by Jay Shaffstall

Created on: March 04, 2005   Last Updated: December 01, 2010

To me, this question is really, "How can I pay off my debts while maintaining the same standard of living?"

It can be done, but it isn't necessarily easy.

The key is to identify what's really important to you. You can't do this at a superficial level, but really have to get down to your core values. Many people are uncomfortable at really looking at themselves like this. If you can't look honestly at what you spend, and decide if it's really supporting a core value or not, then you'll probably not be successful at staying out of debt in the long run.

As part of paying off debts, you'll need to cut expenses (other people have suggested increasing income, but it's generally easier to cut expenses). If you cut those expenses that are least important to you first, you'll find that your perception of your standard of living won't change. So cut expenses first that contribute least to your core values.

You can also often cut expenses by switching to less expensive alternatives. For example, I used to spend a lot buying books and renting videos...now I use the local public library for both. I still read, and I still watch videos, so my standard of living is unchanged, but I spend far less money now than before.

Budgeting is a must...until you know exactly how much money you're spending, you won't know how much extra you have available for paying off debts. The term I use is "envelope budgeting"...figure out how much of your paycheck needs to be saved for each expense, and then symbolically put that much into an envelope dedicated to that expense. When you need to pay the expense, take the money out of the envelope and pay it. This is especially valuable for expenses that come periodically, such as insurances.

Once you know how much extra money you have, put all of it toward the debt with the lowest balance (you could also do the one with the highest interest rate). Pay off that debt, and then you'll have a little more extra each month to put toward the next debt.

Using these techniques, my wife and I were able to pay off about $20,000 in debts, buy a new house, and pay it off completely in six years, at a time when our income dropped about 50%, all without affecting our standard of living.

Note that these are techniques to use even after you're out of debt. Backsliding after the debt is paid off is a sure way to get back into debt.

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