March - Reducing Debt

Many of the tasks you’ve worked on in the Freedom 30 program have necessitated long-range thinking to stay motivated. Setting a retirement goal or adjusting your budget because it will help you eventually accumulate emergency savings means using delayed gratification. This month’s focus – aggressively paying down your debts – can immediately pay dividends. Yes, paying off your debts will likely take several or even many months. But the relief you’ll experience knowing there’s a light at the end of the tunnel can immediately uplift your day-to-day mindset. Few things are more empowering in your financial life than knowing you’re taking command of your situation and erasing burdensome, stressful debts.
As a reminder: The Freedom 30 is a year-long program to help put some structure to the process of putting your money to work for you. The idea is that you dedicate a 30-minute time slot each week to achieving financial freedom – whatever that looks like for you. Each month, you’ll receive a list of 4 mini-projects to complete within a particular financial wellness theme. If you didn’t have the chance to start the program in January, don’t fret. You can always add catch-up sessions to your schedule.

March: Demolishing your debt

Week 1 Project: Know what you’re up against

It’s important to be systematic with how you attack your debts. Doing so will help you pay off your debts faster and potentially save you thousands of dollars.
Your first step is to check all three of your credit reports. By law, you’re allowed to get your reports from Equifax, Experian, and TransUnion once a year for free from annualcreditreport.com. Your credit reports will show credit card debts, personal loans, student loans, collections accounts, and other unsecured debts you might owe.
Some debts you legally owe may not show up on your credit report. Because of this, it’s important to also go through any bills you’ve received related to any other outstanding obligations.

Once you’ve identified all your debts, enter the account information – like total debt balance, interest rate, and monthly payment – into a debt worksheet to have all the vital details in one place.

Bonus tip: Include account numbers in your worksheet since you may have multiple accounts with the same company or lender.

Takeaway: Your prize for your labor is a debt worksheet that will be essential in your quest to conquer your outstanding obligations.

For next week: Start brainstorming on areas of your current spending you can cut back on to free up more debt-destroying dollars.

Week 2 Project: Size up your wrecking ball

If you have significant debts, last week’s project might have been emotionally challenging. After all, you were faced with the task of staring down all your debts in their totality. That can be unsettling and even a bit defeating. But all that challenging work is about to start paying off!

The main action item for this installment of the Freedom 30 is to examine your budget to see how much money you can free up each month to really start taking large chunks out of your debt load. Ideally, you’d have already completed a budget as part of the earlier exercise dedicated to that task. If you still need to do one, fill out this worksheet to get a firm grasp on where your money is going.

Common areas where people can uncover extra money each month include entertainment, streaming services, online subscriptions, dining out, trips, and clothing. Remember, too, that improving your cash flow often involves generating extra income. Consider taking on a side hustle, renting out a room, or selling some valuables if these are options.
Sometimes, it can help you to stay motivated in this exercise to have a “dream number” in mind. Start off trying to go as big as possible. Can you carve out $1,000 per month to put toward your unsecured debts? If that’s not reasonable, what about $500? Or $250? Turning this process into a game where you try to raise your monthly “score” to the highest level possible can make it a little bit more fun because it shifts the emphasis away from any sacrifices you may have to make temporarily.

Takeaway: As this exercise commences, you’ll have that magic number in hand that you can put toward shattering your debt.

For next week: Begin thinking about which debts will feel the best to conquer.

Week 3 Project: Plan your attack

If you have multiple debts you’ll be paying on, you’ll need to decide how to divide the number you arrived at in last week’s activity among your outstanding debts.
If you want to take a purely mathematical approach to your payments, you can simply pay off the debt with the highest interest rate first. For example, if you have a credit card with a 29% Annual Percentage Rate (APR) and a personal loan with 9% interest, paying off the credit card first will save you money – assuming no other fees impact the total cost of the debt. Once you’ve got the debt with the highest interest paid off, in this strategic approach, you put the money you were paying to that debt toward the debt with the next highest APR, and so on down the line. This is known as the “debt avalanche” technique.

There is another critical factor to consider: the psychology of sticking to your plan. If you’ve got a sizeable debt load, you’ll probably be paying down your balances over a period of several months, if not years. Maintaining your focus and motivation over that long of a time can be difficult. What can make it easier is to eradicate some of your smaller debts in the early stages so that you build a bit of mental momentum and keep yourself feeling good about the process. This is called the “debt snowball” method.

Remember: never avoid paying certain monthly debt obligations entirely as part of this process. It may be tempting to neglect certain monthly payments to put that money toward a more stressful debt, but you’ll only be buying yourself more heartache in the big picture if you’re missing payments on any of your bills.

As with any financial goal, it’s important to be specific with your action plan. Since you know the size of your debt, how much you have each month to pay it down aggressively, and a plan of which debts you’ll pay first, use a debt payoff calculator to figure out exactly how long it will take to be debt-free. If it will be a while, don’t be discouraged; think of the thrill you’ll feel when you’re finally out from under all the pressure of excessive debt.

Takeaway: You did it! You have your whole strategic game plan for eliminating those awful debts.

For next week: Life has a lot of twists and turns. Put together a list of things that could throw a monkey wrench in your debt repayment plan over the coming months, along with possible factors that could speed up your debt repayment, like bonuses or other windfalls.

Week 4 Project: Be good to yourself along the way

Start this week by taking a moment to take a deep breath and feel good about the grit and determination you’ve shown in getting to the point you’re at now. You’ve navigated some emotionally draining tasks, looked some hard truths in the face, and kept going. You should feel good about that! Here are some ways to keep feeling good as you continue to defeat your debt.

Track your progress

Have you ever seen one of those cartoon thermometer fundraiser displays to track how much money they’ve raised for a charitable cause? If so, you’ve already got one great idea for keeping a visual record of your progress. Alternatively, keep a small whiteboard on your refrigerator that you update each time you pay down one of your debts. No matter how you choose to keep a record of your gains, it’s vital that you stay in touch with current debt levels. Doing so can be a powerful motivator to stay focused and keep going!

Reward yourself

As you keep track of your wins, giving yourself some fun little treats when you hit certain milestones is essential. For example, you could allow yourself to go out to eat for a sensibly priced meal every time you lop another $2,000 of your debt. As with tracking your progress, giving yourself some little rewards along the way can help you keep your eyes on the prize.

Don’t neglect other goals

Often, the question arises: do I pay off my debts or create an emergency fund? The answer is simple. You do both. There’s no point in having a plan for aggressively paying down your debt if an unexpected expense will necessitate using your credit cards to pay for it. While you may not be able to save as majorly for your other goals as you’d hope while paying down your debts, it’s important to always have at least something going toward all your goals each month.

Don’t beat yourself up

Unanticipated curve balls will come up as you rid yourself of debt. That’s just the way life works. If you have to adjust your timeframe or circumstances dictate not being able to pay quite as much on your debts as you’d hoped each month, it’s OK. You’re doing your best, and that’s a positive thing. Results will always vary; intention and effort are more important.

Takeaway: After reading this week’s tips, you should feel much more prepared to see your debt-busting plan through to fruition in a way that maintains your overall financial health.

For next week: Consider where your credit score is right now and whether improving it could open up greater opportunities for achieving your life’s ambitions.