I used to be a borrowing junkie, but I got over my dependence on debt by going cold turkey. My strategy for digging myself out of more than $50,000 worth of debt was to come up with simple rules that I could follow to change my financial habits. A recent article by Forbes points out that addiction isn't too strong of a word to describe our credit card dependence in America. According to the author, the total debt in America is $2.8 trillion or about $11,000 for every adult. Without a doubt, using high-interest rate credit cards is not rational. Yet, I used to charge everything from pizza to shoes at alarming rates of 19 percent and higher. I didn't need anyone to convince me that I had a problem, but I did need someone to give me a few hard rules I could stick to so that I'd get out of debt for good. Fortunately, I had a millionaire friend from college who relayed some helpful financial advice.
Save 10 percent
The first rule I followed was to save 10 percent no matter what. I saved 10 percent of every cash birthday present. I saved 10 percent of every paycheck. If I got an unexpected tax return, I saved 10 percent. At first, I didn't think that saving 10 percent would make much of a difference. I even questioned whether I should be saving more than 10 percent. However, I found the money quickly accumulated. It was a small enough percentage that I could still afford to pay all my bills and enjoy living life.
Pay off debt quickly
Since I was only saving 10 percent of my money, I could devote a large chunk of my salary to paying off debt. I had to cut back on my spending for two years in order to get rid of the debt. Even after I eliminated my $50,000 worth of debt, I stayed out of debt by following the same principle. I keep my credit cards at a zero balance because I pay off the debt sometimes the same day with online banking. I never make the minimum payments on any credit cards.
Opt for short-term loans
Even though I'd love to pay cash for everything I own, it isn't always realistic. However, I can follow a simple rule of taking out shorter-term loans. When buying a car in the past, I would take the longest term available so my monthly payment would be lower. However, now I only opt for 3-year car loans. With my mortgage, I have a 15-year fixed rate.
Work backwards to set goals
Although it may seem rather elementary, my friend advised I set short and long-term goals. The secret was to start with my long-term goals and then work backwards. I had to think about what I would have to do for work on a daily, weekly and monthly basis in order to meet my longer-term goals of buying a home and amassing $1 million for retirement. My starting number (or the money I had to make each day) was unknown until I worked on backwards on the problem.
Although I don't always follow the money rules, I stick to them as best as I can. I credit the rules for digging me out of debt and helping me save. Now when I need a fix, I don't turn to my credit cards. I get a high from watching my retirement account grow and watching the mortgage balance shrink.
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