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Getting Out of Debt, Part II

November 17th, 2015 at 10:45 pm

Ok, lets do the most important thing first. Figuring out how you're going to reward yourself as you proceed! That's part of the taking the grind out of it, that you have a little reward for yourself at each step. So think about something special that *doesn't* cost much money. That would defeat the whole purpose. For me, it would be a brownie. For you it might be skipping the gym for 2 days. Or binge watching 3 hours of Gilligan's Island. We're talking guilty pleasures here. I'm not worried about your diet, one self help process at a time. Pick something you would really look forward to, and really indulge as you go. It's another way to make this a little fun.

There are two ways to get out of debt. More income, or less spending. But more income has taxes and expenses associated with it. If you increase your pay by $100 a month, you'll have taxes, social security, medicare, unemployment and disability insurance deductions. So in reality it might only be $60. But the money you save, you've already been taxed on. You can think of it as 1 penny saved is 2 pennies earned. It makes a bigger difference. So we're going to go after expenses first.

What expenses are important? Answer, the ongoing ones. I mean, it's all fine and good to save $25 on your new garbage disposal, but that won't get you out of debt. But saving $25 a month on your cell phone bill? That might. That doesn't mean you shouldn't shop for major expense items. Of course you should. But it's the continuing expenses that will just kill you. They are also the ones that go from luxury to necessity almost overnight.

So here's what to do. Do a rough budget of your ongoing expenses. This is where my caution about knowing yourself comes in. If you won't do it to the penny, don't let that stop you. If all you do is estimate things off the top of your head, that's better than stopping because it's too complicated and too boring. Make a spreadsheet of all your ongoing expenses. For example:

Rent
Mortgage
Insurance
Cable bill
Phone bills
Groceries
Gasoline
Gym fees
College expenses
Lattes
Netflix
Utilities
Eating out
Storage space
Hair Salon
Magazine and Newspaper subscriptions
Parking
Dry cleaning
Dentist
Etc, etc, etc.

This is of course not an exhaustive list, just some ideas to get you started. And break out each individual item. Insurance should be broken out into car, health, homeowners and life insurance for example.

Ok, now for the challenging (but I think fun) part. Your goal is *not* to eliminate those things. Your goal is to figure out how to get each one for 15% less than you are spending now. 15% is your stretch target. Some of those things will be difficult to reduce much. Some can be dramatically reduced. It requires some creativity and legwork. We're going to go after that 15% goal very hard. Remember we're after the wealth creator, living on 85% of your money. Here are a few examples of the types of things you can do:

Your local library has a ton of DVD's to check out for free. Netflix maybe can go by the wayside for awhile.

Your local sanitation department may give you a discount for using smaller trash barrels.

Cell phones is an easy one. Look into one of the pay as you go plans, which are usually even cheaper than they look. Pay as you go has no extra taxes and fees. You know that a $80 a month Verizon plan actually costs $90 a month. But a $40 pay as you go plan costs $40.

Call your local newspaper and ask for a discount. The LA Times cuts my fee in half just for asking.

Did you know that dry cleaning isn't good for your garments? They wear out faster. Instead, get them pressed if they are not dirty. It costs less and your clothes will last longer.

For your work clothes you of course need to look nice. But for your workout outfit or the kids play clothes? Nice stuff for dirt cheap at the thrift store.

Haircuts? Shop around. Maybe you can do Supercuts every other visit instead of the expensive salon.

College expenses? Two years of community college before the university will cut that bill by 40%.

If you and your SO eat out once a week I'm about to put $300 a year (equivalent to a $500 raise) in your pocket. That ice tea with tax and tip is $3 x 2 or $6 each time x 50 weeks a year. Here is your new drink order "Water with lemon please".

In general a lot of this will be shopping. Shop your health insurance, car insurance, cheapest local gas station.

Be creative. Think outside the box. Keep that stretch target in mind.

Get family members and friends involved. In fact that is a really key thing. Let people know you are doing this. It can help remove some of the awkward problems that come when friends invite you out for drinks or to that expensive new restaurant.

Done all that? Great! Time for a brownie!

Be careful of one trap. Spending a lot of money to save some money. I know people who have sold their old car and bought a new Prius to save on gas. An old car is free. A new Prius is $25,000. If you improved your mileage from 20mpg to 45mpg by doing that, and if you drive 15,000 miles a year, your payback period is about 12 years. Factor in increased insurance, and registration costs plus financing that car, and your payback period is never. If you can"t get a payback from a new expense in say, 6 months, skip it. We're trying to reduce expenses here, not incur new ones that you'll probably have to finance. Always do the math.

I'm going to give you a bunch of links to help with some of this. But I'll do that next week, as this tip is already long enough. Next week we'll look at how to execute the plan. We'll also look at what to do if you're deeply in debt and this still isn't enough.

1 Responses to “Getting Out of Debt, Part II”

  1. VS_ozgirl Says:

    Great tips!

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