How to Break the Cycle of Debt

One of the biggest road blocks I faced when I was paying off debt was getting out of the “debt cycle.” If you’re struggling to break free of credit card debt for good, you may already be familiar: you pay off a card, only to have an unexpected expense pop up that plunges you right back in to debt again. You work hard to pay it off, then something else comes up … and the cycle repeats.

I’m grateful that I was eventually able to break the cycle, but I had to change my ways a little bit. Here’s how I did it:

  1. I created a spending plan. I always planned for my bills, but I spent the rest of my money without boundaries, leaving me financially exposed to unexpected expenses or overspending that led me back to debt. To fix this, I created a plan for every dollar, sometimes called a “zero based budget,” to account for all my current expenses while also allowing me to start saving for future expenses like vacations, car and home maintenance. Remember this is your plan, so you decide what categories are important to you — I have a category for Starbucks. If you are short on time and technological skills consider using your bank’s online budgeting tools to create and track your budget — many have apps so you can track your spending on your smart phone. Other tools include Mint.com, the Easy Spending Plan or even just Excel.

  2. I started a savings account. A big mistake I made initially was to focus solely on paying off debt without having any money saved. Inevitably some type of emergency would come up and I’d find myself deeper in debt. As part of your spending plan, include a category to put at least $1,000 away in a mini-emergency savings fund ASAP. I labeled the account “Debt Proof Insurance” to remind me what the money was for. Where you keep the money depends on your level of discipline: if you are pretty disciplined, a savings account at your bank to transfer funds in to each time you get paid will suffice; if you are not as disciplined (aka you are in Club Tania), look at opening a savings account at a different bank, then having funds deducted directly from your paycheck to go to that separate account.

  3. I chose a repayment strategy that kept me motivated and consistent. There are a couple popular strategies out there for paying off debt, one of them where you work on paying off the lowest balance account first, another where you focus on paying off the highest interest rate first. Both work — the best plan for you is the one that will keep you motivated enough to get to a zero balance on all your debts. Paying off your highest interest rate first will save you the most money overall, but may not be the most motivating. For others, getting the quick wins from paying off the smallest balance may be what keeps you motivated.

    For me, it was paying off a credit card that I used to make a large, stupid purchase. Every time I saw the statement, I was reminded of my bad decision. Although this debt was not my lowest interest rate nor my lowest balance, I paid it off first because I wanted to get rid of the emotional baggage I felt each month when I received the statement. That was all the motivation I needed to keep myself on track until the last debt was paid off. Check out the Debt Blaster calculator for some motivation and a plan as well (it focuses on paying the highest interest rate first).

Probably the most important thing to do is to redefine progress when you are in the thick of paying off debt. Instead of just focusing on the ultimate debt free day, give yourself milestones to celebrate, like when you have paid off each debt, when you have paid off half or even when you denied yourself something so you have the money to payoff debt. These celebrations will keep you motivated until you can do your “debt free dance.”

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