What Are The Real Takeaways From The Unrealistic Debt Free And Early Retirement Stories?

Lately there seems to be a big push from the blogosphere to shine a light on the accomplishments of thirty-somethings, forty-somethings, heck even twenty-somethings paying of five and six figure debts. You’ve likely heard these stories. If you haven’t, here’s a couple of examples.

Along with these wunderkind stories of debt payoff there are also the first cousin of these financial success stories called early retirement. There are examples of folks who have been able to retire early, in their thirties or forties for example, and live la vida loca.

The first problem with most of these stories is that they are unrealistic for most of us. The median household income in the US is around $50k. That’s for a household, which often includes two working adults. Median is best because it is a more accurate representation of the average as it discounts the outliers.

Most of the examples that you’ll find of people paying off debt or retiring early are helped by large incomes. Generally in the six figure and up range. Sadly though, you won’t hear these folks brag about their large incomes. In fact it’s hard to even find out how much they make.

But these examples of extreme debt reductions only makes sense that they’re shouting the loudest. First of all, it’s not very interesting to hear about someone who paid of $12k in two years, even if they only earned $20k a year. But someone paying off $50k in 10 months like my first example or someone paying off $90k in ten months as in the second example is news.

But I don’t find these examples to be helpful nor motivating for most folks. In fact, they’re likely to be depressing. Additionally, you’ll find that examples of extreme debt repayment had boosters. Oftentimes folks have several thousands of dollars to use to jump start their debt repayment or they manage to sell a second car for several thousand.

Now don’t get me wrong. It delights me that folks are able to pay off their debts and live more responsibly. But it seems to me a little disingenuous that such outliers are applauded and given as much limelight as they are because there are folks out there who are really hurting financially and need to figure out a way to release some of the financial pressure.

This post is aimed at them. I want to offer concrete and realistic advice for those in the middle and lower income spectrum on how to get rid of debt and start saving.

Now why would you want to do this? Primarily for peace of mind. And as Proverbs 22:7 puts it “… the borrower is slave to the lender.” Working your way to freedom from debt is an accomplishment that will give you tremendous peace of mind. So what can we take away from the examples of the debt repayment outliers.

An easy thing to do is to scale it down, but this does not always give you a realistic example to follow. Joe Mihalic paid off $90k in ten months on a salary of around $105k. We can’t just halve his income and halve his debt and say that a household earning around $50k should be able to pay off $45k in ten months.

Why? Because one of the very real difficulties for folks living on smaller incomes is that their incomes are used up to a greater percentage on necessities than folks living on larger incomes. In other words, it is much harder to carve off money to put towards paying down debt from a $50k salary than it is from a $100k salary. So what to do?

The first thing I’d suggest if you’re committed to paying off debt is to go cash only. First of all you have to commit to the long haul. You have to put your mind right. It’s not gonna be easy. You’re gonna have to say no to friends and to desires. You need to steal yourself for this. Your whole mental outlook will have to change. But you can do it. Just get focused and determined, and find pleasure in the little things and the free things.

Okay. You’re mentally prepared. I’m not going to suggest you cut cable or get rid of your second car or sell your vinyl collection or only eat rice and beans every night. You’ll have to do some of those sorts of things, but those are the things you can and should determine for yourself. But you need to get ready before you can see where the fat is that you can cut. Where you’re leaking money that you don’t need to.

How do you do that? You go cash from this moment forward, or as close to cash as your lifestyle will let you. Listen, this worked for me. I still use a credit card but only because I pay it off in full each month. If you can’t, then cash or debit is the way you need to go.

Starting today, or on the first of the month carry a small little notebook with you like this one. You will carry this with you from now on everywhere you go. You’ll also carry a pen with you everywhere you go. What do you do with this notebook? You write down EVERYTHING to the penny that you spend money on. I learned this from Your Money Or Your Life one of two books that changed my life. The other one in case you’re wondering is Diet For A New America.

This in and of itself is powerful medicine. You don’t have to use a pen and notebook. You can also use an iPhone or Android app. I’m a fan of Back In Black available for the iPhone. My personal recommendation is to use a pen and notebook. That’s how I did it for the longest time. Give it a try.

Now you absolutely must write down every penny you spend. You go to Starbucks and you buy a $2 coffee. Write it down. I just wrote it down like this “Starbucks $2”. On the left I’d write Starbucks and in the far right I’d write $2. I put the date of each day on one line and all entries for that day underneath it on a line each.

At the end of the month you basically write up every thing that you’ve spent money on and assign it to categories. So for example, Starbucks might be assigned the category “Eating Out” or “Coffee Shops”. Don’t sweat this stuff. Just come up with categories that you think are helpful. What you’re trying to do is to make a spreadsheet at the end of the month with major spending categories, not a line item for each time you went to Starbucks.

I transferred all the spending from my daily notebook to a larger letter sized notebook where I set up a spreadsheet. This spreadsheet would include all my spending and all my income. Basically, I’m trying to find out what my balance is at the end of the month. Do I have savings or am I further in debt?

I’ve created a very simple spreadsheet that you can use on Google Docs. Feel free to use it as a starting point. I’ve filled in all the values, just change them to suit yourself. It should give you an idea about where to start and what the goal is.

You’ll find that by doing this diligently every month you’ll notice that you’re spending money in some areas where you’re not getting the benefits you think you are. These are the areas where you should try to start cutting back. For example, I’m loath to spend $2 or $2.5 on a coffee let alone $5 on a latte. So I started to cut back there and buy one only once a week instead of daily or several times daily. But you’ll find areas where you’ll be astonished at how much you’re frittering away on things that aren’t really bringing you value. Those are the areas where you can and will be motivated to start cutting back.

Read the book Your Money Or Your Life. It’ll give you great clarity. Part of it is determining how much your real hourly wage is. You might be getting paid $15 an hour, but once you add the time to get to and from work, the amount of money you spend related to work you might realize you’re REAL wage is perhaps only $10. Now that $5 latte costs you a half hour of work. It helps you to start thinking about the value you place on purchases, because in reality you are exchanging a piece of your life – your time – that you can never get back for everything you buy.

When you see it like that, your whole world and outlook towards money starts to change. I’m not gonna say this is easy, but it is simple. Once you’ve done this income and expense spreadsheet for a month or more you’ll likely find areas where you’ll want to pull back from spending. Sometimes you might have to look at things carefully and make some hard choices. But do it. You’ll start to see that you’re spending less money and coming up with extra savings each month which you can start to put towards your debt.

If you can’t find any savings each month, you’re gonna have to make harder choices. You might need to move or get a roommate. You might have to give up your car in exchange for public transit. You might also need to consider getting a second job if you can to help in the short run.

There are many things you can do start getting yourself into the black. You know what needs to be done and I know you can do it. Your goal as Dave Ramsey said is to get that first $1k in savings. This is an emergency fund. Do that first, then start paying off your debt using the debt snowball. Then we can get to savings which we’ll talk about next.

The biggest hurdle is getting started. It’s not so much the how or the what. We know how to save money and reduce our spending. If you take a hard look at your situation you’ll find areas where you can do better. The problem is motivating yourself. That’s the hardest part. I hope this post has helped. You can get out of debt even if it seems insurmountable right now. Just give yourself a chance. Take it one day at a time. As Lao-tzu said, “A journey of a thousand miles begins with a single step.” I’d like to say that a journey to paying of thousands in debt begins with a single dollar.

Winnie the Pooh knew about this too when he said: Rivers know this, we’ll get their one day.