Living with debt can be a horrible experience. Getting out of the debt trap can be incredibly hard! Learn from our experiences getting out of the debt trap and move towards financial freedom.
Loans, be they credit cards, school, car, or any other type of non-income lending loan are all traps. Any initial joy or buzz from buying with borrowed money is quickly replaced by the stress of paying it off. That ‘high’ melts like ice cream on a hot day, and guess who’s left to deal with the mess? Yes, that’s right: you. This post is the first in a series of three about the methods I used to get out of debt in just two years.
Living with debt
In 2008, I returned to Hawaii. My career in Denver, Colorado had gone ‘belly up’, so I ran back to the only career ‘safe spot’ I knew. I also decided that I was going to achieve my dream of living on a boat, despite having no money and no Plan B.
At this time, I had little money and a big $35,000 loan to repay to my father. Although I had a traditional loan lined-up, my father generously stepped in (I think he enjoyed the interest payments!) As crazy as it sounds, living on a boat made financial sense. Essentially, rent in Hawaii or living on a boat costs the same. For me, it was a no-brainer.
My biggest issue was affording to live. My credit card and school loans totaled $40,000 (US), and nearly half of this was at a whopping 29% interest. At that time, I had no hope of paying it off with minimum payments; I felt trapped. I was regularly behind on repaying, and the never-ending calls from the creditor made me feel overwhelmingly anxious. If you’re reading this and nodding your head, you’ll understand that feeling.
However, despite being well and truly in the Debt Trap, I managed to get myself out in just two years and so can you. I paid off $15,000 in credit card debt while earning a salary of $50,000 and living on a boat in Hawaii. For some that might not seem like much, but if you know how it feels to be in debt, you will appreciate what a big deal this is. Here’s how I did it…
My 7 Steps to get out of the Debt Trap
Answer the calls from your creditors (despite how anxiety-provoking they are).
Ignoring calls and burying your head in the sand is mentally damaging. I discovered that some creditors would help by setting up more manageable terms for repayment. Defer your student loans or other credit debt. For example, check with your student loan creditor to see if they have a hardship program. If they do, this will allow you to defer your repayments for a set period. I secured back to back six- month stints for paying off my loan. By deferring payments, you create room to breathe, which, despite the incurred interest, I found invaluable.
Create a buffer account (see below for example). This step is crucial for dealing with any unforeseen expenses. You can create a buffer account using the money you have deferred from paying back the student loan. It’s important to remember that this is not a savings account, so don’t start paying off another debt until this buffer account is up to a reasonable amount (in my case that was $1000). All your money should flow through this account and should always hover around the $1000 mark (or your chosen amount). If the amount varies, you will need to figure out why.
Draw up an asset and liability sheet (see below for example). Tracking your progress will show you how well you are doing and be motivational. I found seeing where I ‘was’ and where I wanted ‘to be’ a great reality check.
Find a roommate (or in my case, shipmates). Renting out one or two rooms is challenging, if like me, you love your own space. However, the reward is worth it. The rent I charged covered an even spread of my rent, boat repayments and was more than I needed to meet the payments to my father and the marina fees.
Begin paying off the smallest credit card first. Once you’ve established your buffer and money is flowing through, use any extra money you have from deferring your student loan to settle your credit card debt. By doing this, you create an effect like a snowball rolling down a hill, where it picks up more snow (or debt) as it rolls down. By the way, this analogy didn’t work in Hawaii; it’s only now that I understand why!
Move to the next smallest debt and continue in this pattern. Yes, this will take time, so you need to be patient and keep going. Of course, it depends on how much debt you have and how persistent you are but, in short, that’s it. Keep going until you eliminate all your debts and you are out of the trap.
I know my method for escaping the Debt Trap isn’t rocket science and only you know whether it sounds right for you. In my case, using these steps led me to financial freedom, a feeling that, if you’ve experienced the anxiety and mental anguish of repayments and high interest, you will appreciate it.
This post is the first in a three-part series about the Debt Trap and how I managed to escape.
Read parts 2 and 3 to discover the next steps and how perseverance is key.
1. Assets and liabilities document. There are plenty of documents out there. However, you are welcome to use my copy.
2. Buffer account document. This is a copy of my buffer account document which my parents and Sade also used.