How I Solved $40,000 of Personal Debt

In retrospect, it's pretty embarrassing that I managed to get myself into more than $40,000 of personal debt. I combined numerous bad spending decisions with a complete lack of understanding of how credit cards work to amass this unsavory, and unenviable, total. Add to that a few ill-timed job losses which caused me to move back in with my parents, and there I was - a single, twenty-something guy facing a mountain of bills and credit card debts that couldn't be paid for.

Fortunately, this story has a happy ending. I was able to solve my massive debt woes in only a few years without ever having to file for bankruptcy or pay for debt counseling. I did it all on my own, and you can too.

Here are seven steps to eliminating personal debt in your life:

1. Realize There's a Problem

For quite some time, I simply refused to admit that my debt was a problem. If you're constantly worrying about credit card balances and missed bill payments, maybe it's time to wake up to the fact that your debts are having an extremely negative impact on your life. Personally, I just got tired of all the problems that not having money was causing me - so I finally decided to do something about it.

2. Differentiate Between Wants and Needs

Your footloose and fancy-free days of spending must end. I objectively identified the wants and needs in my life, and reduced or eliminated the wants as much as possible. I stopped purchasing lottery tickets, newspapers, coffee, snacks, and other impulse buys. Most of these items are either unnecessary or can be obtained through less expensive means. For instance, you can make your coffee at home in the morning instead of spending several dollars everyday at the local coffee shop. Spending less than you make is the cornerstone of any successful debt management plan.

photo credit: joshwept

photo credit: joshwept

3. Save Money Wherever You Can

To climb out of debt, you must save money in your everyday expenses. That way, you'll have more money available to pay down your debt.

I started off by saving money on groceries. I switched to a more fresh food-based diet, and avoided prepackaged and processed foods. I found a local farmers' market where I found fruits and veggies to be much more affordable than at my national grocer. For all other grocery items, I clipped coupons and timed their use with double-coupon days to further increase the savings.

I also took a quick survey of the gas stations in my neighborhood and found that the price variance on a gallon of gas was as much as $0.15. I located the cheapest gas station and exclusively filled up there.

Finally, I carefully monitored my thermostat at home and turned off all appliances when not in use. Depending upon your situation, there will be other areas in your life where you can save more money - you just need to take the time to examine.

4. Review All Bills

You may pay your monthly bills without considering that you could trim your costs substantially. However, when I was working on paring down my debt, I compared what I was paying for Internet, cell phone, and satellite TV with the competition, and switched to cheaper services when necessary. I found numerous service charges and monthly maintenance fees and either got these eliminated or switched providers.

Furthermore, while it's important to keep you bills as cheap as possible, it's also crucial that you never miss a bill due date. I created a payment calendar to help my commitment to always paying on time.

5. Set a Budget and Create a Payment Plan

Creating a budget is another key to solving personal debt. If you don't fully understand your current spending habits, you'll never get to where you want to be.

Once I controlled my spending to the point where I had a monthly surplus, I prioritized my credit card debts. I chose the debt avalanche strategy, in which you pay down credit cards with higher interest rates first. It takes a little longer to see results, but you'll spend less money in the long run.

If you're the type that needs to see an immediate impact, you can opt for the debt snowball method. By doing this, you pay off the smallest balances first, regardless of the interest rate.

6. Curtail Entertainment

It might not be easy, but cutting back on entertainment expenses is very important to saving money. I had to make several drastic changes: Eating out several times per month was reduced to just once. Visiting bars on the weekends with friends was cut in half. In the beginning, I tried to eliminate entertainment completely, but I quickly found this to be an ineffective strategy - you've still got to enjoy your life to an extent. If you don't, you run the risk of losing hope and giving up.

7. Generate More Income

Lastly, I found a variety of methods to generate more income in my daily life, beginning with my employer. I worked hard and did the best job that I could every single day. I also volunteered for overtime whenever it became available. The end result was a bigger paycheck.

I also looked to the many electronic gadgets I had purchased on the way to racking up all this debt. I decided that I could do without many of them, and sold them online. I had quite a few other items that I no longer used, which were donated to a local charity. Although this didn't result in actual money, I was able to use them as tax deductions for charitable contributions.

Final Thoughts

It only took me slightly more than two years to amass this debt, and a little over four years until the last balance was paid off. It was difficult in the beginning, but once I started to see concrete results, it motivated me to continue with my efforts.

An unintended result of eliminating this debt is that many of these ideas have remained important cornerstones of my finance management. I now have a college fund set up for my son, and am contributing to my employer's 401k program. All it takes is a few common sense ideas, some sacrifice, and a lot of determination and patience.

What are your plans to eliminate debt in your life?