Get Financially Fit in 2010: Trim Away Your Debt

The two most popular New Year’s resolutions are losing weight and getting out of debt. Money Crashers wants your physical life and your financial life to be as fit as possible, so the next five articles will be a series to help you get rid of your financial gut. Step 0 to becoming financially fit is to seriously work on becoming better physically fit. You’d be so surprised at how much your financial, relational, professional, and spiritual life can suffer if you’re not in good physical shape. If your body doesn’t feel good, the rest of your life will suffer as well!

Step 1: Get Out Of Debt As Quickly As Possible

The first step to losing weight is not exercising. The first step is getting rid of all of the junk in your refrigerator. Think of paying off debt like throwing out junk food in your house. In the popular show, “The Biggest Loser”, getting rid of the junk food in your house and changing your diet is often the first thing they do on the show.

Debt Is Like Junk Food

The more McDonald’s and candy you eat, the fatter you’ll get. The more debt you consume on your credit card, the worse off your financial future will be. Paying off a $10,000 credit card would be like losing 50 pounds. Imagine how you’d feel losing 50 pounds if you were 50 pounds overweight? Paying off that $10k will give you the same euphoric feeling, because it’s a virtual weight off your shoulders.

How Do I Get Out Of Debt?

Save $1,000 to $2,000 for a small emergency fund Set the money aside in a separate bank account and don’t use it unless you really need it for a true emergency
List your Debts Smallest to Largest and attack one debt at a time. Attacking them from smallest debt to largest debt helps you build momentum and free up more income to attack the larger debts.
Get on a written budget. You’ll give yourself an instant raise by making your money behave on paper. Be purposeful with your spending and know where it’s going. This will not only allow you to put more money towards your debt, but it will help prevent you from getting into more debt.
Find creative ways to boost your income. An extra job, selling stuff, starting a side business, cleaning houses, pet sitting, and many other ideas can earn you extra money to throw towards debt and speed up the repayment process.

The next step to getting financially fit is building up your emergency fund.

Create an emergency fund of 3 to 6 months worth of expenses.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

Learn more About Money Crashers - including co-founders Andrew Schrage and Gyutae Park.

Erik Folgate

So true, great point!
Cat

Debt’s like junk food in another way: spending too much, like eating too much, is very much an issue of impulse control, and in either case, you’ll keep binging until you decide to take action and don’t look back.
Nancy

A great goal is to be both financially and physically fit! Both take planning, work and discipline, but the goal of dual fitness is worth it!
L

What about paying off the debt with the highest interest rate first? Wouldn’t that save money? It’s like having one slice of cheese on your burger instead of 3, for the sake of the dieting comparison. :P
Stu

Debt reduction is somewhat like joining a gym to lose weight, it start good, but after a couple weeks you lose interest because your not see any results. Same way if you start paying off your larges debt first. You lose interest when it doesn’t happen over night. Start with your smalls debt and gain momentum
CM

While getting out of debt as quickly as possible is important, I think it’s unwise to set aside only $1-2,000 in an emergency fund. If you devote all your savings to paying off debt and then lose your income stream, you’ll end up in even more debt than before. Try starting off with one month of expenses, or a minimum of $2,000, and then divide all the extra money you have–half to the emergency fund and half to the debt. Once you have 6 months of expenses saved THEN devote all your extra cash to getting out of debt. That way, if the worst happens (job loss, illness, etc.), you won’t end up an extra $20,000 over your head because you have to charge everything to survive for 6 months.
Mike

Selling things on Craigslist has helped us a lot. The more your debt is from buying gadgets, the more you can recoup. I have also found donating things you can sell to get the clutter out of your house helps to make things feel simpler.
Mayra Cedillo

I was so inspired by the last biggest loser season, that I have started a journal to keep track of food intake and have ordered a body bugg to go to the next step: exercise. So far I’ve been doing well keeping my calories under 1600 for a month now, and I’ve noticed that eating more fruits and vegetables makes me feel so good as far as energy and mood goes. Also I’ve recently discovered craigslist and have sold a few things. Feels good to get some side money.
http://thefrugallawyer.com Danielle

I’m a big believer in paying the higher interest rate off first, rather than the smallest to the largest. But I’m also reformed financially irresponsible and involved with CCCS. I feel particularly fortunate since I received a year-end bonus and I’m paying off my highest rate card when my payments are taken from my bank account later this month. That will feel like losing a lot of financial weight! Now if I could just motivate myself to get on the elliptical…
Erik Folgate

For those of you that mentioned paying off the highest interest rate debt first, here’s my take: If all of your debts have a similar balance like $1,500, $2,500, and $3,000, then yes, by all means, go with the highest interest rate first.

But if you have 3 debts that look like this: $1,000, $5,000, and $15,000, and you start attacking the $15k one first because it’s the highest interest, you’ll get discouraged to pay it off quickly because it seems like such a bear and you have a smaller shovel of income to throw at it. If you knock out the $1k and $5k debts first, you’ll gain a lot of mental momentum and you’ll have more money to put towards paying off the big debt, which will make it go quicker.

If you’re aggressive with paying off the debt, interest rate savings won’t be a significant issue or a big savings, I promise.
Connie

I found just having a budget and watching where my money went caused the money to be better behaved…lol. It’s like a saying we had while I was working, “Whatever gets tracked, gets done (but not always the way you want)”
Karmella

That’s really interesting, I initially felt I would feel the exact opposite – I would be encouraged by paying less interest on the highest interest debt.

That last comment makes a lot of sense though – the interest rate savings probably is not so great that it’s worth giving up the chance for the milestones of paying off the smaller debts first. I do see that as being a way to have mini-goals within your larger goal.
Gina

I am definitely on the Dave Ramsey bandwagon. I find that when I start to get off track with my savings, if I listen to one of Dave’s podcasts, I get reenergized to focus on my savings goal.
Elizabeth I

I definitely agree on the building the savings before paying down the debt. However, most people have poor budgeting. The look at their paycheck as the “budget”. People need to look at their receipts as a starting point. Do most people know how much they spent in groceries in December? They should.

Creating a budget can be daunting, especially in the beginning. However, once you get started it does not change that much.
http://graduatedlearning.wordpress.com Stephanie

The one problem I have right now is that I’ve lost momentum. Back when my student loans were at 8% interest, I was super gung ho about paying them down. Now that the rates have dropped to ~3.5%, I’m less frantic to pay them down. The thing I’m trying to balance my debt reduction is saving money for a down payment. I know that mathematically, my total debt load will be less if I pay down my loans, but at the same time, I’d like to have the money to pay 20% down on a down payment for a home. I’ll still be paying my student loans for quite some time, but the payments are very manageable, so I’m not going to be scrounging for money if I have a mortgage on top of my student loans.

Wow, anyway, does that make any sense? I’d pay my loans off quicker if I felt that I could have enough for a down payment by the time I want to buy a house.

Thoughts?
Dale Wyrick

@Stephanie, Sounds like your on the right track balancing the two. Many people find student loans and mortgages as “okay” debt (if there is such a thing.)
A few points to consider, 1. How soon are planning on buying a house? 2. Do you have any other debt, i.e. credit cards, auto loans?

If all your other debt is paid off and you plan to buy in the near future (less than 2 yrs), you will have more considerable savings and financial stability if you save for a down payment and continue to make payments on your student loan.

Outside of that scenario, continue to improve your financial situation by quickly paying down your debt. Home ownership will be easier if you are not saddled with other large debts.
http://www.artificialrobot.com Sean

If you are in debt and have good credit still it may be worth looking for a promotional rate credit card with free balance transfer. I know these are hard to find these days, but this really helped me out. I was able to consolidate all my balances to a 0% card and then put all my credit cards in a locked drawer including the one with the balance (didn’t want to take the credit score hit of closing them). This way I had one bill to attack and I wasn’t racking up any new debt. I’ve been debt free for about 4 years now and still budget and use my credit cards just for the rewards. Good luck to anyone still in the hole, it’s possible to get out!
Lauren

I used the pay-the-lowest-balance method to pay off my debt. It worked for me because of the very reasons mentioned above. I liked the feeling of accomplishment I felt when I paid off one card. I became more motivated to pay off the next card. I paid everything off in less than a year.

Get Financially Fit in 2010: Trim Away Your Debt

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