New Year’s Resolution: How to Get Out of Debt in 2020
Surveys show most Americans will make a resolution to get out of debt in 2020. Surveys also show most Americans will fail miserably.
If you want to get out of debt, you need more than wishful thinking. You need a plan. And more than anything, you need the right attitude.
A lot of people have that – for now. A survey by Fidelity Investments found 67% plan to make financial resolutions in 2020, which is up from 61% in 2019.
“It’s encouraging that Americans are committed to building up their finances,” said Melissa Ridolfi, vice president of retirement and college products at Fidelity Investments. “A small step like making a resolution for the New Year can go a long way in forming good money habits that can last a lifetime.”
But making a resolution is just the start. If you want to make 2020 the best financial year of your life, here are four steps you should take.
Get Your Mind Right
According to the American Psychological Association, 93% of Americans make New Year’s Resolutions. If they kept them, 350 million or so people would be thinner, healthier and have learned how to speak French while playing a piano.
Judging by the drive-through lines at McDonald’s, a couple hundred million people lost their resolve at the first scent of a french fry.
The survey found only 19% had kept their resolutions after two years. The reason most cited was lack of willpower.
Dr. Jelena Kecmanovic, an Adjunct Professor of Psychology at Georgetown University, says too little willpower comes from too much self-criticism. She devised a few strategic steps to help overcome that flaw.
But first, what are the concrete financial steps you should apply a good attitude toward?
The Basics of Eliminating Debt
When it comes to getting out debt, a few standards always apply.
- Make a Budget – List your monthly income sources and expenses in a monthly budget. Seeing where your money is actually going can be eye-opening. Look into some budgeting apps to get things started.
- Increase Your Income – Yeah, easier said than done. But in our gig economy, temporary and flexible jobs abound. Get one. Make some extra money and steer it toward eliminating debt.
- Cut Expenses – Differentiate between a “want” and a “need.” Do you need to spend $450 a month leasing a Lexus when there are $250-a-month Toyotas available? The list goes on and on.
- Build a Rainy Day Fund – “Rain” is an unexpected event, like your car’s transmission needing repair, your refrigerator going kaput, your beloved poodle needing life-saving gallbladder surgery. According to the Federal Reserve, four-out-of-10 Americans don’t have $400 for emergency expenses. Start your emergency fund, so you won’t be one of them.
- Refinance Your Student Loans – About 44 million Americans have student loans and the average debt is $37,000. Look into refinancing with another lender. Online lenders and credit unions are two good places to start looking.
- Refinance Your Credit Card Debt – Lots of choices for refinancing credit cards, but the two best bets are enrolling in a debt management program through a nonprofit credit counseling service or taking out a home equity loan where the interest rate is 5%-10% as opposed to paying interest rates of 20% or more on credit cards.
- Improve Your Credit Score – Paying your bills on time and not carrying too much debt means big savings. How big? The average credit score in 2019 was 703, according to Experian. If you got a $350,000 mortgage in 2019, you qualified for a 4.3% interest rate on a 30-year loan. If you had a 760 credit score, you could have gotten a 4.08% interest rate. That would have meant a savings of $16,319 in interest over the 4.3% loan. Improving your credit score can net big savings, so make that a priority in 2020.
How to Increase Your Will Power and Eliminate Debt
Nearly 80% of consumers predict they’ll be better off in 2020, according to the Fidelity study. That’s great, but we’ve seen what happens when it’s time to put good intentions into practice.
Their resolutions go pfft!
Kecmanovic says the key is to think positively about the tasks ahead. Here are examples when it comes to reducing debt.
- Clarify and Honor Your Values – Ask yourself why getting out of debt is important. If it’s because your spouse is nagging you or you feel societal pressure, you’re setting yourself up for failure. If it’s because you want to be a better provider for your family and stop worrying about money, you’re on the right track.
- Frame Your Goals Positively – Brown-bagging it can save hundreds (probably more like thousands) of dollars a year. Instead of getting depressed over not eating out with coworkers, think of how much more productive you are working through lunch while enjoying that delicious chicken salad sandwich you brought from home.
- Construct a Positive Environment – Interact with people who share your goals and avoid the temptations that got you into a financial hole. A great start is to remove all your credit cards from your wallet or purse. If you don’t have enough money in your checking account to buy an item, don’t buy it. Surround yourself with friends or even strangers who share your goals. A good place for that is Debtors Anonymous, where plenty of people are eager to turbocharge your willpower.
- Be Ready to Struggle – Saving means sacrifice, and it’s only natural to miss things like Netflix, going out for lunch or vacationing at a 5-star hotel. Prepare for those bouts of depression. Have cheaper entertainment options like YouTube or even reading a good book ready. Have a supportive friend on standby to remind you how the sacrifices will be worth it.
- Be Kind to Yourself, Especially When You’re Struggling – Kecmanovic says people who are harsh on themselves often fail to reach their goals. Don’t beat yourself up if you blow $19.39 on lunch or turn down a chance to work overtime. Realize almost everybody slips up occasionally, and rededicate yourself to your goal the next day.
- Use a Gradual Approach – You can start small, like putting an extra $10 a week toward saving. Chances are you won’t miss it, so you can gradually increase it to $20 and beyond.
- Concentrate on the Rewards That Await You – Every day, think of a life without debt. Imagine no more calls from bill collectors, not worrying about emergencies or stressing over qualifying for a loan. Visualizing the rewards makes it easier to accomplish them.
What If You Need More Help to Get Out of Debt?
There is help available if you need more guidance on escaping debt, or if you need a mental adjustment to reach that goal.
Nonprofit credit counseling agencies offer debt management programs that can turn your resolutions into reality. Your bills are consolidated into one monthly payment with an interest rate around 8% and many times, much lower. Here are a few things to consider.
- You pay off high-interest debt at an affordable monthly rate.
- Your credit score improves because you pay off debt on time.
- Certified counselors set up a budget and help provide emotional support you need to stick to it.
- You develop financial skills that will keep you from ever having to resolve to get out of debt in a new year.
- You have to give up all but one credit card and use it for emergencies only. That’s a rough adjustment for a lot of people.
- It takes 3-5 years to complete the program, so you could be totally out of debt by 2025.
Just remember, it all starts with a positive attitude. If you get your mind right in 2020, your finances will follow.
As a bonus, you might even learn how to play the piano.
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N.A. (2012, February 23). APA report: Lack of willpower may be obstacle to improving personal health and finances. Retrieved from: https://www.apaservices.org/practice/update/2012/02-23/willpower
N.A. (ND) The resolution solution: Longitudinal examination of New Year’s change attempt. Retrieved from: https://www.sciencedirect.com/science/article/pii/S0899328988800166?via%3Dihub