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How to Get Out of Debt the Right Way

Three real-life scenarios of debt, budgeting and financial strife—and how to escape.

When it comes to money, everyone’s situation is unique. Their income, their debt, their expenses, their stage of life, their background and thought process—these are all factors that come into play in figuring out a realistic and sustainable financial plan—you know, a budget.

It’s a dirty word to some—who wants to budget, after all? But whether you are a college student, a newly married twentysomething or a 30-year-old with a baby, money matters. And figuring out how to make your finances work for you is a critical part of being a grown-up. It’s one that many have trouble with, too—after all, current statistics put individual consumer debt at nearly $8,000 for every man, woman and child in the United States.

With mounting statistics that show our generation is getting buried under piles of debt, we presented author and finance coach Chris Hogan with three scenarios that echo many people’s situations. Each one is fairly typical—you likely know someone going through one of them. But people respond in all sorts of ways. Here are some of Hogan’s tried-and-true solutions for getting into a better financial state.

The recent college grad

Sam is a 22-year-old male just out of college, living in Chicago with $5,000 in credit card debt and $10,000 in school loans. He makes $30,000 a year at an entry-level job. He lives in a two-bedroom apartment he shares with a roommate, and his share of the rent is $550. He wants to get out of debt, but he also wants to have fun with his friends. Plus, he wants to fly home for an upcoming family reunion. What should he cut out?

It all starts with getting on a plan. Sam needs to sit down and spend every dollar “on paper and on purpose” before the month begins. In other words, he needs to make a budget.

By putting his expenses down on paper, he’ll be able to see exactly how much money it takes for him to live: rent, utilities, groceries and so on. Once Sam sees how much of his income is going toward expenses, he can then get a good idea of how much money he has available to attack the credit card debt and student loans.

Remember, income is the biggest weapon to fight debt. The quicker he eliminates debt, the sooner Sam will be able to keep more of his income.

Probably the best place for Sam to start cutting is his “going out” budget. It’s not like he needs to completely stop going out with friends and having fun, but he’s got to put a limit on how much he spends, and that limit may be less than he wants it to be.

If getting home for the family reunion is a priority, then he must treat it like a priority. He needs to calculate all of the costs—plane ticket, parking, food, etc.—and immediately begin to save the money he needs. He should put “family reunion” as a line item in his budget with a specific amount of money dedicated to that each month. He might also search through his entire apartment and find stuff he doesn’t need. He can sell that stuff to pay off debt or put toward the trip.

If he doesn’t have much stuff, then Sam needs to consider taking a second job to make quick money. The sooner, the better!

Next: A mid-20s newlywed tries to navigate school loans, credit card debt ... with a husband who has just gotten laid off.

The mid-20s newlywed

Christina is a 26-year-old newly married female. She has $10,000 in credit card debt and $12,000 in school loans. The student loans are locked in at a low interest rate, and she is paying $150 a month toward them. She lives in a house in an Atlanta suburb with her husband, Jose, who has no credit card debt and $7,000 in loans. Christina makes $42,000 as a PR associate, and her husband made $32,000 as a financial analyst before he was laid off. He makes $1,200 a month in unemployment and is struggling to find a job. They have about $2,000 in savings.

Dealing with a job loss or significant cut in income is always a harsh financial blow. The first thing this couple needs to do is unite and focus. They need to sit down and get a clear view of their current financial situation—they need to look at it on paper and be honest with each other.

Uniting as a couple is critical. That means each person is committing to their part to help the family recover. Financial stress has a way of pulling people apart, causing them to make bad decisions and panic. Christina may be feeling nervous because her—and her new family’s—financial security is at risk. Jose may be feeling wounded and insecure because of the job layoff. Unless this situation is defused in a hurry, it could turn into an emotional powder keg. So it’s a must that they openly talk about this situation and how to fix it. That means admitting fears to one another and becoming the other’s biggest supporter.

The most important thing for Christina and Jose to take care of before anything else is the “four walls”—food, shelter, transportation and clothing. These items need to be paid first, and everything else as money permits.

The key to this family rebounding financially is for Jose to get his earning potential back quickly. He’s taken a significant pay cut while on unemployment, so his primary job right now is to find a job that pays him what he’s worth.

He has to be up first thing in the morning, sending out résumés, reaching out to his friends and business contacts, letting them know he’s available and ready to work. If the “well” stays dry for too long, he might have to get a job just to help pay the bills until he finds a career fit.

The money in their savings account is a safety net. They have to protect it and only use it for emergencies. They have to cut out all unnecessary spending—eating out, going to the movies, shopping sprees, vacations and any other form of discretionary spending.

Next: New parents who have some questions about housing and if both spouses need to work.

The new parents

Jeff and Milla are a 32-year-old married couple who just had their first child. They live in a one-bedroom apartment in Orange County, Calif., but they want to buy a two-bedroom house so their baby has a room and they can eventually get some sleep. Jeff makes $40,000 a year at the bank he manages, and Milla is on maternity leave from her job at a daycare where she was making $33,000. Their rent is $1,400 a month. Moving to a two-bedroom house would mean their payment would increase to $1,800. And Milla is trying to decide if she needs to go back to work.

This couple is at a crucial life point right now. They have a new baby and are looking to buy a home.

Priority number one is deciding how they want to raise their child: Is someone going to stay at home, or will both parents work? They need to make a decision on this before they move forward on buying a house.

If they buy the home, their housing obligation will increase by $400 a month. They need to slow down and clearly identify their options before they do anything.

They have the option of staying where they are for a period of time and looking for a two-bedroom apartment to rent. This would give them some time to save for at least a 10-20 percent down payment on a house.

A lot of people just push forward because they get the dreaded “house-itis” disease. This occurs when people become so obsessed with buying a home that they pay too much and overextend themselves financially. Remember, the goal of home ownership is to own a home, not just to buy one and have payments.

Honestly, the best idea for these two is probably renting the two-bedroom apartment for a year. Think about it. Let’s say Milla decides to go back to work. But once she’s back in the routine, she becomes miserable because she misses the baby, plus the cost of childcare is a huge burden. If the couple is renting, they aren’t as financially bound as they would be if they are tied into a mortgage.

Having a baby is a large enough life change for any couple, so there’s no need to add an unnecessary financial obligation.

What can you learn from these three scenarios? Are there financial habits in your life that need to change—for example, are you considering buying a house, like Jeff and Milla, but should probably wait a little while longer?

Remember, the key is to make a plan and follow it. No matter what situation you get yourself into, a good plan, plus hard work and determination, will always get you out. 

Chris Hogan is the director of Dave Ramsey’s Financial Coaching and Counseling Division, developing a program that empowers people to properly manage their wealth. This article originally appeared in RELEVANT magazine. For more great articles like this, along with analysis of the latest cultural trends, conversations with artists and challenging and inspiring stories about God's work in the world, subscribe now.

27 Comments

85,079

Tenndad60 commented…

I discovered that dealing with debt was much like dealing with too much weight. There is no magic bullet solution. If it took years to get where you are it's going to take twice as long to get where you want to be. Mercilessly changing your lifestyle and developing the discipline of working out is the only method. Losing the weight and getting in shape are just a side effects. The benefits of discipline and an intentional lifestyle are the lasting treasures. If you want the muscles to stay you have to do the work. The same is true for financial fitness.
It worked for me. I graduated in 1979 with $30,000 in student debt, a lot of money back then. We set a 7 year plan to pay it off with the thought of experiencing a Jubilee year when we finished. We lived out of "budget envelops." If there wasn't money in the envelop we did do it. The result was a strong marriage based on mutual sacrifice and commitment to a common goal.. We found ways to enjoy life that didn't require much money like walking together to the public park for a picnic supper. We slowed down and began to enjoy a richness of life that was deeply satisfying. We canned fruit and vegetables. We made Christmas gifts. Looking back they were wonderful years. We haven't had a mortgage or car payment in 10 years. We live on a third of what we make. We sleep well at night and we have an abundance to give to kingdom work. If we hadn't developed the financial muscle over the years it never would have happened.

85,079

how to get out of debt commented…

Yes I thought this was inspiring and loved this.

85,079

timthehun commented…

Not to nitpick, but I think that because a situation happens by definition does make it realistic. And the average student loan debt is closer to $25,000.

And you're advice which seems to be "school's not really worth itl", is not a possibility for many. For example my wife works as a social worker, for which she needed a Master's degree. Her degree left her nearly $100,000 in debt and got her a job making $30,000. She works 60+ hours a week trying to help families and keep kids safe and then has to come home to student loan collectors harassing her. She is fully aware that she made poor choices when she was 18 - 22 and took out too many loans because someone at her school convinced her to, but now at 30 she was hoping for something more practical from this article.

I'm sorry that you clearly had a bad experience with your education, but it seems like you are bitter about making a bad decision while telling others to stop being bitter about making a bad decision.

This is certainly a sore subject for many, as it should be, and as long as someone is willing to admit their mistakes and move forward I don't think asking for a little help now and then is no unrealistic.

85,079

Guest commented…

How about someone with over $100,000 in student loan debt?

Stephanie

30

Stephanie commented…

Good advice, but I would like to add that the three "typical" scenarios are the kind of things that turn folks like myself away from articles/sites like this.

The "22-year-old recent grad"... Including myself, I know many who were nearly mid-20s grads these days (for a variety of reasons).

The "mid-20s newlywed"... I don't really even want to go there, but the average age of marriage is much closer to 30 these days... many (like myself) are starting out alone with debt in our mid-20s to tackle on our own.

The "new parents" in their early 30s. This is closer to typical...so I'll not criticize it too much.

However, as an unmarried 30-year-old who has been in the workforce for 6 years just trying to make ends meet and come close to tackling the debt I accrued in college, post-college, and more recently upon buying my own home (b/c even we single folks need homes)... Every bump in the road is a mountain when you are supporting yourself alone. Good advice, but how about some practical tips for those who are trying to make it on our own?

What are folks like myself to do when the assumed financial advice for anybody beyond their mid-20s is applicable primarily to those with dual income or even simply the emotional support of a spouse or significant other?

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