Dealing with debt: seven steps to debt busting

Since I started writing these posts on debt busting, we have been together through the two levels of awareness of debt – the feeling one gets when one only suspects and the certainty of numbers. After that, I shared the two mental shift I found helpful when dealing with debt. Today, I’ll tell you about the seven steps to debt busting.

Step One

Look at your income and expenditure; if you have looked recently, look again – this time properly. Make sure that you really know what you spend every day, every week every month down to several pennies. A friend of mine has a line in her budget for the difference between what she has recorded as spends and how much money has left her account – she calls it ‘GKW’ (God knows what). If your GKW budget line is large it is time to start recording these expenses again.

During this first step, your objective is to make sure that your budget is as tight as the red dress Julia Roberts wore in Pretty Woman. This doesn’t mean that there shouldn’t be space for life – it only means that your GKW line should be down to several pence.

Step Two

Teach yourself to look at you budget as the story of your life. Most people get this wrong – they look at their budget and see numbers so they start adjusting numbers. Many organisations and businesses do the same, mind; they see their budgeting as a number gymnastics and then they wonder why reality is so far remote from their spreadsheet.

Don’t compare numbers; compare life events. Would you rather go to a concert or have a bottle of really good wine? You may decide to do either but this has to be a decision; not a bodged arithmetic exercise.

Step three

If your budget is as tight as it could be and you are still getting in debt instead of getting out of debt your cash flow is negative. In other words you do spend more that you earn. Your first task is to ‘stabilise’ this and the fastest way to do it is to reduce spending.

Forget about the ‘latte factor’ – depriving yourself from the small stuff that can give you so much will only make you feel resentful. Very big savings can be made on the ‘big’ stuff. To decide what needs to be cut and how look at the different kinds of expenditure on your list. Do you pay more than 60% of your income on ‘constant’ expenses like mortgage, loans repayments and taxes? If you do, you may need to make some hard choices – you may have more house than you can afford!

Immediate gains in saving though can be made by looking at your changeable expenditure – this includes all kinds of insurance and contracts that can be negotiated. For a tool that will help you do this click here.

This step is not about getting out of debt; it is about stabilising your budget so that you are sure that every month there is enough money in your account to cover all your financial obligations and to live.

Step four

Only after that look at your income – but look carefully! How can you sustainably increase this? Selling stuff on e-bay and doing garage sales helps temporarily but is unpredictable and unsustainable. To kick the debt’s ass you need to develop reliable, regular and sustainable sources of income.

And please do note the plural – one is a very unstable number. Just try to make a tooth pick stand vertical? Now try the same with three toothpicks; easier, huh? It is the same with income – it is better to make $1,000 from three different sources than the same from the same source.

Step five

Be careful with pinning your hopes on the Kindle books – you are a decent writer but there are many more like you out there; there are many more who are much better than you and in more senses than one. The competition is severe which means that you shouldn’t expect to make any money that will make difference to you any time soon from Kindle books. Except if you write really kinky/niche pornography and have a very good links and agent (I am not joking, have researched the matter).

Step six

Start generating ideas about how you are going to earn more. It is very tempting to come up and stay with one ‘big’ thing; something that you have come to regard as your ‘special gift’ or something that people tell you is easy. Don’t do that!

It is likely that your ‘special gift’ is fairly thin; it may be wise to go with something you value less as a gift but is a niche. Yes, I would like to make money writing best-selling novels. But I know that though I am not that bad as a writer, there are so many who are so much better and the competition is cut-throat. I make a bit from my writing but I certainly can’t live on it. So I keep looking. And no, I don’t think I can write porn lucrative as this is.

Dreaming may be easy; realising ideas is never so. This needs persistence, research, knowledge, learning and so many other conditions. Did you know that roughly two of any ten ideas you may have will succeed? Well, now you do!

Step seven

Never forget that solid, sustainable income streams are build organically – they take time to develop but after that only grow stronger. This means that you should take a longer term look and give it all you have; even if you have to make sacrifices now.

And finally…

Anyone can get in debt; but to get out of debt you need to change your thinking and reconsider your actions. I know!

22 thoughts on “Dealing with debt: seven steps to debt busting”

  1. Great series Maria. I am guilty of the GKW budgeting, which isn’t dramatic on a positive cash flow but should be reduced anyway. Now that I share expenses with my BF, anything I spend I have to claim back half to him, so it is a motivation to track expenses, track it or lose half of it!

    1. @Pauline: Yes, GKW tend to creep up; it is time for us to do the exercise for eliminating it again. As I said, the budget should be as tight as the red dress.

  2. I think most people’s problem is that they spend more than they earn and just abuse their credit cards. If people could just learn to go easy with the loans and spend reasonably, they would be just fine.

    1. @Totio: Technically you are correct. Problem is that the details of how to spend less than one earns is a bit more complicated – some don’t earn enough, others have no notion of how to stop shopping and wanting things; and yet others simply don’t understand money at all. Getting in debt can be a very big and life changing crisis – it was for me.

  3. I like the GKW line. I’ve yet to find a good way to budget for gasoline since the amount of driving done varies so much. Doing the paper route, I was burning a quarter tank each night. When carpooling to Boulder, I was paying for a tank of gas each week. And when I was riding my bike, a tank of gas was lasting my wife about a month.

    1. @Edward: Petrol is doggy; we have ben finding that it tends to vary a lot depending on what happens during the month. If you find a way let me know.

    1. @Glen: Possibly although I think needs are very difficult to pinpoint – after the very basic ones we are in ‘wants’. Problem is we want more and more…

  4. It is just so easy to lose track of when and where the money is going. Personally I find it nigh on impossible to keep everything in check. When I do I seem like a penny pincher! To myself that is. So it is a fine balance. Anyway, still great advice. Cheers

    1. @Michael: No…when you track your money and do budgeting you are not a penny pincher; you are great person in control of their life and future. And what is wrong with being a penny pincher?

  5. I over-budget for gas by about 10% to cover the swings in gas prices. If and when there’s money left over in the gas budget at the end of the month, it goes straight into debt paydown!

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>