How to Get out of Debt When You Are Broke in 5 Steps
Being in debt never rings a pleasant bell, but it is one that we keep hearing all the time. If you are reading this, you most probably know the sound of debt all too well. Here are the 5 first steps toward living a debt-free life when your starting point is way below zero.
#1. Be Sure You Are Broke and Not Just Overspending
What is the difference you might ask? Huge.
If you are saying you are broke when you have run out of money because you spent it all on non-essentials and not on bills, then you simply are overspending. Bad decisions can quickly get you from overspending to broke. Use Maslow’s Hierarchy of Needs, focus on the two bottom levels (Physiological and Safety needs), and not on the Aesthetic needs at the top.
That way, you can make a realistic judgment whether you are able to cover your main expenses or not.
The “how to get out of debt when you are broke” question should always start here.
If you indeed are broke (and/or pampering yourself with unnecessary things), then step two is to…
#2. Commit to Getting out of Debt
One of the main reasons many people never resolve getting out of debt in the first place is because they feel they will be indebted to a bank forever. Whether that is the case or not depends entirely on you. With commitment, Navy-like discipline, a plan, and double the hard work, you can reach the promised land — a debt-free life.
#3. Revisit & Change Your Money Spending Behavior
That covers monthly subscriptions to gyms, magazines, and other online platforms that you probably rarely use. Well, guess what? That “It’s only 40 bucks” once a month, adds up to $480 a year, and if you add two more expenses like that, you will be spending a total of $1440. I’ll let that sink in for a sec.
For this exercise to work, you need to ask yourself one crucial question:
Where is my money going?
We live in a consumer society, so the list of reasons we overspend (often on things of questionable importance) is longer than the Great Chinese Wall. Do you go aimlessly shopping when you are upset or bored? Is your self-reward mechanism all about getting fancy food after a good day at work? Are you truly “dying” for that extra pair of shoes although you have them in two other colors?
Addictions that cost money but bring questionable value need to go. You can replace them with cost-free alternatives, like hobbies or getting an extra job (provided you have the time). Otherwise, your budget plan will fail.
#4. Understand the Correct Money Cycle — First You Make It, Then You Spend It
So, how to get out of debt when you are broke? Not by falling into the same money spending pattern, that’s for sure.
Understanding your money spending behavior is one thing. Realizing the proper circulation of money is another. To avoid getting into more debt and slipping into a downward debt spiral, you need to stop living your life on borrowed money. Make it, save it, and then spend it. That is how it’s done.
#5. Get Real: Start an Emergency Savings Account
Let me ask you this (and be honest in your answer):
How many times have you used your credit card as a backup when there was an unexpected expense you had to deal with?
You probably already know this, but the worst kind of debt is the credit card one.
Start out by opening a dedicated account for your emergency fund. Choose a bank that is different from the one you are already using (and indebted to).
I recommend online banks because:
1) You can’t instantly transfer money every time you are short on cash and need to make an urgent Starbucks run (no, that’s not really an emergency);
2) You will earn more interest on your money because, generally, online banks pay better interest compared to bricks and mortar ones;
3) Setting up an account is easier and budget-friendly.
Do you still feel it’s mission impossible to improve your debt situation? I hope you see the light at the end of the tunnel because it’s there. Stop snoozing the “get out of debt” alarm, sit down, pull up your sleeves, and get started with the steps I provided. If you need further help, you can always reach me!