24 June 2011

Financial self-reliance: six tips on reducing debt

By definition, self-reliance means relying on yourself and your own resources, and not being dependent on others. Of course, self-reliance is really measured in degrees of independence. That is, most of us depend on others for some aspects of our day-to-day existence.

Most of use don't produce the electricity that powers our homes. Likewise, the majority rely on others to produce the food we eat and the water we drink.  And, a large number of Americans even rely on other people's money to meet their perceived lifestyle needs.

By this, I'm referring to the burden of excessive debt that many people carry. Any debt is an obligation to others — giving them a legal right to a some of your hard-earned money. Consider that working a job means that your trading some portion of your time (i.e., your life) for money. Given that, debt truly results in a form of servitude, since you are obligated to work to earn money to pay off that debt.

As you can see, part of being self-reliant is not owing anyone. But, if you've got any debt, or worse yet, a lot of debt, what can you do? Here are some tips on how to get on the path to financial independence:
  1. Know your debt: Evaluate your ongoing monthly spending commitment. This is critical... you need to know exactly who you owe, and how much you debt you owe in a typical month. Consider not only loans and credit cards, but also your ongoing monthly bills like mobile phones, cable television, etc.
  2. Know your cash flow: Figure out how much income you have every month, and then compare it against how much you spend as a whole. This outflow tallies everything you spend, including the payments on the debt which you looked at in step #1. Calculating your income is probably pretty easy, especially if you're working one job. Figuring your total spending might be more of a challenge. If you have difficulty, start by collecting all your receipts for a month. Or, write down in a small journal everything you spend, as you spend it.
  3. Compare your income and outflow: If you're still reading this post, chances are that your outflow exceeds your income. At best, they may be pretty equal to one another. In either case, you're going to make some changes in order to become financially self-reliant.
  4. At least scale back: When you're driving and want to slow down, the first thing to do is take your foot off the gas pedal. The same is true here – Choose to spend less. Can you skip your morning coffee? How about packing your lunch instead of buying. Can you ditch the cable TV? The more you cut your spending, the more money you can apply to lowering your debt. Once you're out of debt, this will lower the amount of money you need to live on.
  5. Try a “spending fast”: For the really ambitious, try going without spending for extended periods of time. This is a worthwhile thing to do, because you'll spend less and get a tremendous amount of satisfaction from doing it. Though a bit scary or unsettling at first, I've found that a week-long fast can be very liberating. It gives me a sense of getting off the merry-go-round for a while.
  6. Getting out of debt: This is the real goal, of course... living on your own, and not being in servitude to anyone. That said, it's possible that you may need to carry some debt, at least for a while. For instance, owning a home will require a mortgage loan, unless you choose to save up enough to buy the house outright (again, if you can do that, you're probably not reading this article). Cars and student loans are other big-ticket purchases that can (but don't have to) require some kind of loan. All other debt should be eliminated as quickly as possible, of course.

These are very basic concepts, to be sure. For a really sound approach to getting our of debt, I recommend checking out Dave Ramsey's approach to reducing debt. He has a great book for getting started, called The Total Money Makeover: A Proven Plan for Financial Fitness. If you check out this link, you can watch a short video introducing the book. You can also read about the seven basic steps advocated by Ramsey on his website.

Another very helpful book to help you get your head on straight about the role of money in your life is Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence. Reading this will give you an better understanding of what financial self-reliance is, and help you determine what the real value of money is for you. Specifically, it will make you think about what money costs you to acquire, and how much "enough" is for you.

Are you ready to become fiscally self-reliant? Have you already done it? Please share below!

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