt.

How long it takes depends on how much debt you have and how serious you are to get it paid off.

In the next Personal Finance Basics post we're going to talk about the emergency fund.

You can find my social media links at the top of the page. See the About Me section for contact information.

Thanks for reading.