Lots of people think financial freedom comes from making more money. This is good but if your debt keeps eating away from your income, you are adding much more risk and you may actually just be treading in place, at best. No one can get you out of debt, but yourself. Even if someone gave you a million dollars to get you out of debt, you’ll eventually fall back into debt because you haven’t learned the principles behind a budget and how to limit your wants to within your financial capabilities. If you don’t believe me, look at the NBA and NFL stars who once had millions and somehow end up buried in debt. YOU have to WANT to get out of debt. This means no fancy cars, no vacations, no restaurants, no iPhone 7, no PS4, no concerts, no cable TV, not even new clothes. If you don’t want to be a slave to debt, then you’ll need to mentally prepare yourself for a battle.
Think of debt as your worst enemy, and you must prepare with a battle plan. So get your war face on and follow the plan below:
- This is a mind game. You need to come up with your “WHY” statement. You are more likely to complete a marathon or Spartan race when your purpose is well defined. Why are you wanting to get out of debt? What is driving you to sacrifice your worldly wants? Whatever that is, write it down and put it on your bathroom mirror so you see it EVERY single day. It sounds corny, but if you’re not always thinking about it, then you’ll slip up. For me, my “WHY” is to have the freedom to invest money into my retirement—so I can retire at 60 years old and just enjoy life.
- Create a budget. You have to know where your money is going to go every month before you spend it. Taking ownership of your spending is the only way to understand how to pay off your debt. Put a name to every dollar that you are spending. First start with the bare necessities: house, food, electricity, and water. Then it’s simply a math exercise. Take what you earn in your paycheck (take home pay) and subtract the necessities. What you have remaining is what we can put towards your debt and other expenses. For example, let’s say I make $3,000/month and after my bare necessities (house, food, utilities) are paid for I’m left with $1,200. It would be great to throw the $1,200 at my debt, but people still have a car, phone, and car insurance payments. Now it’s time to sacrifice your lifestyle. If you are paying ¼ of your take home pay to a car—sell your car. If you can’t use a bicycle, figure out how or use public transportation. If for some reason your life is dependent on car, buy a beater—just something to get you from point A to point B. Another rule of thumb is, if you’re paying more than 1/3 of your take home pay in rent—move to a cheaper place. Entertainment, clothes, or trips should not be in your budget—because you’re in a debt war and can’t afford that right now! To create a budget you can do it manually in excel or use some helpful software like mint.com or www.everydollar.com. These tools are free and mint.com allows you to connect your credit card(s), savings, and checking accounts so that you can track every single dollar you spend. I personally use mint.com
- Rank your loans from the smallest dollar amount to the largest. There are two schools of thought on where to start with paying off loans: a) Start with the smallest loan (regardless of interest rate) or b) Start with the highest interest rate loan (regardless of the amount). Dave Ramsey, who is famous for helping people get out of debt, suggests you start paying off the smallest loan first, and I agree with him. The reason is people get motivated after they pay off one loan, even if that loan is only a few hundred bucks. That first small win creates that intrinsic feeling of success and motivates people to keep paying off the next loan and then the next until they don’t have any more loans. Dave Ramsey refers to it as the “snowball effect,” meaning once you get going you’ll gain energy and passion to pay off your remaining debts.
- Start paying. Start paying as much as you can against the smallest loan while still paying the minimums on your other loans. And then once you pay off the smallest loan you move onto the next smallest loan paying everything you possibly can while still paying minimums on your other loans. For example, say I had three loans for $5K, $10K, and $15k and after my bare necessities I can pay $1,200 towards my loans. If the minimums for each loan were $100, I would put $1K towards the $5K and $100 towards both the $10K and $15K loan for five months. After five months, I would have killed one loan and only have two loans left to fight. So now I would put $1,100 towards the $10K loan and still $100 towards the $15K loan until I pay of the $10K loan. The key here is consistency. Keep the pressure on paying off your debt and do not let up!
- Automatic Payments. The idea was made famous from the book, The Automatic Millionaire, and it truly helps. Automate all your payments so you never forget to make a payment. But best of all, the decision to pay down your debt has already been made. You remove the temptation or at the least make it more cumbersome to not paying down your debt when you set up automatic payments. Once you get out of debt, a good tidbit is to start automatically depositing money into a savings account or investment account—this way the money that would’ve been used for paying off debt can now be used to build up your wealth!
- If you can’t trust yourself, cut up your credit card. If credit cards are what got you in this debt mess, then you can’t trust yourself. Cut it up! If you’re carrying a credit card balance—Cut it up! Credit cards do offer points and even cash back, but if you’re not paying it off every month then you are just fooling yourself into more debt.
- Sell Everything. To speed up the process of cleaning up your debt, do garage sells, sell stuff on craigslist, sell anything you don’t need to live. The more money you can throw to your debt the faster you gain financial freedom. Once again, you have to be willing to sacrifice your worldly wants to get back on track. It’s a matter of establishing your needs over your wants.
- More Money. For those whose take home pay is barely enough to pay for the bare essentials, this is an INCOME problem. You simply don’t have any extra money to spend towards debt after your house, food, and utilities. You need more money. After you sell everything you can to earn extra money, you now need to get a side job. Yup, time to sacrifice again. Even being a delivery boy/girl on nights or weekends making minimum wage can earn you an extra $500 to $1,000 a month. If this is truly a battle for financial freedom—what are you willing to do?!
So that’s the battle plan! I personally followed this plan and sacrificed a lot of fun, sold a lot, drove a beater, worked a lot, and basically put my “wants” on hold for two years to finally become Financially Free! It feels amazing and it truly is awesome to say I have NO DEBT. I now put my money to work for me. I’m now contributing to my 401K, investing in stocks and mutual funds, bought a nicer car, and bought a home. It feels great to be free to do what I want with my money!