Adventurers, when it comes to personal finance, we all make mistakes—sometimes we need a fresh start (maybe even more than one!). Trust me, I’ve been there! Luckily, when I found myself in debt, I was able to get out with a few simple steps.
Step One: Assess your personal finances and make notes for the future.
After graduation, I found myself buried under debt with student loans, study abroad adventures and other expenses. Growing up in a third world country helped me be more cautious of finances, so I decided my first goal after college was to become debt free. My first step was to take a deep look at my expenses—every credit card balance, car payment, education loan, etc. Reviewing every monthly expense helps you identify any unnecessary spending, which could add up to hundreds of dollars. By knowing where I was starting, I could map out how to find my destination: being debt free.
Step 2: Create a budget.
Creating a budget is super easy; you can find an online application or make a simple excel spreadsheet. There are many helpful applications that will help you to stay on a budget: Mint, GoodBudget, Mvelopes, Moneyline, and Daily Budget, to name but a few. Also, some sites that offer free Budget Spreadsheets are Originalmoneyunder30.com and Budgetsaresexy.com. Focus on sticking to your budget while you start paying off those credit cards (see Step 3). I felt a sense of ownership after I created my budget: Even though I was still in debt, I was in control of my finances and I knew where to start.
Step 3: Start paying off credit cards.
To pay off my credit cards, I got a balance transfer card with 0% interest rate and started paying it off immediately. Remember this card shouldn’t be for new purchases, as it is just for paying off your existing debt.
If you don’t qualify for a balance transfer card with 0% interest, try to pay more than the minimum balance on your credit cards with highest interest rates. You can even double the minimum payment or make weekly/biweekly payments in order to pay them off more quickly. Once you pay off the card with the highest interest rate, then start paying off the next one. Applying the same concept to my student loans, I started paying the one with higher interest rates first. I always paid more than the minimum balance and often made more than one payment during a month. As a result, I don’t have any more student loans to pay off! It’s also easy to control your payments and avoid late fees if you automate your payments.
Step 4: Save money as you get rid of debt!
Many of my friends—and myself, I admit—complain about not being able to save money, but often we don’t dig deep into our spending habits. You need to evaluate your expenses and commit yourself to changing them while setting clear goals. For example, I often subscribe to online books memberships or sign up for different magazine subscription trials and quickly forget about them. When I look into my credit card statements, I can identify the memberships that I no longer use or the ones that are unnecessary, and I get rid of them—right away! If you look closely at your spending, I assure you that you’ll find similar unnecessary expenses.
One thing I’m proud of is my ability to conserve and save on my utility bills. This again might come from my experience growing up in Colombia, where you need to save as much as you can. I turn off lights when I don’t need them. I am always looking up different tips for energy efficiency, and I don’t pay for cable, instead opting to subscribe to streaming services like Netflix.
Step 5: Create healthy spending habits.
Now that you’ve made a fresh start (go you!), it’s time to make everyday changes. First, don’t carry all of your credit cards with you. I often keep a credit card at home for an emergency. However, make sure your credit card is not your emergency fund; you can also automate savings just as you do payments, and setting aside enough for an emergency fund is just as important as paying off your credit cards. In fact, don’t completely pay off your credit cards before you have an emergency fund established. You can do both at the same time.
Being in control of spending seems time consuming (and perhaps even boring), but I promise, the financial freedom is worth it. Coming up on AdventurMind, I will get into the details about retirement plans (and why it’s so important to start saving NOW!). Want to know the differences between a 401K, a Roth IRA, and a traditional IRA? Stay tuned!