You want to be debt free, right? Excellent! This post is all about the first of the five steps I teach about how to eliminate debt. Before we get into the details of this step, I’ll go ahead and give you the five steps, in order. They are:
- Cut Expenses
- Maximize Income
- Get Current on Everything
- Use the Dave Ramsey Debt Snowball to Arrange Your Debts
- Make a Call Every Time You’re Ready to Pay Something Off
Simple enough? I hope so. Let’s get into the details of Step 1: Cutting Expenses.
What to Cut
There are lots of bills the average American pays just because an envelope shows up and says money is owed. I talk to people all the time who pay too much for cable, internet, cell phones, home phones, vacation clubs, car payments, insurance, etc., etc., etc. While I can’t give a blanket answer for things you should cut, I do have a simple process to help. Look at everything. Yep – pull out every bill, review it carefully and ask if it is a necessary (or at least a worthwhile) expense. If it isn’t, cut it out completely (if possible) or reduce it (at a minimum).
How to Cut
Don’t assume the amount showing on the bill is the best rate out there. Consider a common example – internet service. Where we lived there were four possible vendors to provide high-speed internet service. When we wanted service, I called each of them and told them what I needed and got their price. I told them I was going to call their three competitors and whichever had the best price got my business. I actually told them, “I have no loyalty to anything but price for this product.” While there are some pretty crappy internet services out there, all four options for me were good. My rate options ranged from $20-60 per month. I went with a $30/month option because it was the cheapest for the speed I wanted. Savings per year = $360. The process took me about an hour. As you look at your bills, look to see if there is anything on there that another vendor offers. Call them and get a price. As long as you’re not under contract, you are likely going to save some money by switching providers or by at least threatening your current provider that you’ll leave if they’re not the best price.
One other thought on this section before we move on. If you have charges you’re not certain about on a bill, call to find out why they’re there. For example, cell phone replacement insurance. With my current carrier, it is $7 per month and I have to pay a $100 deductible if I have to use the insurance. I bought a good, used phone for $4 at a yard sale and stuck it on a shelf. That’s my phone insurance. Yes, I know I got lucky, but if your phone dies, couldn’t you hit Craigslist, eBay or some other site and buy a used phone?
How Long to Cut
The simple answer here is to cut expenses for as long as you need the extra money. In my case, it has become a lifestyle choice to not have cable TV, drive an older, paid-for car, to use the library for most of my book wants/wishes, etc. For you, the answer may be to cut things for just a short time while you focus on getting rid of some specific debts. There is no hard and fast rule here, but I’d almost bet once you cut some everyday expenses, you’ll find many of them will be things you’ll never miss.
Even though it might sound obvious, cutting expenses is the very first step toward becoming debt free. Debt reduction means paying more on your debts so they go away faster. In other words, if you cut expenses, you can have more money to pay toward your debts. Let’s not make this complicated! We’ll get into step 2 in a few days: Maximizing Income. We’ll discuss creative ways you can bring in some extra cash.