A New Year, A New Way to Think About Debt

I’m on the fence about New Year’s Resolutions. A lot of people make vague and lofty resolutions, and then forget about them by the end of January after seeing little or no progress made. If people made better resolutions, they’d be better able to keep them.

Consider this New Year’s Resolution: I want to pay off debt.

Now compare it to this one: I want to pay off 20% of my debt by the end of this year.

Of those two, which sounds like something you could actually work toward? The second one does, of course.

When it comes to paying off debt, I’m a fan of changing habits and thought patterns, and setting specific, actionable goals. That’s the only way you’re going to get out of debt and stay out.

Make up your mind that you’re going to pay off your debt. You will never pay off your debt if you don’t make a definitive decision that you will. Making a firm decision is the first thing you should do.

But don’t expect to do it in a single year. Depending on your debt, income, and other expenses, you probably won’t be able to pay off your entire debt in one year. If you can’t pay it all off in 2009, decide what you can pay this year. Set a yearly goal and then break it down into smaller, more achievable monthly goals.

Stick with your debt plan, even if you miss a month or two of debt payments. One slipup doesn’t mean you should abandon your plan entirely. It also doesn’t mean you can be lenient on sticking with the plan. If you “fall off the wagon,” you have to get back on and be just as careful about not falling off as you would if you’d never fallen in the first place.

Stop accumulating new debt. That means saying no to using your credit card and even to new credit card offers, even if you’re going to save 10% on your purchase. Two steps forward, one step back won’t get you far with your debt. Resist the urge to create more debt. It will only setback your debt-free goal.

Be strict about your spending. That means clearly separating your wants from your needs. A lot of times we go onto debt because we can’t say no. We mentally muddle over things we want until we’re convinced that it’s something we need.

Once, my television went out. Since I’d grown accustomed to having a television, I decided I needed a new one. And since I didn’t have the cash to pay for a new one upfront, I decided I had to put it on credit. I was convinced I needed a flat screen TV because it would be light enough for me to carry into my apartment on my own. Even though I set a price limit for my new television, I ended up going over it because I wasn’t paying out of pocket anyway. It’s that thought process, that causes us to get more credit card debt than necessary. I could have simply put my old television in the repair shop, saved money on interest, and never have to worry about a credit card bill. Or, I could have lived without a television and figured out another way to entertain myself, if I’d made better decisions about my wants and needs.

Give yourself modest rewards. Even though you’re being more disciplined about spending money on needs and cutting out wants, that doesn’t mean you have to cut out all leisure spending. Doing that is setting yourself up for failure. All work and no fun leads to missed financial goals. Every month that you meet your debt pay off goals, give yourself a small, inexpensive reward.

Create an emergency fund to fall back on. With no savings to fall back on, you’ll have to borrow your way out of a financial emergency. You need an emergency fund for things that are too expensive to pay out of pocket like auto insurance deductibles after an accident, unexpected car repairs, and medical expenses not covered by insurance. As with paying off debt, you can’t expect to build an emergency fund overnight. Instead, build your emergency fund over a period of time.

If you decide to make a New Year’s Resolution, make sure it’s something you can realistically achieve. Write it down to build accountability and don’t forget to change your behaviors that allow you to reach your debt resolutions for the new year.