Laura Walton learned three great money lessons early in life. In her twenties, she took a job at a community bank, worked hard and quickly became an assistant vice president, where she learned the first lesson: “People in similar circumstances ended up in very different places depending on how they managed their money day to day,” she says.
For Walton, money management was already a forte when she left the bank for a successful career in real estate development with her husband. They had a great income and times were good, but when the bottom fell out of the housing market, one of their ventures swallowed them like quicksand.
Walton and her husband lost their home, divorced and spent years digging their way out of debt, but therein came lessons two and three: Even people who know money make mistakes, and it’s never too late for a fresh start.
Today, as an Accredited Financial Counselor® with all those debts behind her, Walton shares her story to put her clients at ease and give them hope.
“People feel guilty about mistakes or wonder why they can’t control their spending, but the fact is, we just aren’t good at self-discipline,” says Walton. “The answer is creating structures that help us color within the lines.”
But what about the debts you already have? Will you ever get out from underneath them?
“You do have to make some sacrifices,” says Walton. “And you probably do have to change some habits. But I love that quote by Henry Ford: ‘Whether you think you can or think you can’t, you’re right.’ It takes time, but you can do it.”
[Laura Walton is an Accredited Financial Counselor® and the Executive Director of TCI Foundation, a privately funded nonprofit created to give people no-cost, unbiased financial education and one-on-one advising through its College of Personal Finance and Financial Stewardship Program.
Any reference to a specific company, commercial product, process, or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]
8 Steps to Getting Out of Debt
Take a Good, Clear Look
Start with looking at exactly how much you owe, Walton says. “A lot of times I talk with people who are feeling totally discouraged, but once we sit down and look at the numbers, it's not so bad.” Whether that’s your experience or not, creating structure starts with knowing what you’re up against.
Work with Your Creditors
Contact your creditors directly and ask them to lower your rates. It’s a step people often skip, but it can make a big difference in how soon you’ll be debt-free. Not sure where to start? Do an Internet search for “negotiate credit card debt;” you’ll find tons of tips and advice.
Make a Battle Plan
Start by writing down all of your expenses and income. Then make a budget and determine how much money you can set aside each month to put toward your debt. If you can only make minimum payments on your debts, then that is your plan. You’ll eventually pay them off, but it’s a longer, more expensive journey. If you have even $10 extra a month, you should choose a pay-down plan that puts you in control of your debt instead of stuck underneath it.
Pick Your Strategy: The Avalanche Approach
Financial advisors agree there are basically two great approaches to choose from when it comes to paying off your debts—the Avalanche and the Snowball.
Strategy #1: The Avalanche Approach—Pick the debt with the highest interest rate and throw everything you have at that. Here’s what that means:
Say you have $40 left over after all your expenses each month:
- In month one, make minimum payments on all your debts except the one with the highest rate of interest. For that one, pay the minimum payment plus $40.
- Do the same in month two, but remember that as you pay down that highest-rate debt, your minimum payment will go down. So in month two, you might actually have $45 extra to add to that monthly payment.
- Keep up that process until you obliterate that debt, then repeat with the next highest-interest debt on your list.
Pick Your Strategy: The Snowball Approach
Strategy #2: The Snowball Approach—Pick the smallest debt and throw everything you have at it. Beyond choosing which debt to vanquish first, it’s much like the avalanche process:
- Follow the strategy of applying as much leftover income as you can to a single debt at a time, but stay focused on that smallest debt.
- Once you’ve paid off that one, turn your focus on the debt with the next highest interest rate.
The good news is that you can’t choose a wrong plan because both the Avalanche and the Snowball Approach work for different reasons. “Mathematically, the avalanche system is going to save you more money,” explains Walton. “But if you're someone who needs an immediate hit of success, then the snowball system is better for that feeling of quickly paying off some smaller balances.”
Given that, ask yourself some questions to help you choose your plan:
- Do you get discouraged? If so, consider giving the Snowball a try.
- Do you thrive on numbers and logic? If so, you might love the Avalanche.
If you really can’t decide, consider the kinds of debts you have, Walton suggests. “If you have a couple of low balances that will just take a few months to pay off, I'd be tempted to cross those off. That can really make you feel like you’re making progress and make it easier to focus on what’s left.”
Write It Down
Next, write it all down: your budget, your debts, and your plan of attack. Why waste the paper? Because it frees your mind and makes you more likely to succeed. “Written plans are generally more successful than plans that are just in your head,” says Walton. “Plus, once you have it in writing, you don't have to constantly rewind the problem. As long as you stick to your plan, you know you're going to be okay.”
Find a Money Buddy
We all need support from time to time when we’re feeling discouraged or dying for a shopping spree. This accountability partner typically is a friend or family member who knows your pay-off goals and will check in on your progress. Of course, if you have a significant other, you can be that for each other, but it’s still a good idea to have someone on the outside looking in and offering extra support.
You can try to imagine how it will feel to have extra money two years from now, but that doesn’t compare to the satisfaction of a new pair of shoes this weekend! To deal with that motivational problem, Walton suggests rewarding yourself as you go. “You have to find a way to make your goals as compelling as the thing that’s right in front of you,” she says.
If you’re snowballing, that might mean you get those shoes or that new video game once you’ve paid off your first debt. If you’re on the avalanche system, try setting targets along the way, like a reward for when you’ve paid off the first $1,000 on that high-interest debt.
Of course, rewards don’t have to cost money, but realistically, they usually will. That’s OK, Walton says, as long as they’re planned and you stick to that plan. If putting a little money toward self-reward gives you the motivation to stick with a plan you might otherwise drop, it’s money well spent!