The rich rule over the poor, and the borrower is slave to the lender. – Proverbs 22:7
Question: What was easy to get into but feels all but impossible to get out of?
Answer: That’s right – debt. More specifically, credit card debt. If you’re like most Americans who have a credit card, you carry a balance. If your balance is typical, it’s pushing $15,000! With average credit card interest rates in the mid-teens, it’s easy to see why Proverbs 22 describes us as slaves.
When you’re ready to end your financial slavery, it’s time to take the necessary steps to dig out of the debt trap.
Step One: Stop the Bleeding
The first thing you have to do to get out of debt is stop adding to it. This seems obvious but it isn’t easy to do. If it were, you probably wouldn’t be in debt in the first place. For starters, leave the credit cards at home. You may have heard that you should cut up your credit cards. Cutting them up is ok, just don’t cancel them. Canceling them reduces your available credit which hurts your credit score. If you do cut them up, keep one. It’s a good idea to have a credit card available in an emergency. Just don’t keep it on you.
Start paying cash for everything. You will find that you spend far less paying with cash than if you use credit. Once you’ve stopped adding to the problem, you’re ready for step two.
Step Two: Make Snowballs
Make a list of all of your debts. Put them in order based on how much you owe and what the interest rate is. From a purely financial standpoint, it would be best to pay off the highest rate debts first. But from a psychological standpoint, it is often better to pay off the smallest debts first. So rank them smallest to largest (any ties go to the higher rate debt) and start paying down the first one on the list.
Once you pay off that first debt, you can start working on the next one. This one will go a little faster than the first one because, as you pay off debt principal, the interest you owe becomes less as well. As you apply the amount you owed on the previous debt to the next one, your payments begin to snowball and the speed of paying them off gets faster and faster.
Use the benefits of the snowball principle to motivate you to keep going. If you have a setback, don’t give up. Life happens. Maybe you can’t make progress every month, but keep pushing forward. Set realistic goals for paying off each item and push hard to reach them. Reward yourself for reaching them. When an item gets paid off, celebrate with a dinner out or reward yourself with a gift you’ve been wanting. Then get back to it and tackle the next one.
Step Four: Swing for the Fences
Don’t be content with paying off your credit cards. Don’t be content paying off your student loans. Don’t stop at paying off the car. Take down the mortgage too!
Most likely, the biggest monthly payment you have is your house payment. Did you know that, with a typical 30 year mortgage, you are paying more interest than principal for the first 12 to 13 years? The sooner you pay off the mortgage, the less the house costs you. So how do you do it? Start by paying more than the minimum principal payment. You can do this by either paying an extra payment periodically or by paying extra each payment. Bankrate has a mortgage calculator that lets you apply extra payments to see what the impact will be on your loan. Both approaches will do wonders for moving up your mortgage payoff date. Even adding a small amount to your payment or adding one full payment per year can make a huge difference.
It may seem impossible to pay your mortgage off early. But it can be done. First, take it to the Lord. Talk to God about it. See if it is a goal that He wants for you. Maybe the timing isn’t right for it. But imagine the sense of freedom you could have being completely out of debt.
My wife and I felt God was wanting us completely out of debt. We believed that He would honor our desire to pay off the mortgage. We started by paying an extra amount each month that would reduce the term of our loan from 30 yrs to 20 yrs. From there, we added additional payments each year as we could. We had the benefit of being able to refinance twice to lower our interest rate. Before long, we could see a light at the end of the tunnel. Along with our efforts, God did seemingly miraculous things that we never could have imagined to bless us and make our goal achievable. By His grace, we were able to meet our goal of being completely debt free! I don’t mention this to brag. I don’t deserve God’s blessing any more than anyone else. I mention it to encourage you to press on. God loves you. Whether He will bless you with paying off your house, I can’t say. But He wants to bless you. Don’t be afraid to trust Him.
Step Five: Be Generous
If God has blessed you with success in achieving your debt reduction goals, be generous. Increase your giving. Share what God has given you with others, remembering that He owns it all.