As defined by the Merriam-Webster Dictionary Hope is a verb; to cherish a desire with anticipation. Hope can mean many different things to different people. Hope boils down to the act of wishing or willing something to happen. Usually something positive for the person whom makes the wish. A very common example would be “I hope I win the lottery.”
Hope is the belief for a positive outcome related to events and circumstances in one’s life. Hope is the feeling. Debt is a fact. You are either in debt or you are not in debt. A person could hope to get out of debt, but hope in this sense doesn’t translate into that person’s ability to get out of debt. Getting out of debt requires thinking, planning, and hard work. You could sit around on the couch watching your new 72 inch LCD TV hoping the TV will magically pay for itself, but that just isn’t going to happen.
A manager I work closely with made a statement a few months back that has been on my brain ever since (hence this post). He stated “Hope is not a strategy.” The work we perform revolves around maintaining production equipment so that we can produce widgets. Our goal is to produce widgets with the highest possible quality with the least amount of cost. When the manager questioned a peer of mine about the time required to fix a piece of machinery the peer said, “I hope it will be fixed in 2 hours.” Sorry Joe, wrong answer. If hope is not a strategy then the correct answer should be, “As long as X is the problem it will be fixed in 2 hours, otherwise it will take an extra hour to troubleshoot and fix the problem.” This answer puts a time frame on the known issue X, and sets a total time limit of 3 hours to cover a secondary issue if one pops up. Once the goal and time frame is set, the team knows how to proceed. People move faster when firm time constraints are put in place.
This same idea can carry over to personal finance and debt reduction. Firm time constraints need to be in place in order to progress through a debt repayment plan. Not a plan set up by a “Debt Con” company, a plan set up by YOU. This is where we being to take hope out of the equation. Hope will not repay your debts, action will. These are the steps you need to take to get out of debt; figure out your net worth, get on a budget, plan your snowball, live on less than you make, and get to work.
Figure Out Your Net Worth
By understanding your net worth you will be able to REALLY see how much debt you have. How to Calculate Net Worth is a post that gives complete detail on the process. Here are the Cliff-Notes version:
- Step 1 – Gather the following information
- Balance of all checking and savings accounts
- Balance of all retirement accounts (IRAs, Roth IRA, 401K, 403b, etc…)
- Balance of your 1st, 2nd, 3rd mortgages (if you have any)
- Balance of any vehicles (car, boat, motorcycle, atv, RV, snowmobile, etc…)
- Balance of all other debts (student loan, credit cards, personal loans, 401K loans, etc…)
- Step 2 – Perform the calculation
- Add up all the assets you have. The assets are; the checking/savings accounts, the retirement accounts, the value of the house, the values of the cars, the values of the toys, and anything else that can be sold for money. The results are the total value of your assets. This might look like a good number, but don’t forget about all the liabilities still on the paper or computer screen.
- Add up all the liabilities. The liabilities are; the mortgages, the vehicles, and the debts.
Subtract the liabilities total from the assets total.
- The resulting number is YOUR NET WORTH
Get On A Budget
Without a budget you might as well go back to hoping your way through life. On paper on purpose is the only way you’ll be able to understand the flow of money through your household. I recommend checking out BudgetPulse for a free online budgeting tool. If you like Excel spreadsheets check out Debt Free Adventures budgeting sheet. My personal budgeting spreadsheet is extremely simple, I feel it might be too simple for someone starting out with budget. Below is a picture of it and here is the excel file if you are interested.
Plan Your Snowball
Once you know how much debt you need to pay off (from your net worth) and you know how much money you can apply toward your debt (the budget) it’s time to plan your attack. I use a spreadsheet created by Vertex42 and it works great for me. All you have to do is enter in the debt amounts and play with the sheet. The sheet will help you to figure out how long it will take you to pay everything off. Here’s the Debt Reduction Calculator from Vertex42. Below is a shot of my current sheet. The orginal sheet doesn’t factor in any additional monthly snowball money so I’ve made a slight change to the Vertex42 sheet and added an additional $$ cell (my sheet). I use this cell to add in my debt snowball money (extra money from the budget and pizza delivery money). You can adjust the amount to see how a second income can help the process along. When I started my additional money was $1500. It’s quite a bit more now as I continue to find more money to apply to the snowball. The more money you pay each month, the quicker you can get out of debt (no brainer, I know).
Live On Less Than You Make
Yes, I said that. You need to live on LESS money than you bring in. A budget will help you do that. You will need to sacrifice in order to reach debt freedom. Hope will not get you there, the timely actions you take will. The actions you take are the only way out of debt, unless of course you win the lottery.
Get To Work
Take a second job. Use your talents to make money. Do whatever it takes. It really is that easy.
If you are in debt, you are in a time of crisis. Draft your plan. Put time constraints in place. Hold yourself accountable to meet the timing, and throw hope out the window. Hope is a great tool to use for getting through certain parts of life. It will help lift you up when you are down (not down in debt). It can put a smile on your face. It can help to calm you during family illness. But hope will NOT get you out of debt. Stop wishing, hoping, whining, complaining, blaming, and procrastinating and get to work. The actions you take along with your ability to stick to a plan are the only tools you need to destroy your debt.