Monday, October 20, 2008

How I Got Out of Debt

Debt can be a wonderful thing. Good debt can help you generate additional income. With the right understanding you can leverage debt in good ways. You'd be hard pressed to find a business that didn't use loans in their everyday structure in order to stay afloat and generate positive cash flow. For the average person though, debt can be an overwhelming lifetime struggle. Most people are not financially literate enough to understand how to use debt in good, productive ways. This lack of understanding has catapulted the world into an economic downturn. And, unfortunately, the powers to be aren't promoting financial understanding to pull us out. If you rely on governmental support to pull you through an economic slow down, you cannot gain the economic leverage you need to become recession proof. It is that reliance, and lack of financial understanding, that leaves you vulnerable to the swings of the economy to begin with.

My debt has been less intruding on my life. When I was 21, I found myself in minor debt. I owed about $16,000, but I had absolutely nothing to show for it. I didn't accumulate debt by purchasing above my means or taking risks. I simply lacked understanding and awareness, which unfortunately, started to stack up against me via bad debt. At that time, I started building good philosophies and habits that led to me getting out of debt. These philosophies can be duplicated and utilized for any amount of debt. I think that it is important to note, that with the right philosophies, you're financial woes cease to exist.

Here's an outline of the steps I took to get out of debt.

1. I identified the problem.
One of the hardest things to get someone to do is confront an issue. The easiest way to confront an issue is to identify it. You don't know what you're fighting against until you've carefully recognized what it is. With debt, it is important to know who you owe. While this may seem logical, a lot of people find it easier to ignore creditors instead of confronting them.
When I was 21, I decided that I would not ignore another phone call, email, or letter from a creditor. With that, I took a pro-active step toward paying off my debt by getting a free copy of my credit report. I took the information from all three(3) credit bureaus and put together my own personal debt log (a 3-ring binder with tabs). This was important in identifying the problem. Up until that point, I had too broad of a tally in my head. I knew that I owed some bills, but I couldn't wrap my mind around the problem until I had it all in one log. Psychologically, this helped me to see the light at the end of the tunnel. The problem had become feasibly solvable when I knew how big of a problem I was dealing with.

2. I crafted a plan.
In my log, I had a tabbed list of every company and agency that I owed money to. Evaluating my income, I came up with a comfortable amount that I was willing to contribute toward the task of getting out debt. From this amount, I created a game plan to pay off each overdue account one by one. I would begin with the accounts that were generating the most interest and fees and work my way through one by one. Coming up with a plan that I was comfortable with helped me build up some financial confidence. At this point, the light at the end of the tunnel seemed a bit brighter.

3. I contacted my creditors.
Once I had a good game plan that I was comfortable with, I started contacting my creditors one by one. At first, I felt a little uneasy. I had always pictured the voices on the other end of the phone as evil villains, who were out to take everything I had owned. I was quite shocked to see how much they were willing to work with me to get my accounts paid off. A company would rather you pay them back in small amounts, than to not get anything from you at all. Even if it's just $20 a month, that's allot better than nothing. Companies are also willing to cut deals with you, if you can work with them. I had a credit card that had a balance of $1432.50. The company was willing to reduce that balance to $900 if I could pay the balance in a month.
Once you become pro-active toward eliminating your debt, opportunities start to present themselves, where they didn't exist before.

4. I stuck to the plan.
I must admit at times, it was hard giving up all of my extra money to pay for things I no longer had or wanted. But, as time went on, I persisted. I stuck to the plan that I had put together. After just a couple of months, I had already started to see some results to my credit score.

5. I learned from the past.
After a couple of years, I found myself completely out of debt. By that time, I had incorporated some good habits and also learned some good techniques as to how to build good credit. These habits have been tweaked, and now I'm more efficient at making sure I pay my bills on time.
One of the most important lessons that I learned, was saving to buy something is a lot more gratifying than financing it. My roommate and I bought the same TV a year ago. I worked and paid cash for mine. He financed his, on a loan that guaranteed no interest for the first 6 months. A year later, we are watching the same TV, but he is still making minimum payments for his. I'm sure he will pay for his TV two or three times over by the time he makes his last payment.

This is just the way that I got out of debt. I think that the most important aspect to understand is that I took an active role. I didn't let my creditors hunt me down and control my life. I crafted a plan that worked for me. If you take an active role and focus on your finances, good things are bound to happen.

3 comments:

Pat with SPI said...

I really believe in your tip about Contacting the Creditors. All to often people are scared to take this route to save them a few dollars or drop their interest rates, but it really does work, and be the difference between staying in debt or getting out of it.

Say you have multiple forms of debt. Which should you tackle first? The one that has the most debt on it, or the little ones so you can get rid of them first?

Caleb Nelson said...

When I was in debt, I think that it helped me some to tackle the small amounts first. I had two parking tickets on my report. Together they totaled $100. I paid those off first, and it really helped build my belief up that I could get things done. On top of that, my credit score got a better boost, because they accounts were officially closed out with a zero balance. But I encourage people to take whatever route makes them most comfortable.

Lindsay said...

Congratulations on your success. I don't think $16,000 is minor debt at all, and it's really impressive that you got it taken care of.

I will argue, however, that our current economic downturn dates back a long ways, and the banking system is more to blame than the average American. There's a fantastic video on YouTube called Fiat Empire that is pretty eye-opening.

Here's the link for anyone who wants to check it out (it's almost an hour, so make sure you've got some free time):

http://www.youtube.com/watch?v=n_Jnt61b4nk

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