What creeps up on you without you even being aware? It gradually but surely takes away your freedoms and keeps you from doing the things that are important for your future. It takes away your sense of security and control. This evil monster is debt.

Debt is an insidious thing. While it lubricates the gears of society and allows you to accomplish things that would otherwise be difficult, it can undermine your financial security and your ability to reach your financial goals. Here’s how it happens.

The Student Loans

You and your partner went back to school to get your master’s degree a while back. Between the two of you, you still have almost $60,000 in student loan debt. It was important to go back to school so you could make the next step in your careers, and while that debt will help you earn more, the payments are over $600 per month.

The Mortgage

You move out to the suburbs and buy the house of your dreams. It’s a little bigger than you need, but the agent said it would be a good investment. Your mortgage company didn’t hesitate to make you the loan, so they must think you’re good for the payments. Your mortgage alone is $1,800 per month. Taxes and insurance add another $700, taking you up to an even $2,500.

The New Car

Your local car dealership is offering a no-interest loan on a new car when you trade in your clunker. Your car is ten years old, so it’s about time for a new one. Your loan payment is $350 per month.

The Once in a Lifetime Trip

You had a big anniversary last summer, so you and your honey took a dream trip to Italy. You were inspired by the trip a coworker had taken. If your coworker could take a trip like that, of course you should be able to as well. And it was so romantic. The trip set you back $10,000, and you put it on your credit card. Since then you just haven’t been able to make a dent in the card balance. Your minimum credit card payment is $250 per month.

The Consequences

What are you up to now? Every month you are obligated to pay $3,700 in debt payments before you do anything else.  You don’t get to choose not to make those payments. Between the two of you, you make good money, but money feels tight.

After taxes and health insurance premiums you’re taking home about $4,700 per month. But that only leaves you $1,000 to pay for all of your other expenses. And you haven’t set anything aside for emergencies or your future retirement.

Paying your bills is all you think about. You juggle your payments between paychecks. You wait to send payments until the very last minute. You’ve over drafted your bank account twice this year. You’re starting to quarrel with your partner.

Debt has turned from something that provided an opportunity to something that is ruining your life. How could this be? The debt was taken on for good reasons. What else were you supposed to do?

Vanquishing the Monster

Debt can be minimized if you go at life with that intention. Student loans can be limited by working part time and living as cheaply as possible. Buying only the house that you need will reduce your mortgage payment and property taxes. And paying cash for everything else will go a long way toward growing your financial freedom.

But if the monster is already in your life, the only way to get rid of it is to pay the debt down. These are the steps.

1. Create a budget. Include in your budget all the things that you spend money on monthly as well as an allocation for irregular expenses, like car or home repairs or uncovered health care expenses. Nearly all expenses are predictable if you sit down and think about the present as well as the future. Setting money aside for these expenses, that can be foreseen, but for which there isn’t a monthly bill, will help keep you from adding to your debt.
2. Using your budget, cut back your non-debt spending wherever possible so that you have a little wiggle room. Stick to this new spending plan.
3. Use your wiggle room to build some emergency savings. Your goal should be to save enough to cover your minimum living expenses for three months. If you have two incomes, you can get away with saving what the lower of the two won’t cover, but if there is only one, you’ll have to save enough to cover all those expenses. The emergency savings will keep you from adding to your debt in the event that you unexpectedly aren’t working.
4. With your emergency savings in place, use the money you were saving toward it to begin attacking your debt. The debt snowball popularized by Dave Ramsey is a good approach.
   • Pay only the minimum payment on all outstanding loans except the one with the smallest balance.
   • Concentrate all the money freed up by making only the minimum payment and what was going toward your emergency savings to pay as much as you can on the smallest loan. The extra payments reduce the loan balance directly, and will allow you to pay down the loan faster.
   • Once that loan is paid off, move on to the next lowest balance and use all the money you were paying on the first loan to add to your payment on this loan.
   • Keep going in this way until you reach your mortgage payment.

Pay as much as you can. Don’t be discouraged if the amount is small. Every little bit makes a difference.

Don’t worry about the interest rate on the debt you are paying off. While you will pay more interest if you don’t pay down your high interest loans first, you will get out of debt faster by paying off your debt in the order of the balance. Getting out of debt faster will increase your financial flexibility, reduce the amount of emergency savings you need and allow you to make progress on your other financial goals.

Don’t worry about paying down your mortgage until your other debt is paid off, and you are fully meeting your monthly savings goals.

If your employer offers a match to your retirement plan contributions, it is important that you contribute at least enough to the plan to get it. Paying for your future life is one of those bills you need to be setting money aside for every month, and getting help from the company where you work will go a long way. Ideally you would do this before you begin the debt snowball.

Debt is a monster. If it has taken over your life, the only thing to do is to get rid of it. It won’t be easy. But if you lay out a budget, cut back your spending and pay as much toward your debt as possible, you will eventually win.

Image courtesy of Pansa at FreeDigitalPhotos.net