Debt Free: Your Guide to Getting out of Debt

A dollar bill.

Save these so you can be debt free.

It is time to buckle down and become debt free. This is a step by step guide to getting out of debt.

Being in debt feels like you have a noose around your neck, like the weight of the world is on your shoulders, like you can’t do anything you want to do. You can’t travel like you want to. You cannot buy the things you want. You cannot renovate your house. I couldn't do all these things. That is a depressing picture. How can you afford to go on family vacations? How can you afford to buy nice things? How can you afford to remodel your house? You will be able to afford nothing until you get out of debt.

Enough is enough, you are not doing that anymore. It is time you did your research and come up with a plan to get out of debt, and never look back. If you are in debt and looking to live a more financially stable life, this article is going to help you tremendously.

Step 1: Get Your Family on Board

You need to get your family or significant other (or whoever lives under the same financial umbrella as yourself) on board with your plan. This is a critical step. If your spouse is not on board your plan will not be a success, because that spouse would spend money the way they have always done, and nothing will change.

If you have children, particularly older kids, you need to tell them the situation, so they understand why you are making sacrifices.

You can say something along the lines of, mom and dad are in debt, we are going to be tightening our budget to get out of debt. The sooner we do, the sooner we can fun things as a family.

A family of three having a conversation.

Be sure to emphasize that once you are out of debt, you can take fun family vacations, go on family outings, and afford toys that your kids want.  

For your own benefit, keep in mind that once you get out of debt you can update your home, buy a car, or work on projects you have wanted to start.

Make sure that your whole family is on board and they know what's happening because the process can be a bit uncomfortable and take a long time.

Step 2: Do Some Accounting

You need to sit down and find out how much debt you really hold. This is crucial because people tend to under emphasize their debt. You may think you have $10,000 in debt, but once you do some accounting, write out all your debts in a list, you may discover that you have way more debt than you thought, and that you did not understand how bad your situation was.

Write down all your debts. I recommend documenting them in a word document or an excel spreadsheet. The reason I recommend a digital medium is that I am going to have you order/organize your debts in the order you are going to pay them off.  It is easier to do that if your list is written in a computer program, because you can copy and paste.

The following is the information you need to collect for every single debt you have:

  • I need the name of the debt

  • I need how much you pay each month or how much your monthly payment is

  • I need to know your APR or interest rate for that debt

  • I also need to know how much you owe in total.

Coins stacked up in piles.

For example: If you owe two-thousand dollars on a credit card, write that down under the total column.

You can include your car and house payments in this list but leave them at the bottom of the list. Why? Because you need to focus on revolving debt.

Revolving debt is debt accumulated at will by the debtor; usually, the debtor needs to reimburse the creditor periodically. It differs from one-time loans such as mortgages and car loans. The most common example of revolving debt is a credit card.

You are going to focus on getting rid of revolving debt. There is no question that it is the most important debt to get rid of. After you have paid off your revolving debt, you can start to pay off your cars and house at an accelerated rate.

Step 3: Organize Your Financial Plan

Now that you have written out all your debt, it is time to put your debts in the correct order. You have two options for this.

You can either put your debt in order of the debt that has the least amount of payments left before it's paid off. Or you could put it in order of the highest interest rate or highest APR first.

I suggest organizing it by the lowest amount of payments left because the progress you make paying off a few lighter debts will motivate you to continue. The fewer debts you have, the easier it is to concentrate on the whoppers! I call this the snowball debt elimination plan; we will talk about it in just a moment.

You need to make sure you make the minimum payments on all your debts every single month. Do not stop paying off debts because you're trying the snowball debt elimination plan. You want to avoid late fees, interest penalties, or a credit score hit.

Most importantly: you do not want to pay more money than you have to.

Step 4: Introducing the Snowball Debt Elimination Plan

A man holding a snowball.

Take the item at the top of your list and imagine that it will take five months to pay off the entire debt with payments of 100$ a month. After you pay off that line of credit, you have an extra hundred dollars a month I was putting toward another bill. You take that hundred-dollar payment and put it toward your second line of credit (imagine that it is a student loan).  Say your current student loan payment is 50 dollars a month, so that when you add 100 dollars, you are paying 150 dollars; obviously, you will pay off that student loan much faster.

In fact, you will pay it off three times faster. If you follow this procedure properly, it can be cool how fast the debt disappears. It is almost like a game. This is what I call the snowball debt elimination plan.

Once you pay your student loans off (and it will happen quicker than you think because you now are paying off 150 dollars a month instead of just 50), take the 150 dollars from those first two lines and put it towards your third imaginary line which is a VISA credit card. Right now, you are paying 26 dollars a month. But at 11 percent APR, and 1000 dollars on the card, you will take a lifetime to pay that line of credit off. Remember that credit card companies do this on purpose.

Now you pay 176 dollars every month towards that credit card until you have paid it off, then move on to the next line of credit, and so forth, all the way down the list until you are debt free. Easy, right?

It is important to remember that this method (any method really) takes time. Maybe it will take two years, but it will be worth it. Do not get get discouraged.

Do not get into the mindset of, we're too far gone, we have too much debt, there's no way we can ever get out, let's not worry about it because there is no way I'd be able to get through it.

You can do this!

Step 5: Stay Debt Free

A key suggestion I highly recommend you follow, is to make sure you don't accrue more debt. Do not put money back on those credit cards. Once they are paid off, leave them alone.

If you put more money on those cards, you will ruin your progress. You do not want to get back into debt right after you have gotten out of debt.  Do not spend money using those cards; just make sure they're paid off.

A credit card during a transaction.

It is also important that you do not close the credit cards after you have paid them off. If you do, your credit score will take a hit.

I also suggest that you put any extra income in your budget towards your debt. And, I mean ANY extra money; the amount is irrelevant. If you pay off just a bit more than the minimum amount, that's great. You will still finish a bit faster.

Even if you only have five or ten dollars laying around, put it towards that first line of credit that you are paying off through your debt elimination plan. You will get out of debt-the snowball will be rolling-that much faster.

Step 6: Dedicate Any Extra Money to Debt Payments

You need to find extra money. I bet you are thinking, what extra money? I have none. That is why I am reading this article. It is very likely that you have extra money that you are wasting. Everyone does. I am wasting money right now. We will cover some of the low hanging fruit:

Number one is electricity.

A light bulb.

Do you leave your lights on? I’d bet that you have your thermostat set too high if it is winter or too low if it is summer. There are lots of ways you can energy save money on your energy bills.

There are tons of ways to save money and electricity. Make sure you get your family aboard to help you make sure you turn the lights off. Ask them if they would be comfortable wearing hoodies in the house because you are going to lower the temperature from 70 degrees to 60 degrees. Take any extra money that you saved over the previous month and put that money towards your debt snowball elimination plan.

Another item you can save on is the cable bill.

If you are paying for cable and have the money (and no debt), great. But if you're paying for cable, it's expensive, and you don't have money for it or you want to get out of debt, it is time to cut the cable bill.

There are so many alternatives in the form of Hulu, Netflix, HBO Now, etc. A lot of the networks are streaming On Demand via apps or via your browser. There are tons of ways to watch all your favorite shows without paying for your cable bill.

I would highly recommend cutting back on entertainment, even if it is just for the months you are eliminating debt.

Reassess your car payments.

Depending on your car loan’s APR, it may be a good idea to refinance your car. Refinancing can save you a lot of money per month depending on your monthly car payment and your interest rate.

Another thing I want to talk about is cell phone.

Quality cell service racks up very, very expensive bills. Check to see if your carrier is running any promotions. Alternatively, downgrade to a lower plan that still has enough minutes and data to cover your needs.  

Check with your cell phone provider and let them know that reassessing your finances but you are loyal to the company and want to see what they can do to work with your financial needs.

Your mortgage payment may be costing you more than it needs to.

The keys to a house.

I suggest that you investigate refinancing your mortgage because it could save you a few hundred dollars a month. It is possible that it could save you even more depending on the monthly mortgage payment and interest rate you have under your current plan.

This is a huge chunk of change. A few hundred dollars every month can go a long way. Your mortgage payment is probably your biggest bill of the month. Everyone's situation is different. People have different interest rates depending on your credit score and other variables. But it is worth a shot.

Step 7: Organize Your Finances Going Forward

Learn how to use/organize your checking accounts and saving accounts. There are plenty of different programs that will help you systematize your finances and put all the important information at your fingertips. Properly organizing your finances going forward makes a big difference. It will help you avoid ending up in debt. It will help you save money that you can spend on things you really love. My father kept all of his finances in an excel sheet; I do to. But there is automatic software that can do this for you. I like the feeling of control, knowing where my money is.

Financial programming software.

Avoid that crazy, cash-payment, envelope-system that people use to pay their bills. Keep everything digitized so you can just open up your financial history at any time, no matter where you are doing, and see what is going on.

It is nice to know what is going towards bills, or what you are saving for fun activities like vacations.

 

WealthIsaac Therriendebt