Many of us have a similar dream. We wish we can have a debt-free life. No struggling paycheck to paycheck, being able to buy what we need without struggle, or actually be able to take a vacation somewhere we actually want to go.
Have you ever experienced the following:
- Looking at a large pile of bills that’s never shrinking?
- Start building up our savings only to have something come along to wipe it out?
- Wanting to purchase something but get denied because of bad credit?
Having zero debt to worry about seems like a perfect solution to everything. Let me just explain one misconception about being debt-free – it actually harms your credit score. If you have zero debt, your score actually starts dropping and that will make it harder to get a mortgage or other credit down the line.
So, I’m going to talk about being “debt-free” from BAD debt. Those debts that don’t increase in value or net worth in the future. Credit cards and other consumer debts are bad debts.
Here are 12 simple ways to get debt-free:
The most important step in the direction of being debt-free is to have a budget. I’ve said this repeatedly throughout my posts but I cannot stress this enough. Putting all your income and expenses down on paper (or in a software program) enables you to clearly see what is exactly happening with your money.
Once you have been monitoring your money for a while, you’ll see where you can trim back. Use the money saved from this towards your current debt. Pay the smallest debt off first, then apply that amount to the next smallest debt and so on until they are paid off.
Once you start paying those credit cards off, start canceling them. You only should need one credit card for emergencies. Those department store cards, gas cards, and any extra cards should be canceled and cut up.
The next step is to “Pay yourself first”. I don’t mean go out and treat yourself to something special. I mean when you get your paycheck and before any money goes out – put some money into a savings account.
We get that idea backwards – pay everything off first and then what’s left will go to savings and usually there’s nothing left to invest. It doesn’t have to be much either, a simple $40 a week becomes $1,450 a year (1.75% interest), and that’s $7,525 in 5 years.
As an extra boost, any monies left after all the bills are paid at the end of the month should go towards your savings as well. Dave Ramsey, a well-known financial advisor says we should have an “Emergency Fund” of at least 3 to 6 months of your income to cover any sudden costs that happen.
Switch all your bill payments to online and automatic payments if possible.
Automating your bills will have several outcomes:
- Better budget – the same amount is paid every month
- Improved credit score – you’re showing a consistent payment.
- No debt pileup – forgetting a payment adds to more debt.
Do this for your savings account as well, a steady automatic weekly transfer will grow that emergency fund.
4. Use Cash
For the other budget categories that cannot be paid online such as groceries and gas, eating out, and entertainment — use cash. Withdraw just enough to cover these expenses for the week and stick to your budget. If you run out of cash in that category, you’re done spending until the next budget “payout”.
5. Eliminate Old Debts
Do some research and check all your credit reports for any errors as well as old debts. Research the statutes of limitations in your state and find debts that fall under this.
Some states don’t allow debt collectors to collect after a period of time, while others don’t allow lawsuits after a period of time. If the time has passed, you can likely forgo repayment without worrying about financial, legal or credit consequences plaguing you.
6. Transfer You Cards
If you have several high-interest credit cards, one major thing you can do to help reduce your debt quickly is to transfer them to a 0% interest card. This step alone can save you a lot of money in interest payments.
Let’s say you have 3 credit cards:
- Card 1 is $3,000 with 18.9% rate & minimum payment of $120 = $4,810 total debt
- Card 2 is $5,500 with 16% rate & minimum payment of $220 = $8,146 total debt
- Card 3 is $400 with 24% rate & minimum payment of $16 = $575 total debt
You transfer these cards to a card that has 0% interest for six months, so now the balance is $8,900.
You pay $350 a month for 6 months, now your balance is $6,800 and now the interest becomes 18% but you keep paying the same $350 a month on it.
The total debt is now only $8,098 instead of the $13,531! That’s $5,433 in savings!
7. Cut Back
Now that you’ve got the money part down, it’s now time for another important and hard step towards being debt-free – getting frugal. If you look closely at your budget you might see you have a lot of amenities and extras.
Do I need:
- 300+ channels on my cable? Or can I get by with 100? Or should I switch to Netflix and Hulu?
- Premium Gym membership? Can I get by working out at the Y or at home?
- That specialty coffee? Can I make a copycat version at home instead?
- That Nail Salon visit? Can I do it at home? Why not have a Manicure party with your girlfriends?
- All those subscriptions? Magazines, newspapers, and subscription menu boxes?
- And the list goes on….
8. Attitude Adjustment
In order to succeed at being debt-free, we need to change our mindsets about “needs vs. wants”. Today’s society is so set on wanting the next newest thing that comes along. We’re spending money on the newest model car, newest upgraded phone, a bigger TV and other things like that. We do this because “it’s there” and we’ll look good.
We need to change this thinking to one of only replacing things when they break (and unrepairable). The attitude of wanting it because it looks good isn’t going to help your wallet at all.
9. Reward Yourself
Now, getting out of debt shouldn’t be all doom and gloom. You should plan for some rewards for yourself too. Reward yourself with a dinner out after a major credit card debt is paid off. Buy a small coffee at the end of the month for making your savings goal that month.
10. More Money
A fast way to get debt-free is to get more money. Get a better job, a second job, a side hustle, or start selling off things you don’t need. This extra money should be used to pay off your debts, build your savings, and ease that tight budget a bit (in that order). Don’t be tempted into thinking that now you have more money you can spend more, that will come later.
As you pay off your major debts, it’s now time to add more categories to your budget to cover the small stuff as well as emergencies – Dental visits, car repairs, new appliances, medical emergencies and other small family things like haircuts, clothes, supplies.
The money in these categories can be built up slowly and when the situation calls for it, you’ll have that cash ready. By this time, you should have only one good credit card (with a zero balance) for those major emergencies that doesn’t have the cash reserves to cover it.
This should only be the absolute last thing to consider when trying to be debt-free. This should only be done when you have undeniably mucked up your finances so bad that there’s no way out or there is no income left.
There are two types of bankruptcies:
- Chapter 7 – You have little to no income. They’ll liquidate some of your assets to cover some of your debts.
- Chapter 13 – You get a re-payment plan established to pay off your debts over the next three years.
You’ll need to check with your state on the qualifications for either of those bankruptcies.
Just remember that after this is completed that your credit score will plummet, the bankruptcy stays on your credit report for up to ten years, and you may still have some uncovered debts to repay as well.
Yes, it’ll take hard work, patience and sacrifice to reach your goals. But the relief you’ll feel when you realize you don’t have as many bills to pay anymore can be exciting. You will then have enough cash to budget for things you finally want – that vacation, that kitchen remodeling, a new TV.
It is possible to live debt-free and live the life you want.