Paying Down Debt: The Missing Step
Paying down debt is a daunting task. High interest rates make it difficult to do in a timely way, while internalized stigma makes the process fraught with emotion.
Because of this, we are prone to throwing as much money as we can at our debt — only to realize we have no money left behind to pay our usual expenses. So we use credit cards again, digging the hole deeper despite wanting desperately to get out.
Does this sound familiar? You’re not alone. I’ve done this, I know other people who have done this, and banks know we do it. It's a great business model for them, right? There is a way to kick the habit, though.
What’s missing from this cycle is a crucial step: getting ourselves to a place where we stop adding to our debt, then making paydown decisions based around that. What this requires is becoming cash flow aware. That is, understanding how much money is coming in and going out each month — and working to keep that number positive.
In the cycle of debt paydown I outlined above, there is no pause to determine whether there are truly resources available to make larger than necessary debt payments. Instead, there is panic, then the decision to make larger payments than necessary that deplete our financial reserves.
When we are cash flow aware, we work to break that cycle by keeping cash on hand. Here’s how to do it.
Begin by taking a look at your regular bills (including monthly minimum debt payments) and subtract those from your income. Is the number positive? That’s a good place to start. If not, you’ll need to look at ways that you can reduce those regular bills or increase your income. More on that in a bit.
But we’re not done yet. After paying your rent, you still have to eat. And, of course, have fun, save money, and plan for retirement. Balancing all of that is where many folks tend to run into problems with their cash flow. Check out how you spent your money over the last three months. You can use an app to categorize expenses, or just pop them into a spreadsheet -- whatever is easier for you.
This, partnered with the list of questions below, will reveal what you can do to get your cash flow into the green — and what steps you can take to manage your debt.
What is the absolute minimum amount of money I need to bring in each month to get by? (only include debt payment minimums in this)
How much more money do I need per month to get to a point where I’m keeping more cash than I’m spending?
How can I stop adding to my debt each month? Is it about how much money I am making, about how much I am spending, or both?
How much am I working? How do I feel when I am done for the day?
Have I gotten a raise recently? Could I ask for a raise? If so, how has my work changed since my last raise?
What are my skills? Am I using them at my day job? Could they make for a lucrative career switch or side hustle?
Could I take on a side hustle that could bring in more cash without compromising my health and well-being?
What am I spending a lot on? Are there things that I’m spending money on that don’t feel worth it?
Where can I cut back without feeling miserable? What is it important for me to spend money on?
Are there ways to lower my bills? Can I get on a payment plan for medical bills or negotiate them lower?
If my monthly cash flow is already positive: how much can I put toward my debt without getting myself back into the credit card cycle?
Who can help me in this journey? What can I ask them for?
Once you’ve done this, it’s time to look at payment options. Start by paying the minimum on all your credit cards or loans. This ensures that you’re not hit with extra charges. Then, you’ll make a plan for what’s next.
Use the answer to the questions above to determine how you’ll get to the point where you’ll stop adding to your debt. Once you do, you can begin the process of paying it down — something we will cover in this newsletter again very soon.
