How to Get Out of Debt When Money is Tight

In 1987, times were extremely tough for Jerrold Mundis.

He was in his mid-40s and owed creditors $50,000 in unsecured debt. Once a new New York Times editor and successful author, Mundis found himself living in a one-room apartment in New York. His debt alone was costing about $3,000 per month, and he had a reliable monthly income of only $350. He described this period of time as “torment, despair, and hopelessness.”

Recalling this period in his life, Mundis once wrote:

“I had once had, and then lost, just about everything I’d ever
wanted: My marriage was gone, my children were gone, my
home, my career. My library was gone, my dogs, my stone walls,
my oak trees. My books were out of print. I was alone and living
in a tiny little room in the city. I was alive, but there wasn’t a
great deal more to say for me. I was a year off substance abuse.”

Mundis, who died in April 2020 at the age of 79, eventually climbed out of debt and turned around his financial fortunes. He became a best-selling author again, with several of his best-known works addressing the topics of debt and personal finance. He turned his personal experience with the despair of debt into a way to help others in similar situations.

His writing is instructional, providing some step-by-step guidance for getting out of debt. But the tone of the writing is also very encouraging. Maybe because Mundis was able to remember so clearly how desperate and hopeless he felt, he was better able to identify with people who feel that way. He writes as though people struggling under the weight of debt need that encouragement.

Mundis himself got the support of others by participating in a group called Debtors Anonymous. It was first formed by members of Alcoholics Anonymous, the 12-step program designed to help those struggling with addiction. The AA members who founded DA did so because they came to believe that it wasn’t just substance abuse that caused their financial difficulty. There was more to it than just their abuse habits. Just as alcoholics have drinking and drug addicts have using, the founders of DA believed those chronically in debt have the habit of “debting.”

Maybe Mundis’ history of dealing with substance abuse helped him deal with his financial problems. DA, which he wrote a great deal about, focuses not just on changing bad habits but also about improving the quality of life. It goes to show that Mundis was far from alone when he wrote that it can feel like your life is over when you’re buried under a ton of debt.

The cover of Jerrold Mundis' book.In fact, the title that might be the best-known Mundis book is How to Get Out of Debt, Stay Out of Debt, and Live Prosperously. It suggests that living prosperously – what DA calls “getting what you want out of life” – goes hand in hand with getting out of debt. You could, for example, pay your way out of debt and still not “live prosperously,” necessarily.

The big-picture idea is that changing the behaviors that get you into debt not only help get you out of it but also lead to a happier, less stressful life.

Mundis had an “ah-hah” moment while living in that tiny room in New York. After struggling with debt for so long, it dawned on him that the first step toward getting out of it was to stop incurring it. He wrote that the situation he found himself in had been the result of two decades of progressively increasing his debts, which grew with every passing day.

Mundis immediately stopped taking on debt, no matter what that meant. He didn’t pay for anything with a credit card. He skipped buying anything he didn’t immediately have the cash to pay for. He had to explain to his two sons that they wouldn’t receive Christmas presents from him that year because he couldn’t afford it. Refusing to go further into debt came with some hard decisions.

To illustrate what he meant by incurring no further debt, Mundis wrote about two people, Joanie and Ed, who wanted new televisions.

“If Joanie goes into a department store and buys a television for $600 and pays for it in cash or with a check or a debit card, she
just bought a television. She spent $600 to do it.

If Ed goes into the same department store and walks out with the
same model television but charges it to his store account or puts
it on a credit card, he did not just buy a television.

Joanie bought a television.

Ed borrowed $600.

Joanie spent some money.

Ed debted.

That’s what happened.”

It might seem strange to see the word “debt” being used as a verb, but it’s common in the Debtors Anonymous world. Recovering debtors seem to want to remind themselves that debt doesn’t just happen. It’s caused by specific behaviors and becomes a behavior itself.

Changing those behaviors, then, is a way to recover from being chronically in debt. The chronic debtor is often full of despair and hopelessness, just as an alcoholic or drug addict might be, according to Mundis and DA.

Interestingly, there are some parallels between the world Mundis was experiencing in 1987 and the world today. The Cold War was still going on. The year started with a U.S. unemployment rate of 7 percent, and by October, the stock market crashed, bringing on a financial crisis. It was not really a happy or prosperous time.

There was no global pandemic back in 1987, but finances were tight for many Americans. They were certainly tight for Mundis, who – remember – owed monthly debt payments amounting to almost 10 times his monthly income.

Maybe the lesson is that you can get out of debt and live prosperously, even when times are tight. If a broke, middle-aged writer could do it amid the misery of 1987, there are people who can do it in 2020 and beyond. At least that’s the kind of encouragement Mundis would probably give.

Where to start

They say the first step to solving a problem is recognizing that you have a problem. Again, that sounds like addiction-counseling talk, but there’s some logic behind it. How can you reasonably expect yourself to stop incurring debt if you don’t truly believe it’s a problem? Here’s what Mundis wrote in How to Get Out of Debt, Stay Out of Debt and Live Prosperously about recognizing debt is a problem for you:

“Do this month’s bills pile up before you’re paid last month’s?
Do you regularly receive past-due notices?
Do you get letters threatening legal action if immediate payment
is not made?
Do the total amounts on your revolving charge accounts keep
steadily rising?”

If you find yourself answering “yes” to those questions, it’s likely you are struggling with the problem of debt. You might try to talk yourself out of it, but facts are facts: The things above are things that happen to people who have problems with debt. They don’t happen to everyone.

It’s a difficult truth to realize, but, again, recognizing that you have a debt problem is the only way you’re going to be motivated to take the next step. The next step is copying what Mundis did when he had his “ah-hah” moment, which is to stop incurring debt.

That means not buying anything with a credit card. Ever. It means not financing or leasing a car. It means not signing up for student loans for yourself or even your children. It means not even taking up stores on their “12 months same as cash” or layaway offers.

It means that if you don’t have the cash to buy it right now, you don’t get it right now.

Executing this step requires a commitment to that one main rule. And, after committing to the rule, it requires dedication to stick to it. It’s going to require living more frugally. It’s going to mean sacrificing some things you’ve gotten used to having in your life. But if you want to get to the “Live Prosperously” part of the book title, you are going to have to do the “Get Out of Debt, Stay Out of Debt” part first.
Frugality and sacrifice are what’s required.

That might sound grim, but the good news is that there are some simple tools that can help you navigate your path to prosperity once you make the commitment to seriously get started.

Cashflow management

How many times have you heard the phrase “run it like a business”? It’s used to describe what occurs when an entity other than an actual business – a church, government, non-profit – is operated as a business might be. One type of entity that can certainly use the “running like a business” approach is a household. Especially when times are tough.

Businesses operate with what’s called cashflow management. They carefully track money that comes in and out of the business over given periods of time. Cashflow management is what allows them to stay afloat even when times are tough.

The main goal of any business, which is increasing the amount of money coming in while decreasing the amount of money going out.

This graphic shows the main goal of any business, which is increasing the amount of money coming in while decreasing the amount of money going out. If you want to run your household like a business – thriving in good times and surviving in bad – that should be your goal, too.

And the only way to start is to begin tracking your income and expense the way a business does. Doing that is very simple.

Write down every penny you earn and every penny you spend, every single day.

There’s no other way to figure out where your household finances stand. Tracking income and expense is NOT the same as formulating or following a budget. A budget is a financial plan for a given period of time. Income and expense tracking records what actually occurs during that time period.

What’s the difference?

Think of it this way: You can budget, say, $200 per month for fuel for your car. If gas prices suddenly go up, or you make a few more unexpected trips, you might actually spend $220 in any given month. When somebody asks you how much you spend per month on gasoline, you’d tell them “$200.” But that’s how much you PLAN to spend, your budget. You don’t know how much you actually spend unless you keep track of how much you spend each time you buy gas.

That $20 difference between what you plan to spend and what you actually spend might not seem like much. But if you did it every month, it would come out to $240 per year. If you made the same miscalculation each month with your groceries or dining out, that’s another $240 a year. Tack on $20 a month for clothes and shoes for the family, and now you’re talking about $720 a year that you’ve spent
without accounting for it.

The danger of such a situation is two-fold when you’re battling a debt problem:

  1. If you’re trying to pay down debt, that’s $720 you possibly could have used toward debt payments. If you would have stuck to your budget, you’d theoretically have $720 more at the end of the year.
  2. That money wasn’t in your original budget, so where did it come from? For most people, money that exceeds their monthly income – which is the basis for the budget – is spent on a credit card. That means not only are you not paying down your debt, you’re actually adding to it. And a credit card balance costs you interest each and every day.

A business that operates like this will eventually go out of business. No business can continue spending more money than it takes in and survive. If you want to run your household’s finances “like a business,” you MUST begin meticulously tracking your household’s income and expenses, just like a business does.

Once you are accurately and consistently tracking your household’s income and expense, you can deploy the four main principles of cashflow management that businesses use:

Principle No. 1: Reduce expenses first

Profit is net income – money in, minus money out. Increase your income or decrease your costs – or both, ideally – and your net income (profit) rises. What most businesses know is that it’s easier to reduce expenses than it is to increase income.

When it comes to a household, this is where the budget comes in handy. Examine your monthly budget, your plan for spending the money that comes in. Look for areas to cut down, starting with nonessentials such as entertainment, clothing or professional services. After that, move onto the more essential, but variable, expenses such as groceries and gas to see if you can reduce costs there. Finally, look at the necessary fixed costs – mortgage or rent, utilities, childcare – and try to reduce what you can.

Businesses also constantly shop around for insurance, internet service, phone service, and other annual or bi-annual contract-type obligations. Households could do the same thing. Get yearly quotes on homeowners or renters insurance and auto insurance. Switch wireless or TV/internet providers every so often to get introductory rates.

Principle No. 2: Increase income

Increasing income is more difficult than decreasing costs, which is why businesses are often in cost-cutting mode.

For some households, it’s probably a very similar circumstance. Cutting $500 a month in expenses might be easier than earning an extra $500 per month, which would require a decent raise, getting a better-paying job or working a second one. Would you rather take on a part-time job in the evenings or on weekends, or get rid of cable TV and eat out a few times fewer each month?

That said, there are ways to increase your income that might not be as painful to you. You could have garage sales or use the internet to sell things you don’t want or need anymore. You could offer tutoring services, or dog-walking or yard work in your neighborhood. There are websites that also provide a platform for freelance work.

All of those examples will require some extra time, but they’re ways to increase your income without having to take on an actual second “job” or beg for a small raise.

Principle No. 3: Managing debt

Almost all businesses have debt. Just like households, many have mortgages on buildings and buy things on credit. They might also have loan payments on equipment and inventory purchases and possibly lines of credit they can draw on.

Managing their debt is important to businesses’ success and survival. Eliminating interest expense actually increases cashflow. Increased cashflow can be used to generate more revenue or can be invested for long-term income or equity.

The same things apply for a household, so it’s important to be strategic if you are carrying debt. And a household can copy the strategies businesses tend to use for managing debt. They are:

  1. Pay high-interest debt off first: Obviously, the higher the interest rate, the more expensive the borrowed money is. It might be tempting to pay extra principal on your household’s biggest monthly expense, but if you have another debt with a higher rate, it’s costing you more even if the monthly payment is less. Paying off credit cards and personal loans before mortgages and student loans makes the most financial sense.
  2. Refinance debt: Businesses can sometimes transfer debts that carry higher interest rates to loans or lines of credit with lower rates in order to save money. Similarly, a homeowner might be able to refinance their current mortgage with a lower rate loan. Someone with a balance on a high-interest credit card might save some money by paying it off with a lower-interest personal loan. Especially in a low interest-rate environment, you can reduce your interest costs by refinancing old debt with new loans – just be careful about upfront costs and prepayment penalties if you’re extending the length of any loan period.
  3. Don’t use credit to pay fixed expenses: Unless it’s a seasonal business and part a long-term operating plan, it’s usually a red flag when a business starts using a line of credit from a bank to make payroll, or starts using the company credit card to pay the mortgage or utilities. These things just add to the debt. If you’re earnestly trying to get out of debt, you’ll make that commitment to avoid incurring any more. This would involve not paying your own fixed costs with a credit card. When you do, you’re making things more expensive when they don’t have to be. And it’s not sustainable.

Principle No. 4: Save and invest

When a business is profitable and has its debt manageable, it tends to build a reserve of cash on hand and/or invest profits for additional revenue or equity. Having cash on hand reduces the need for future debt should an unexpected expense come up, and investing profits is a way to passively earn more. A household can do the same thing. Once unsecured debt is paid off, any money that you would have spend on debt payments could go toward a cash reserve. You could call this savings an “emergency account” – something you could use when needed so that you don’t have to put an unexpected expense on a credit card. Most American families don’t have enough savings to cover such expenses, and living prosperously involves having an emergency fund that can help alleviate the stress of surprise expenses.

Once you have a sufficient emergency fund, any money that you were putting into savings can be invested. Investing can provide income and equity growth over the long term. In low-interest rate times, it makes more sense to invest – even with a little risk – than to keep ALL your money in cash. Banks’ savings accounts pay next to nothing in interest.

Those are the four cashflow management tools that businesses use to operate efficiently and profitably. Hopefully, you can see how a household can copy these principles to “run like a business.” Keep in mind that businesses typically have other specific strategies for when times are tough. A household could copy those, too. They include:

  • Prioritizing payments: If your income drops and you can’t pay everybody you owe, it’s probably time to decide a pecking order of whom to pay. You don’t want to lose your house or car, and you don’t want your utilities shut off. If you’re going to be late paying a bill, it’s best to miss payments on unsecured obligations.
  • Negotiate with lenders: If you anticipate having problems paying on your debt, you can do what businesses do when times are tough: Negotiate repayment terms that work for you. This might mean asking for a forbearance on your mortgage, where you skip some months of paying and tack them on to the end of the loan. It could mean asking for deferment on student loans. You can try to negotiate lower interest rates or extra time to pay with anybody you owe money.
  • Eliminate expenses: Businesses continuously look to reduce costs, just as households should, but when times are really tight, they eliminate them. It can be painful. For a household, it could mean ditching television service. It could mean having one car instead of two. It almost certainly means entirely skipping takeout meals, unlimited data plans, non-income producing media subscriptions, even clothing purchases.

These tactics seem hard, but they don’t call them “tough times” without a reason.

Getting Out of Debt

If you’re saddled with debt, you want to get out of it. The stress can be overwhelming, and you’ll never live prosperously if you have its weight on your shoulders. Understanding cashflow management strategies and using them is the first step toward getting out of debt, but there are some other specific steps to take.

There are thousands of books, videos and articles about how to get out of debt. The potential for information overload is real. This report will focus on the strategies outlined by Mundis in How to Get Out of Debt, Stay Out of Debt, and Live Prosperously.

It’s a straightforward, tell-it-like-it-is approach that anybody willing to make a commitment to being debt-free can copy. It also worked for Mundis at a time in his life that was bleak and at time the world had its troubles, too.

The book is divided into four parts:

1. The debt spiral
2. Stopping the debt spiral cold
3. Turning it around
4. Freedom, prosperity and abundance

It might help to think of the spiral as a whirlpool. You’re swimming along fine, then find yourself drifting toward the spiral. It starts dragging you under water. To get back to your enjoyable swimming, you have to stop the spiral, begin spinning it the other way so that you can start rising toward the surface, then, finally, emerge above water.

The steps follow a logical order. As discussed, you have to recognize that you’re in a debt spiral before you can stop it cold. Once you’ve stopped spiraling, you can start turning it around. Once it’s turning around, it’s time to get out of the spiral completely and learn to live prosperously.

The first part mostly describes how people get into debt, the behaviors that started the spiral and keep it plummeting downward. If you think you have a problem with debt, you would probably identify with a lot of what the book details. But for a condensed summary, stopping the spiral, turning it around and freedom, prosperity and abundance are the action-steps focus.

Stop the spiral

Mundis quotes in his book someone who has worked on debt-payoff using the methods outlined. The man calls it “a simple plan for complicated people.”

And stopping the spiral is as simple as it gets: Stop borrowing money. Remember, buying something with a credit card – even if you mean to pay it off right away – is borrowing money.

As with similar programs, Mundis advises to take it one day at a time. Don’t borrow $5 from your coworker TODAY. Don’t put lunch on your credit card today. Then, you just have to start stacking those days on top of each other. While you’re doing so, it’s important to track your spending on each and every little thing you spend money on (as described earlier in this report).

Once you are making those things habit, Mundis says, it’s time to make a list of every single debt you owe. Here’s what his looked like when he started.

An example list of every debt Mundis owed at this point in his life.

He writes that it’s important to know the total number, no matter what it is. A lot of people have so much debt piled up, from so many sources, that they lose track of how much and how many people they owe. Mundis says that many people complete this exercise and learn that they actually owe LESS money than they thought.

The exercise is important, too, because to stop the mental stress of the spiral, debtors need to recognize that it’s just a number. He repeats a mantra throughout the book to remind debtors that:

“Remind yourself that it’s not Armageddon. You owe some
money, that’s all. The missiles won’t be launched, blood isn’t
running in the streets. Get grounded in today, in right now, this
very moment. Right now, today, you are perfectly all right. You
have everything you need.”

It’s probably something to remind yourself as you work through the next steps to stopping the spiral, which are:

  1. Cutting up your credit cards and closing your accounts.
  2. Stop making promises to creditors unless you’re absolutely sure you can keep them. Where possible, make repayment schedules you can honestly afford and stick to them.
  3. Say thanks, but no thanks to friends or relatives who want to lend you money to help.
  4. Write out a spending plan – not a budget – that details how you will spend each dollar.
  5. Go through the plan and cut out what you can.
  6. If after cuts, your spending plan still requires more money than you bring in, DON’T BORROW. Find a way to increase your income.

That’s it. Those are they steps to stop the spiral. The basic idea is: Live more frugally so that you can stop spending money you don’t already have.

That’s a simple premise but one that’s probably more easily said than done. Getting emotionally comfortable, reducing the day-to-day the debt burden causes, can make it a little easier.

Turning it around

Stopping the spiral is about changing the behaviors that caused the overwhelming debt and arriving at the right mindset. Turning it around is more about taking action that will allow you to eventually allow be free. That is, it’s mostly about putting the plan in motion.

It starts, Mundis writes, with visualization.

Remember Mundis’ list of debts when he first started? It included his father, a friend named Matt, his attorney, and the writer’s guild. To execute this plan, he had to pay his highest-interest debts first, which could mean paying very little or paying very slowly to people with whom he has personal relationships. The difficult reality is that you have to negotiate to pay as little as possible to the lower-interest debtors, so…

You pay only what it takes to not lose the guild membership.

You pay only what it takes for your attorney not to sue you.

You pay only what it takes to maintain your relationships with your father and Matt.

Remember, you’ve told all these people the truth about what you can do as far as repayment – not making promises you can’t keep. You have to stick to that truth, which might be difficult for both you and them.

Mundis writes that as you’re executing your plan – turning it around – it’s important to visualize yourself successfully working it. It’s important to see yourself fulfilling the obligations you set forth for yourself and important to picture what success will look like someday.

Turning it around will at times be tough, and picturing what’s on the other end of the tunnel will keep you motivated. It’s also the first step toward the final part of your debt-free plan.

In stopping the spiral, one of the steps is negotiating repayment plans with creditors. As Mundis wrote, you should have stopped making promises to bill collectors unless you were absolutely certain you’d meet them. In the “turning it around” portion of the plan, you’re simply meeting them.

You’re executing what was laid out in stopping the spiral. That is:

  • Not spending money you don’t have
  • Sticking to the spending plan you developed
  • Adhering to the payment plans you agreed to
  • Adding to your income
  • Maintaining the mindset that debt isn’t Armageddon

Maintaining a mindset might not seem like taking action, but everything you do that moves you toward becoming debt-free is an action. It’s important to recognize that everything you’re doing to work toward being debt-free is an action.

And sticking to your plan is the most important action.

Freedom, prosperity and abundance

Climbing out of debt, even at first, can feel liberating. You won’t have freedom until you are debt-free, but as the balance of your debt drops, you’re moving toward it. And toward prosperity and abundance.

As for the specifics, it’s important to pay off high-interest debt first. That is the most efficient, least expensive way. In fact, if you have, say, three credit cards, pay all you can afford on the one with the highest rate, even if it means making only the minimum payment on the others.

Keep paying as much principal as possible on the high-interest card until it’s paid off. If you see an increase in income, use the extra money toward the principal balance, too. Once that card is paid off, use the money you were spending each month on that card to pay as much as you can on the card with the next-highest rate, until that one is paid off, and so on.

You should keep this primary goal in sight at all times as you work your way out of the debt whirlpool. Here are the other things Mundis recommends:

  1. Be proactive: Contact your creditors and explain that you want to repay them, and here are your circumstances. Tell them what you can afford to repay each month or week.
  2. Pay YOUR amount even if they refuse: If they tell you they can’t take $200 per month, but that’s what you can afford, send it anyway. Most creditors won’t refuse money, even if they tell you they will.
  3. Pay at least the complete finance charge: Even if you can pay nothing toward the principal balance and can’t make the minimum payment, send it at least the entire finance charge.
  4. Don’t worry about your credit score: Creditors and debt collectors will try to use your credit score to impose their will on you. If you’re in debt and have late payments, your credit score is already bad. It’s something that will improve if you stick to your plan.
  5. In and out in 24 hours: No matter what, you do not let bills that arrive either by mail or electronically sit around. If you get a bill, pay it within 24 hours of its arrival.
  6. Avoid the traps: Paid-for credit or debt counseling, consolidation loans, and interest-only loans can be tempting, but often cost the debtor even more money in the end. There’s a reason there’s so much advertising for these services.
  7. Track your repayments: As you pay down your debts, document each payment, including the date and the new principal balance. Also, over time, make a journal with entries for when each debt is paid in full. These tasks will help you feel freer and more prosperous.

Once you’ve gotten a handle on sticking to your spending and repayment plans, you’ll find that things get a little easier. Mundis recommends looking toward the future a little bit as the stress of debt drops out of your life. That includes writing down an IDEAL spending plan and documenting the things you’d LIKE to spend money on when you’re able. He recommends setting both short-term and long-term goals for those things.

You might be surprised to find that your priorities might have changed from the start of your journey.

Once all your debt is paid off, you’re free of obligation to others. To stay that way, Mundis believed you can do it by following three simple rules:

  1. Don’t debt, one day at a time
  2. Scrupulously keep your spending record
  3. Adhere closely to your spending plan

Also, once you’re debt-free – at least of unsecured debt – you should start your emergency savings account. DON’T do this until you are done paying off debt. Once you are out of debt, use the money you paid to creditors to instead fund your emergency savings account. Put money from each paycheck you earn into this account until you have at least three months worth of earnings saved up.

You could, of course, contribute more, but three months is a general guideline financial planners recommend. As you save more than that, you run the risk of carrying TOO MUCH cash because savings accounts don’t earn anything. Instead, begin investing the money from each paycheck. You could invest in:

  • Contributions to your retirement plan (IRA or 401k)
  • Stocks and mutual funds
  • Bonds (lower risk than stocks and funds)
  • Real estate
  • Private business (your own or a partner’s)

Once you are making money with investments, you are certainly living prosperously. Think about it: You used to owe people so much money that it caused mental and emotional pain. Now, you’re using the money you used to send to others to earn money for YOURSELF through investing.

No matter what you feel about addiction, recovery or 12-step plans, you should be able to imagine that sticking to a plan that relieves you of a stressful problem will change your outlook over time. Chances are, Mundis writes, you will emerge from the whirlpool of debt a different person from when you sank in.

Even when the world is turned upside down, times are tough and you’re stressed out, maybe knowing that you have the potential to grow and eventually live prosperously can be of comfort.

To Your Success,
Rob Minton

P.S. I have worked with quite a few people who’ve done what Jerrold Mundis did – go from debt-ridden to debt-free, then to living prosperously. Some, once they get to the investing stage, are eventually able to quit their regular jobs or retire. Their
investment income pays all their expenses. Real estate is especially attractive to these investors because it’s an income-producing asset – like a business – that also increases in value over time.

P.P.S. Paying down your debt is the safest investment you could possibly make. There is ZERO risk of loss.

P.P.P.S. Real estate is not a risk-free investment. You can lose money investing in real estate just as you can lose money in any investment. Your ability to be successful depends on many factors, including the systems you use, your experience and your support system. You can minimize risk by building a solid team of experienced professional advisors, including a real estate professional, real estate attorney, and
real estate tax advisor and through appropriate insurance protection.

This report and the sample investment ideas within are for informational purposes only.

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