How to Become Debt Free

How to Become Debt FreeLet’s face it, living with debt is a huge burden.  It controls nearly everything that you do and living with it can feel overwhelming.  Debt causes you unnecessary grief and emotional pain.  It makes it difficult to change jobs or go out on your own to start a new business.  Debt even makes moving into a new home difficult.  If you are really masochistic, debt can even make you want to incur more debt – disguising itself as a cure to make you feel better about the debt you’ve already accrued.

 

While incurring debt may seem like a good idea at the time, the truth is that debt is dumb.  The power of debt is that it keeps you working as a slave to the banks.  Yet, breaking free from the chains of debt can seem like such a daunting task.  Trust me, I know how you feel because I am in debt too.  However, I’ve learned the error in my ways and plan to do something about it.  You can too! All it takes is a little perseverance and a little know how.

 

Needs vs. Wants

Before we get into the nitty-gritty of how to become debt free, we first need to have a discussion about which things constitute a “need” and which things are merely “wants”. Simply put, needs are things that you need to stay alive. For our purposes, your only real needs are food, shelter, utilities, and medical expenses. That is it. Everything else is a want. Buying new clothing is a want. Paying for cable tv is a want. Your $200/month data plan for your cell phone is a want.  While we are at it, your cell phone itself is also a want. As you begin to pay off your debt, you should be paying for NEEDS ONLY. Paying for wants is only going to set you further behind.

 

Now, I’m not so naive to think that everybody is going to go out and cancel your cable just because you want to pay off your debt (Although, that is a great idea!). In fact, not everybody who is in debt needs to stop spending on their wants completely. However, the fewer wants you purchase, the faster this process will go. Furthermore, anybody who is behind on their debt repayments needs to stop spending on all wants  immediately. If you can not afford to pay your mortgage, you can not afford to pay for a cell phone. Period. After you get your debt under control, you may be able to revisit some of your wants – though you may find that you enjoy your simplified life and that you don’t really want all the extra distractions of having stuff.

 

Create a Zero-Sum Budget

The first key to getting out of debt is to know how and where your money is being spent. It is easy to let all kinds of money slip through the cracks if you are not tracking it. I know because that is what we did for years. However, learning to write a zero-sum budget is easy. All you need is a pen and paper. The best part about this particular type of budget is that it not only tracks where your money is being spent, but it forces you to consciously spend every penny that you make each month. Check out our article, My Zero-Sum Budget, My Friend and get yourself on track today.

 

Pay On Your Debt

Becoming debt free may seem like a daunting task, but we’ve all got to start somewhere. Rather than think about the enormity of your total debt, think about doing things in small segments. This will help you to stay on track and keep you from feeling overwhelmed.

 

Whether you owe $2,000 or $200,000, paying off your debt starts with paying on your debt. In general, the first thing you should do – if you are not doing so already - is to start making minimum payments on your debt. If you are not paying on your debt, how do you ever expect to pay off your debt?

 

So, let’s imagine that your minimum payment on your credit card is $40.  Pay $40.  Your minimum house payment is $1,200.  Pay $1,200. While it may not seem like a lot, you have to get yourself in the habit of paying back these debts. Also, it is very important that you pay these debts on time! Paying late will only cost you more in fees and interest.  Being that our goal is to pay these debts off, that would completely work against what we are trying to do.

 

If after cutting out all of your “want” spending you are still unable to make minimum payments toward your debt, you must then look for other options. First, you should consider finding a second source of income in order to pay off your debt. If increasing your income isn’t an option, you should consider selling some of the things which have caused you to be in debt in the first place. For instance, if you are swamped with car payments you can’t afford, it is probably time to sell the car. If you aren’t making enough money to afford your mortgage, you need to consider selling your house and renting. You may also wish to seek the advice of a credit counselor so that they can help you with your specific situation.

 

Building a Beginner Emergency Fund

Now that you are making regular minimum payments on your debt, the next thing you need to focus on is building an emergency fund savings. Since we have cut out all of our spending on wants, hopefully, our zero-sum budget leaves us some room for putting money in savings. You may need to start small. Maybe you can only save $50 a month. However, the more you trim, the more you should be able to save. Our goal is to save enough money so that we can take care of emergencies when they arise. For now, we should shoot to save $1,000-$3,000 as fast as possible. Once we have done that, we can move on to our next challenge.

 

The Debt Snowball

Here is where the real fun begins. After you have saved up enough money in your beginner emergency fund, you should stop putting money into savings. Rather than go out and spend that money on more wants, use your zero-sum budget to reallocate the money you had been saving to now pay off your debt.

 

Start by putting the additional money you had been saving toward paying off your smallest debt first. This money should be over and beyond the minimum payment that you were already making on this debt. Furthermore, you need to make sure that you are continuing to make minimum payments on your other debts.  (Again, I stress that you must be paying these on time.) Once you have paid off the smallest debt, take that money  and start paying it toward the next smallest debt. Like a snowball that picks up more and more snow as it rolls down a hill, you will be paying off larger and larger amounts of debt each time you finish paying off one of your smaller debts. Continue with this process until you have paid off all of your debt beside your house. (Paying off your mortgage is also a good idea, but should be used in your larger financial strategy, not as part of your debt snowball.)

 

Complete Your Emergency Fund

Congratulations! You’ve just become debt free. Now, don’t go out and do something stupid like going back into debt. What you should be doing is completing your emergency fund. I would recommend that you save somewhere between 6-9 months of your take home income and place it in an account that is liquid – like a savings account or money market account. From there, the sky is the limit. You can start saving for your child’s college education, invest in the stock market, or even save for that brand new car you’ve always wanted. Above all, remember to keep using that zero-sum budget so that you can carefully and consciously “spend” every dollar that you earn.  Remember, pay cash for your wants and enjoy living debt free.

For further information on this subject, I highly recommend reading The Total Money Makeover by Dave Ramsey and The Money Class by Suze Orman.

 

 

 
About Greg

Greg Johnson is a proud husband, father, and debt crusader who is in the process of becoming debt free. He is the co-founder of the personal finance website Club Thrifty, where he brings the awesome sauce each and every day.

Comments

  1. “breaking free from the chains of debt can seem like such a daunting task.” Isn’t that the truth. I hate the way debt makes me feel so out of control with my money, and that I’m completely at the mercy of the banks. This is some great advice for everyone in debt.

  2. bedevilment bedevils bedew bedewed bedewing bedews bedfast bedfellow bedfellows bedframe bedframes bedgown bedgowns bedight bedighted bedim bedimmed bedimming bedims bedizen bedizened bedizening bedizens bedlam bedlamp bedlamps bedlams bedmaker bedmakers says:

    I like to disseminate understanding that will I have built up with the yr to assist
    enhance group performance.
    bedevilment bedevils bedew bedewed bedewing bedews bedfast bedfellow bedfellows bedframe bedframes bedgown bedgowns bedight bedighted bedim bedimmed bedimming bedims bedizen bedizened bedizening bedizens bedlam bedlamp bedlamps bedlams bedmaker bedmakers recently posted..bedevilment
    bedevils
    bedew
    bedewed
    bedewing
    bedews
    bedfast
    bedfellow
    bedfellows
    bedframe
    bedframes
    bedgown
    bedgowns
    bedight
    bedighted
    bedim
    bedimmed
    bedimming
    bedims
    bedizen
    bedizened
    bedizening
    bedizens
    bedlam
    bedlamp
    bedlamps
    bedlams
    bedmaker
    bedmakers
    bedmate
    bedmates
    bednighted
    bednights
    bedouin
    bedouins
    bedpan
    bedpans
    bedplates
    bedpost
    bedposts
    bedquilt
    bedquilts
    bedraggle
    bedraggled
    bedraggles
    bedraggling
    bedrail
    bedrails
    bedrid
    bedridden
    bedrock
    bedrocks
    bedroll
    bedrolls
    bedroom
    bedrooms
    bedrug
    beds
    bedside
    bedsides
    bedsore
    bedsores
    bedspread
    bedspreads
    bedspring
    bedsprings
    bedstand
    bedstands
    bedstead
    bedsteads
    bedstraw
    bedstraws
    bedtime
    bedtimes
    beduins
    bedumb
    bedumbs
    bedwarf
    bedwarfs
    bee
    beebee
    beebees
    beebread
    beebreads
    beech
    beechen
    beeches
    beechier
    beechiest
    beechnut
    beechnuts
    beechy
    beef
    beefburger
    beefburgers
    beefcake
    beefcakes
    beefeater
    beefeaters
    beefed
    beefier
    beefiest
    beefily
    beefing
    beefless
    beefs
    beefsteak
    beefsteaks
    beefy
    beehive
    beehives
    beekeeper
    beekeepers
    beekeeping
    beelike
    beeline
    beelines
    beelzebub
    been
    beep
    beeped
    beeper
    beepers
    beeping
    beeps
    beer
    beerier
    beeriest
    beers
    beery
    bees
    beeswax
    beeswaxes
    beeswings
    beet
    beethoven
    beetle
    beetled
    beetles
    beetling
    beetroot
    beetroots
    beets
    beeves
    befall
    befallen
    befalling
    befalls
    befell
    befit
    befits
    befitted
    befitting
    beflags
    befog
    befogged
    befogging
    befogs
    befool
    befooled
    befooling
    befools
    before
    beforehand
    befoul
    befouled
    befoulier
    befouling
    befouls
    befriend
    befriended
    befriending
    befriends
    befuddle
    befuddled
    befuddlement
    befuddlements
    befuddler
    befuddlers
    befuddles
    befuddling
    beg
    began
    begat
    beget
    begets
    begetter
    begetters
    begetting
    beggar
    beggared
    beggaries
    beggaring
    beggarliness
    beggarly
    beggars
    beggary
    begged
    begging
    begin
    beginner
    beginners
    beginning
    beginnings
    begins
    begird
    begirt
    begone
    begonia
    begonias
    begorah
    begorra
    begorrah
    begot
    begotten
    begrime
    begrimed
    begrimes
    begriming
    begrimmed
    begrudge
    begrudged
    begrudges
    begrudging
    begrudgingly
    begs
    beguile
    beguiled
    beguilement
    beguilements
    beguiler
    beguilers
    beguiles
    beguiling
    beguine
    beguines
    begum
    begums
    begun
    behalf
    behave
    behaved
    behaver
    behavers
    behaves
    behaving
    behavior
    behavioral
    behaviorism
    behaviorist
    behavioristic
    behaviorists
    behaviors
    behead
    beheaded
    beheading
    beheads
    beheld
    behemoth
    behemoths
    behest
    behests
    behind
    behindhand
    behinds
    behold
    beholden
    beholder
    beholders
    beholding
    beholds
    behoof
    behoove
    behooved
    behooves
    behooving
    behove
    behoved
    behoves
    beige
    beiges
    beigy
    being
    beings
    beirut
    bejewel
    bejeweled
    bejeweling
    bejewelled
    bejewelling
    bejewels
    beknighted
    bel
    belabor
    belabored
    belaboring
    belabors
    belabour
    belaboured
    belabours
    belated
    belatedly
    belay
    belayed
    belaying
    belays
    belch
    belched
    belcher
    belchers
    belches
    belching
    beldam
    beldame
    beldames
    beldams
    beleaguer
    beleaguered
    beleaguering
    beleaguers
    beleaps
    beleapt
    belfast
    belfries
    belfry
    belgian
    belgians
    belgium
    belgrade
    belie
    belied
    belief
    beliefs
    belier
    beliers
    belies
    believability
    believable
    believably
    believe
    believed
    believer
    believers
    believes
    believeth
    believing
    belike
    belittle
    belittled
    belittlement
    belittler
    belittlers
    belittles
    belittling
    bell
    belladonna
    bellboy
    bellboys
    belle
    belled
    belles
    belletrist
    belletristic
    belletrists
    bellevue
    bellhop
    bellhops
    belli
    bellicose
    bellicosely
    bellicoseness
    bellicosities
    bellicosity
    bellied
    bellies
    belligerence
    belligerencies
    belligerency
    belligerent
    belligerently
    belligerents
    belling
    bellman
    bellmen
    bello
    bellow
    bellowed
    bellower
    bellowers
    bellowing
    bellows
    bellpull
    bellpulls
    bells
    bellum
    bellweather
    bellwether
    bellwethers
    bellworts
    belly
    bellyache
    bellyached
    bellyaches
    bellyaching
    bellybutton
    bellybuttons
    bellyful
    bellyfull
    bellyfulls
    bellyfuls
    bellying
    belong
    belonged
    belonging
    belongings
    belongs
    beloved
    beloveds
    below
    belows
    belt
    belted
    belting
    beltings
    beltless
    beltline
    beltlines
    belts
    beltway
    beltways
    beluga
    belugas
    belvedere
    belvederes
    belying
    bema
    bemas
    bemata
    bemire
    bemired
    bemires
    bemiring
    bemix
    bemoan
    bemoaned
    bemoaning
    bemoans
    bemuse
    bemused
    bemuses
    bemusing
    ben
    bench
    benched
    bencher
    benchers
    benches
    benching
    benchmark
    benchmarked
    benchmarking
    benchmarks
    bend
    bendable
    bended
    bendee
    bender
    benders
    bending
    bends
    bendy
    bene
    beneath
    benedict
    benediction
    benedictions
    benedicts
    benefact
    benefaction
    benefactions
    benefactive
    benefactor
    benefactors
    benefactress
    benefactresses
    benefactrices
    benefactrix
    benefactrixes
    benefic
    benefice
    beneficence
    beneficent
    beneficently
    benefices
    beneficial
    beneficially
    beneficialness
    beneficiaries
    beneficiary
    beneficiate
    beneficiated
    beneficiating
    beneficing
    benefit
    benefited
    benefiting
    benefits
    benefitted
    benefitting
    benes
    benevolence
    benevolent
    benevolently
    bengal
    bengals
    benighted
    benightedly
    benightedness
    benign
    benignancies
    benignancy
    benignant
    benignantly
    benignities
    benignity
    benignly
    benin
    benison
    benisons
    benjamin
    bennets
    bennies
    benny
    bens
    bent
    benthal
    benthic
    benthos
    bentonite
    bentonitic
    bents
    bentwood
    bentwoods
    benumb
    benumbed
    benumbedness
    benumbing
    benumbs
    benzedrine
    benzene
    benzenes
    benzin
    benzine
    benzines
    benzoate
    benzoates
    benzocaine
    benzoic
    benzoin
    benzoins
    benzol
    benzyl
    bequeath
    bequeathal
    bequeathed
    bequeathing
    bequeathment
    bequeaths
    bequest
    bequests
    berate
    berated
    berates
    berating
    berber
    berbers
    berceuse
    berceuses
    bereave
    bereaved
    bereavement
    bereavements
    bereaver
    bereavers
    bereaves
    bereaving
    bereft
    beret
    berets
    beretta
    berettas
    berg
    bergamot
    bergamots
    bergh
    bergman
    bergs
    berhymed
    berhymes
    beriberi
    beriberis
    bering
    berkeley
    berkelium
    berlin
    berliners
    berlins
    berm
    berms
    bermuda
    bermudian
    bermudians
    bernard
    berobed
    berrettas
    berried
    berries
    berry
    berrying
    berrylike
    berserk
    berserks
    berth
    bertha
    berthas
    berthed
    berthing
    berths
    beryl
    beryline
    beryllium
    beryls
    beseech
    beseeched
    beseecher
    beseechers
    beseeches
    beseeching
    beseechingly
    beseem
    beseemed
    beseeming
    beseems
    beset
    besets
    besetter
    besetters
    besetting
    beshrew
    beshrewed
    beshrews
    beside
    besides
    besiege
    besieged
    besiegement
    besieger
    besiegers
    besieges
    besieging
    beslime
    besmear
    besmeared
    besmearing
    besmears
    besmile
    besmirch
    besmirched
    besmircher
    besmirchers
    besmirches
    besmirching
    besmoke
    besmuts
    besnows
    besom
    besoms
    besot
    besots
    besotted
    besotting
    besought
    bespake
    bespangle
    bespangled
    bespangles
    bespangling
    bespatter
    bespattered
    bespattering
    bespatters
    bespeak
    bespeaking
    bespeaks
    bespectacled
    bespoke
    bespoken
    bespread
    bespreading
    bespreads
    besprinkle
    besprinkled
    besprinkles
    besprinkling
    bess
    bessemer
    best
    bested
    bestial
    bestialities
    bestiality
    bestialize
    bestialized
    bestializes
    bestializing
    bestially
    bestiaries
    bestiary
    besting
    bestir
    bestirred
    bestirring
    bestirs
    bestow
    bestowal
    bestowals
    bestowed
    bestowing
    bestows
    bestrew
    bestrewed
    bestrewing
    bestrewn
    bestrews
    bestridden
    bestride
    bestrides
    bestriding
    bestrode
    bests
    bestseller
    bestselling
    bet
    beta
    betake
    betaken
    betakes
    betaking
    betas
    betatron
    betatrons
    bete
    betel
    betelnut
    betelnuts
    betels
    betes
    bethel
    bethels
    bethink
    bethinks
    bethlehem
    bethought
    beths
    betide
    betided
    betides
    betiding
    betime
    betimes
    betoken
    betokened
    betokening
    betokens
    betonies
    betony
    betook
    betray
    betrayal
    betrayals
    betrayed
    betrayer
    betrayers
    betraying
    betrays
    betroth
    betrothal
    betrothals
    betrothed
    betrothing
    betrothment
    betroths
    bets
    betta
    bettas
    betted
    better
    bettered
    bettering
    betterment
    betters
    betting
    bettor
    bettors
    betty
    between
    betweenbrain
    betweens
    betwixt
    bevatron
    bevatrons
    bevel
    beveled
    beveler
    bevelers
    beveling
    bevelled
    beveller
    bevellers
    bevelling
    bevels
    beverage
    beverages
    bevies
    bevy
    bewail
    bewailed
    bewailer
    bewailers
    bewailing
    bewails
    beware
    bewared
    bewares
    bewaring
    bewig
    bewigged
    bewigs
    bewilder
    bewildered
    bewildering
    bewilderingly
    bewilderment
    bewilders
    bewitch
    bewitched
    bewitches
    bewitching
    bewitchment
    bewitchments
    bewrayed
    bewrayer
    bewrays
    bey
    beyond
    beyonds
    beys
    bezel
    bezels
    bezils
    bezique
    bezoar
    bhakta
    bhaktas
    bhakti
    bhaktis
    bhang
    bhangs
    bhutan
    bhutanese
    bialy
    bialys
    biannual
    biannually
    bias
    biased
    biasedly
    biases
    biasing
    biasness
    biassed
    biasses
    biassing
    biathlon
    biathlons
    biaxal
    biaxial
    bib
    bibasic
    bibbed
    bibber
    bibberies
    bibbers
    bibbery
    bibbing
    bibbs
    bibelot
    bibelots
    bible
    bibles
    bibless
    biblical
    biblically
    bibliog
    bibliographer
    bibliographers
    bibliographic
    bibliographical
    bibliographically
    bibliographies
    bibliography
    bibliomania
    bibliophile
    bibliophiles
    bibliotherapies
    bibliotherapist
    bibliotherapy
    bibs
    bibulosities
    bibulosity
    bibulous
    bicameral
    bicarb
    bicarbonate
    bicarbonates
    bicarbs
    bicentenaries
    bicentenary
    bicentennial
    bicentennially
    bicentennials
    biceps
    bicepses
    bichloride
    bichlorides
    bichrome
    bicker
    bickered
    bickerer
    bickerers
    bickering
    bickers
    bicolor
    bicolors
    bicolour
    bicolours
    biconcave
    biconcavity
    biconvex
    biconvexity
    bicorn
    bicornes
    bicorporal
    bicorporeal
    bicultural
    biculturalism
    bicuspid
    bicuspids
    bicycle
    bicycled
    bicycler
    bicyclers
    bicycles
    bicyclic
    bicycling
    bicyclist
    bicyclists
    bid
    biddable
    biddably
    bidden
    bidder
    bidders
    biddies
    bidding
    biddings
    biddy
    bide
    bided
    bider
    biders
    bides
    bidet
    bidets
    biding
    bidirectional
    bids
    biennia
    biennial
    biennially
    biennials
    biennium
    bienniums
    biens
    bier
    biers
    biff
    biffed
    biffies
    biffing
    My Profile

Trackbacks

  1. [...] the equation for becoming rich is quite simple. The less you owe, the more you are able to save. Think about how much money you [...]

  2. [...] have fully funded your emergency fund, you should allocate money for it in your monthly budget. Building an emergency fund takes time, and you may need to do it in increments. We recommend that you start with a small [...]

  3. [...] putting it into practice may take a little more work. However, I’ve broken it down into an easy to follow plan to debt freedom that will have you sipping cocktails in Aruba in no time. So, now you know the secret to building [...]

  4. [...] only real way to win this game is to not play.  To do that, make a zero-sum budget, become debt free, don’t buy things you can’t afford, and don’t go back into debt for any reason.  [...]

  5. [...] If you are in debt, start by cutting your expenses.  Determine which creditors you would like to pay off first, and allocate all of your extra income toward them.  Some people choose to use debt consolidation services, but make sure to read all debt advice terms before agreeing to them.  There are plenty of resources to get help.  The most important thing to do is to learn to be happy living below your means. If you can do that, your money problems will eventually take care of themselves. [...]

  6. [...] the funds that were used for your new water heater.  As Greg explained in our post entitled “How to Become Debt Free,” we believe that you should start with a $1,000-$3000 emergency fund until you are out of [...]

  7. [...] The starving artist lifestyle really wasn’t a ton of fun when you had to figure out how to pay your bills. Then, it came time for me to begin repaying my student loans. Yep, I financed my entire education [...]

  8. […] So here we are, still in our imperfect house.  I take baths in my regular tub.  I put my dishes and pans away in spaces that make no sense for them.  I try not to pay attention to the things that bother me.  My kids are happy and safe here, and that is all that really matters.  I may not get my dream house now, but with every month that goes by, I get closer to my real dream: I’m one month closer to becoming completely debt free. […]

  9. […] spending more money on Christmassy treats, it’s important to take stock of your debt. This might mean popping into the bank to discuss your overdraft, or transferring outstanding debt […]

Speak Your Mind

*

CommentLuv badge