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Getting Out of Debt One Bite at a Time

Eating an Elephant

By Rosie Tomforde, Audit Officer

Elephant Piggy Bank Illustration

Some say getting out of debt is like eating an elephant. You do it one bite at a time. I think it’s more like Alice in Wonderland eating that elephant. If she takes bigger bites, the elephant starts getting smaller. If she takes small bites, it stays the same. If she forgets to take all her bites, it starts getting bigger.

If you google “getting out of debt” you will find all sorts of links. Money guru, Dave Ramsey, has an entry, as does the venerable Forbes, Clark Howard and lesser known advisors. The Motley Fool even features a 60-Second Guide to Getting Out of Debt . To be clear, the guide only tells you how to set up a plan of attack. Getting out of debt takes considerably longer than 60 seconds.

Here is a mash-up of some of the best advice I found out there:

Make a conscious decision to stop borrowing money.

Does anyone think you can get out of debt if you continue to dig that hole? Anyone?

Establish a starter emergency fund of $1,000, if you don’t have one already.

This may seem like an odd place to start, but it was mentioned more than once. Someone who doesn’t have an emergency fund is going to find be using their credit card if something unexpected comes up. Do you really want to buy new tires with that 28% credit card?

Figure out what you owe.

Credit.com lists its first step as obtaining your free annual credit report in order to check it for accuracy and to identify all debts. You should be receiving these bills every month, either in your mailbox or in your in box, but your credit report should keep you from overlooking anything. For each debt, list how much you owe in total, the minimum monthly payment and the interest rate.

Create a realistic budget and stick to it.

Hopefully you will discover that your take home pay will cover your housing, food, transportation, medical and dental bills, insurance, other expenses and all your minimum payments owed for debts plus a little bit more. If not, you will have to trim your expenses or increase your income until it does. Several people mentioned taking on a second job delivering pizzas or driving for Uber.

Organize your debt.

Decide what order you will use to pay off your debts. Most people choose the debt with the highest interest rate, some choose to start with the lowest balance to achieve the psychological boost from paying something off. Whichever method you prefer, choose your first debt to tackle. Make minimum payments on everything else, so that you don’t pay late fees and incur higher rates. Pay that first debt off, then move to the second debt and keep on going. Your mortgage is probably at the bottom of this list, with any student loans just above that.

Ask for lower rates.

As you start paying down your debt your credit score should start improving. You can call the number listed on your credit cards and ask them to lower your rate. I know it sounds hard, but this could save you a lot of money. You could also consider taking out a debt consolidation loan as long as the rate is lower and you don’t have to pay fees that cancel out the lower rate. Be sure to ask what the total amount owed will be if you go the debt consolidation route because sometimes those fees will be rolled into the total owed. This is also true if you use a cash out mortgage refinance as a debt consolidator. Use your calculator to make sure it all adds up. There are scams out there designed to trap people trying to get out of debt, so be aware.

Throw any excess cash at your debt .

Your tax refund should go to your debt, as well as any bonus you receive. If you always use your tax refund for your summer vacation, ask yourself if you can take a cheaper vacation this year and put most of the refund to your debt. Maybe instead of Europe, you can go to Disneyland. Maybe if you were planning on Disneyland you can consider a camping trip. Our National Parks are beautiful!

Celebrate without incurring additional debt.

You may think now is the time to buy a new car. It probably isn’t. Start putting that excess cash into savings. See if you can build your emergency fund from $1,000 to six months of living expenses. Start or increase payments to your retirement account. After you are on a better financial footing you may be ready to go car shopping. Calculate your expected monthly payment and put that amount in the bank every month for six months so that you can be sure that you will be able to make that payment without strain. It will also provide a down payment. Tell yourself that being out of debt is so much better than that new car smell! Now you’re ready for that celebration.

Finally, take a look at supplementing your retirement savings plan. 

This article originally appeared in "Expanding Your Financial Horizon," a digital publication of the ASRS (Q2, 2016).

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