My Debt Quest

Almost every Personal Finance Blog out there has a "Get out of debt plan." There are debt snowballs, snowflakes, debt reduction plans, named plans, unnamed plans, my plans, your plans, commercialized plans, etc. Although it seems a waste for all of those blogs to write about the same subject, the harsh reality is that consumer debt is the number one problem for personal finances.

The first step in forming any plan is to identify the specifics of the problem. To this end, in March, I wrote about my plan for Getting Out of Debt - Step 1: How I got there in the first place. Now that I figured out where I went wrong, I can start looking at ways to fix it:

In the face of an increasing debt, I need to stop adding debt before I can eliminate the debt.

Committing to a credit-free lifestyle has one huge potential pitfall -- loss of motivation, resulting in failure of the plan. One of my goals as I pay off my debt is to make sure that I maintain a lifestyle that I enjoy so I don't lose the desire to push forward with my debt-reduction. With this in mind, I also realize that any decision to spend money, whether with cash or credit, will delay my progress towards being debt-free.

I needed to find ways to support my lifestyle choices -- clothing, household goods, entertainment, food, etc. -- without using credit. This meant that instead of spending money that I had yet to earn, I had to reverse the trend and instead spend money that I had already earned.

To accomplish this, I opened a couple of savings accounts: an account at ING Direct for longer-term savings and an account with my bank, USAA, for shorter-term savings. Each pay-period, I transferred money into each savings account as soon as my paycheck posted, before I could even consider the money in my account balance. Before long, the USAA account was funded to $500, may target balance, and the ING account continues to fund each pay-period. Whenever I decide to make a purchase, I can transfer the money from the savings account into my checking account. Essentially, the savings accounts become my own line of credit to myself. Instead of spending as much as 14% APR on a credit card, the loan to myself is less than 1.5% APR, or the current interest rate for the savings account.

For the first time in my life, I have funds in reserve for unexpected expenses like auto service, medical bills, etc., and I can still cover any planned personal purchases without using credit.