News Letter

by Karen McCall

Imagine how it would feel to have no worries about debt. There is a simple but powerful way to get out, and stay out, of debt. I call this strategy “Saving Your Way Out of Debt.” People get out of debt all the time. As with yo-yo dieting — when weight is lost, then regained — people often pay off debt, and then old habits resume and they find themselves carrying a heavier debt load than ever. The real challenge is staying out of debt. You probably spent your way into debt. Now it’s time to save your way out of debt.

Step 1. Avoid Deprivation Mode
People assume that they must cut out everything that is fun or pleasurable until their debt is paid off. Leaving essential emotional and physical needs unmet sends us into dep-rivation mode. Deprivation often leads to overspending. Overspending often leads to more debt. Identifying your essential needs and building a spending plan that meets them (even in simple ways that don’t involve spending money) is vital during the process of eliminating debt.

Step 2. Stop the Leaks by Stabilizing Debt
Prematurely paying down debt while still using credit cards keeps you stuck in the debt cycle. This is like sitting in a boat with a grapefruit-sized hole in the side and bailing out the gushing water with a thimble. The most foundational step to freeing yourself from the debt cycle is debt stabilization. It’s nearly impossible to stabilize your debt while you continue to use credit cards. Stabilizing debt simply means that you stop adding to it.

Step 3. Build a Firm Foundation with Periodic Savings
One common myth is that we can’t begin saving until we are debt-free. In fact, saving right from the start is the key that will free you from the yo-yo of the debt cycle. Start by building periodic savings. This is money available to meet periodic, non-monthly expenses, such as car insurance, taxes, and family vacations — that’s right, the obligations and the fun stuff. Life happens. Surprises always crop up. Without savings, we resort to using credit cards. Then we’re back in the leaky boat, bailing away.

How do you save when money is already tight?

Make minimum payments on all but one targeted debt.
Reduce optional spending for now.
Look for creative ways to bring in more money.

Saving your way out of debt may seem slow at first, but eliminating debt forever will pay for itself a thousand times during the course of your lifetime.

Step 4. Use Periodic Savings Guilt-Free!
Most of us feel that savings are not to be touched. Periodic savings are meant to be used, guilt-free, to pay for periodic expenses rather than charging them.

Step 5. Reduce Debt with a Proven Strategy
Once debt is stabilized and you’re building your periodic savings, you’re ready to start reducing debt. Designate whatever amount above the minimum that you can pay toward just the targeted debt. When that’s paid off, roll over the payment amount to the next debt target, until you’re eventually debt-free.

The higher your debt, the slower the process of debt reduction will be. But please, reassure yourself: going slowly in the right direction is enormously better than going in the wrong direction at any speed.

Step 6. Build Your Safety Net
It’s important to have a plan for the possibility of an interruption of income. A Safety-Net Savings account is designed to cover your living expenses if your income is interrupted for any reason. Your Safety-Net account is to be used only if you have an interruption in income. Once you’re no longer paying off debt, you can roll that money right into savings without changing your monthly spending plan one bit. Acrobats on the high trapeze always have a safety net below. This offers the acrobats not only protection but the confidence to really fly. Safety-Net Savings protects us, but it also offers us the freedom to create new career possibilities rather than feeling trapped in jobs that make us unhappy. That’s why I think of this account as a “freedom fund.”

Step 7. Celebrate Being Debt-Free!
Living debt-free may seem like a fantasy, but I have celebrated this reality hundreds of times with people who have used the saving your way out of debt plan. Clients have literally danced in my office after they made their last debt payment. I’ve danced with them! Be sure to celebrate your accomplishments. You deserve it.

Step 8. Plan for the Future with Long-term and Investment Savings
Periodic and Safety-Net Savings not only keep us out of debt but protect our investment and retirement accounts. With Periodic and Safety-Net Savings in place, your long-term savings are truly secure.

Step 9. Resist the Seduction of a Zero Balance
Once you’ve eliminated debt, those big zeros on your credit cards can call to you. Instead of succumbing, use your periodic savings to pay for non-monthly expenses. Learn to delay optional purchases until your savings grow enough to make them. Enjoying a special purchase that is made without incurring debt doubles the pleasure.

Step 10. Enjoy Real Financial Freedom
By leveraging the power of savings, you can free yourself from debt once and for all. Debt-free and secure, you can experience financial serenity. Imagine a life without being confined by the cage of debt and the stone walls of worry. Saving your way out of debt is a powerful tool in securing a healthy relationship with money at whatever your income level.

Karen McCall is the founder of the Financial Recovery Institute, an international organization for financial counseling training. Her latest book is Financial Recovery: Developing a Healthy Relationship with Money. More information at www.financialrecovery.com