There have been a few times in my life where I have racked up a large amount of credit card debt. It’s not fun to have and it caused me a lot of stress, especially when it started to seem a little unmanageable.
Both times I managed to pay it off with two simple techniques:
- I lowered my expenses
- I increased my income
That sounds so simple right? You might be saying, “It’s not that easy, I can’t do either of those things.” Before you throw your hands up in the air, try addressing these two things systematically. Here’s an outline. I used several of these techniques to pay down my debt.
Lower Your Expenses
Write down all your fixed expenses every month. This would include your rent or mortgage repayment, groceries, electricity, water, internet, cable and cell phone bills, and any subscriptions you have. Include the minimum payments on your credit cards and other loans. Add in your public transportation or monthly gas requirements. You should end up with a number that is your minimum cost to live, not including eating out or entertainment. The next step is to create the biggest possible gap between your minimum cost to live and your income. We start by going through every item and seeing what we can cut or reduce.
- Can we get a roommate or move to a cheaper apartment to lower our housing cost?
- Can we cut our utility bills through using less electricity, gas, or water?
- Can we get rid of cable (use Hulu + Netflix) and get a better rate on internet service (call the competitor)?
- Are there any subscriptions we pay for that we can cancel (cut the gym, run outside)?
- Can we walk or ride a bike more to get around instead of using a car or public transport?
- Can we reduce our interest payments by refinancing loans or moving credit card balances to cards with an intro APR, taking out a personal loan, or just asking for a lower APR?
- Are we paying any bank fees? These should be zero. Ask the bank to remove a monthly service fee and make calls to ask for fees to be refunded. Or switch to another bank.
Increase Your Income
This might seem more difficult to do, but there are definitely actions we can take to make more money.
- Ask your boss for a raise.
- Get a second or third job (this has the added benefit of reducing your spending by having less time for recreation).
- Find additional sources of income. Become an Uber driver, AirBnB a room in your apartment (or your own and stay with a friend for the weekend), do some side consulting work.
Start Paying Down Your Debt
Once you’ve maximized your income gap, it’s time to start paying down your most expensive debt first (typically credit cards). Build a list of which cards you want to attack and set goals. Maybe go after the card that has a lower balance so you can achieve a victory in two or three months. This is as much a psychological battle so it’s important to create little wins for yourself. Once you knock out a card, put it in a drawer, freeze it in ice, or some other method so that it’s out of use and you are not tempted to rack up a balance again. (Don’t cancel the card.)
Start Saving (even if it’s a small amount)
Something else that’s important is to start saving a small amount in your savings account even as you knock out your debt. Building up that emergency savings fund is crucial because there are times in life you need to have cash on hand. It also gets you in the habit of not spending everything you make and to experience that rewarding feeling of having savings. The amount of emotional security (and lack of anxiety) that brings is priceless.
Change Your Mindset
The final piece, and also perhaps the most difficult, is shifting your behavior of what to do with that new ‘gap’ cash. Critical to paying off debt is keeping a modest lifestyle for a period of time. Taking lunch to work, eating at home, limiting your bar spend (take $40 cash and leave the ATM card at home), and reducing the amount of stuff you buy. Set a goal, keep your head down, and celebrate getting out of a debt hole!