Finding yourself back in debt after having paid it off before is a horrible feeling. I know, because I've been there. In 2012, I spent 14 months aggressively paying off $14,000 of consumer debt and worked hard to become debt free for the first time in life.
Then, in 2013 I decided to quit my job to pursue my own freelance business. This is when my financial situation became much more volatile and resulted in taking on a bit of business debt to keep things going. So when I say that it's a horrible feeling to be debt free only to find yourself back in debt, I mean it. It's not fun!
If you find yourself in a similar place, here's the strategy I'm using to pay it off again — and keep myself out of debt for good.
Identify the Problem
Before you can begin to pay off debt and get back on track, it's vital that you understand why and how you're back in the situation. Creating a permanently debt-free life is much more difficult than working towards becoming free of debt for the first time.
The mindset and lifestyle changes are vastly different. This is something I miscalculated when I first got out of debt, as I obviously didn't change my mindset or spending habits sufficiently. I'd stopped using credit cards as part of my debt payoff plan, but after about a year I thought I could handle using them again. Wrong!
I also thought that investing in a new business was a smart idea as it would pay off in the long run. That's all well and good, but you have to draw the line as how much you're going to invest in business ventures and how often you use credit cards as an extension of your income.
The need to depend on personal loans or credit cards for additional cash flow proved that my new business wasn't bringing in enough income to survive on its own. Doing a thorough inventory of my spending habits to elucidate why I was back in debt again showed that I needed to not only change my mindset, but also find ways to bring in more money.
Try a New Plan of Action
Obviously, if you've gotten out of debt once you can do it again, but in order for this time to really stick, you have to change your approach and try something new. As Albert Einstein put it, "Insanity: doing the same thing over and over again and expecting different results." So don't expect to follow the same plan and have it work better this time.
My mistake was that I viewed getting out of debt as the end goal. But getting out of debt is merely step one, and staying out of debt while changing your mindset and spending habits is a very long-term step two.
My new plan of action includes:
- Finding ways to level out my inconsistent income
- Bringing in multiple streams of income to have more of a cushion
- Stopping the use of credit cards and loans as an extension of income
- Working with an accountability partner to stay on track
- Living well below my means and doing monthly budget check-in
- Performing a cash budget challenge (or other spending challenge) on a quarterly basis
Decide How You Want to Live
There are two key parts to being debt free: staying out of debt, and living a life without using debt as a tool to get what you want. For me, that second part has been the most difficult. Your credit history and score is basically determined by how much debt you leverage and pay off over time.
So if you don't want to use debt to buy things, you will have to face that fact that it won't be easy. Most banks and lenders will not understand your reasoning for paying. And there will be instances where you simply cannot buy something without using debt, so you and your family will have to come to grips with this limitation.
As long as you define a new set of priorities and have a renewed plan of attack, you'll be able to move forward and pay off debt for good. Take comfort in knowing that you don't have to stay here, and that since you've been debt free once, you can do it again. But now you'll have more experience and lessons to fall back on!