I'm in Debt. How Do I Get Myself Out of This Mess?

 I got this question on Quora today. It's a common question. The answer I provided is below. 

I got into debt young as I didn’t realize how important it was to have a good credit score. How can I get myself out of this mess? I’m worried it’s going to affect future relationships.

You really must to want to be debt-free. There is no other way. It’s a process, of both knowledge of personal finance, and modifying your financial behavior. But it is something you can achieve, if you create a plan and follow the steps of sound financial planning.

I’m going to tell you up front that it will take quit a bit of work and effort on your part, depending on how much debt you have, and what you are willing to do. We had a saying in the military about what needed to be done do accomplish our mission: “Whatever is necessary.” This will be the same kind of thing. So you have to develop the same mindset. Be hungry.

Personal finance is 20 percent knowledge, and 80 percent behavior.

When I started I had more than $50,000 in credit card debt, had two mortgages (one on a rental house that was actually costing me more than I made in rents), and a couple of car payments, along with a student loan. I had more debt than my annual income. But I’ll never forget the moment when I paid off my last car payment to become debt free (I still have one mortgage on the house I live in, but this kind of debt — and only this kind — is allowed.)

I’m retired now. I have more than enough money to do what I want. My last car was a 2-year-old slightly used Impala and I paid cash for it…that was a fun buying experience, I’ll tell you.

Use the following steps as a guideline. I also suggest you purchase a copy of Dave Ramsey’s Total Money Makeover. It is the book I used to get out of debt and stay debt free, with very few exceptions. Best $25 I ever spent. There are others you may find that work also, but this one has been used by millions of people to get out of debt.

1. Have a plan. Write it down. It should state your goals, when you’d like to reach that goal, and what you will do to reach that goal. Of course, in the beginning you don’t know everything, but it’s a good exercise to start. Writing everything down solidifies it in your mind. And keep updating it as you go. Review it monthly. If you have a partner, you both should agree on it. You’re going to run your household finances as if it were a business.
2. Start using a budget. This is so important that no matter what else you do, if you don’t consistently and faithfully use a budget, everything else you try to accomplish with either not work or be much more difficult. In the beginning it’s hard. But just make it a habit. There are many sources online and through books to teach you how to make a budget and how to follow it. I still do this. If someone where to ask me, I could tell them off the top of my head what my monthly income and expenses are, within $100. Some people don’t know how much money they have at any point in time — avoidance or denial sometimes seems easier — but that is not going to be you.
3. Learn how to create a Net Worth statement. Basically this is your liabilities (what you owe), minus your assets (what you own). It is a great way to track your progress. You may start out with a negative Net Worth, but that will change. One note: I never use my personal property, such as furniture and/or automobiles in my assets. These are depreciating assets (they lose their value over time). I only use my home value, my investments and my cash in my assets.
4. Have an emergency fund. Nothing can blow up a well-written plan than not having an emergency fund. So I repeat: Have an emergency fund. Having a credit card is NOT an emergency fund. You never know when an unexpected expense will appear, and having to use more debt goes against everything you’re working toward. Ramsey suggests starting with $1,000 before moving on to other steps. That may not be enough in today’s world. But you have to start somewhere, so if you don’t have one yet, shoot for $1,000 to start. But always be working on it. Your goal should be at least three months’ of living expenses. I keep six months of living expenses in my checking accounts. I know, I’m not earning much if any interest, but the funds are immediately available. I don’t worry about my air conditioner or water heater blowing up, my car breaking down, or anything else I guess.
5. Now we start on the debt, and most start with credit card (or consumer debt) because it is the most costly. Then move on to car payments or other debt, such as student loans. There are two different methods of attacking this debt: snow-ball method and the high-interest rate method.
1. I used the snow-ball method, because it has a psychological component to it. You make a list of your debts (I put mine on my refrigerator) and pay the smallest one first. Make minimum payments on all the others, using the most funds you have to pay off the first one. Then cross it off when it’s paid. That is success. Then attack the second one (using the money you paid on the first, also. You don’t get to celebrate yet). Keep going until they are all paid. You’ll be surprised how fast this can go if you don’t waiver.
2. The other method has you order your debts by the interest rate. Paying the highest interest rate debt first, then the second highest, and so on. This can work, but the reward can be delayed depending the amount of each debt. I think this method can require a little more patience and self-discipline, but if you have those, it can save you some money in overall interest payments. You have to decide which one is for you.
6. Invest wisely. While you’re paying down your debt, you should be learning how to invest. When your debts are paid, you’re going to have a lot more extra cash, and you’ll want to put that into some solid, long-term investments, with an eye on a nice retirement. I’m retired now, and I’m glad I did these steps before I retired. I have enough money to do what I want now. But complete that emergency fund and get those debts paid before you get too serious about this step.
7. Save at least 10 percent of what you earn, first. This should always be part of your plan. When you’re working on the first five steps here, this may be hard, but have it as a goal. After I became debt free, I was able to save 20 percent of my income, and my retirement fund just went crazy. A nice crazy.

I have a link to my blog, and the steps I’ve outlined, with some videos to get you started. Make it an adventure, and you’ll never look back.

Six Steps to Financial Freedom