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Four Easy Steps to Debt Freedom

By Edited Oct 5, 2016 3 2

Step One: Create a Budget

Stop the bleeding and take control over your finances

For many people, it would be easier to build a dam than a budget.  I said it. A budget.

But you're going to have to put one together if you ever hope of becoming debt-free.  Start now, so you can control the flood of money that comes through your hands every month.  Here's how.

Hoover Dam(112916)

Many people dread the word 'budget;' they fear its connotations of restriction and "no-fun."  Don't fall for this trap.  Budgeting your money is just telling it what you want it to do.  Like a coach knowing the plays before the game begins, you tell your money the 'game plan' before the month begins.

It's real simple, actually:  

Start with a sheet of paper.  Write down all your monthly expenses and all your sources of income, and the amounts of each.  You can also use Dave Ramsey's template from the book "My Total Money Makeover."  I did, and I love it!

Take your total income, and subtract each payment you have to make, beginning with the four pillars of your financial life: Food, Shelter, Utilities, and Transportation.  These are must-haves, so start there.  You can't focus at work if you're starving because you didn't bother eating properly.

After you put another item on the budget, subtract that amount from you available income. This is how much you have left. Do this until all your expenses have been paid, then move on to your debts.  Put your debts in there from smallest total amount owed to the largest.  When you run out of money, draw a line. Above this line is what gets paid this month. The rest will have to wait until next month. Stick with me, it gets easier as you go along.

Step Two: Build an Emergency Fund

Prevent disaster before it strikes with a small emergency fund

Once you've put your budget in place, swear to your spouse or some other accountability partner that you WILL NOT BREAK IT.  Sticking to your budget is important, because it forms the foundation for everything else you will do with money.  And if you need to change it, go ahead - you wrote the thing after all.  Just don't change it after the fact. Discuss whatever changes you want to make with your spouse or accountability partner, and then go for it. To become debt-free you must stick to your budget.

Emergency Fund(112917)
Set up some barriers around your finances with an Emergency Fund.  Start with a goal of $1000.  Get this done as quickly as you can.  Go, go, go! Sell some stuff, take on a part-time job if you have to.  Just get this done quickly.  Get this money in a savings account, and don't touch it.  It's for EMERGENCIES.  Not pizza, not a new purse, and not a night out on the town. 

Emergencies are things like a new radiator, or new tires for your car. Having to pay your insurance deductible because some bozo ran into you at the stoplight counts.  So does having to travel for a relative's funeral.  Think of it this way: 

Emergencies are things you HAVE to spend money on, but you really wish you didn't.  Got it? Good.  :)  See??? This money stuff is easy.  

Keep reading to learn how to prevent further disaster on your way to becoming debt-free.


Step Three: Cancel Your Credit Cards

Yes, really. You MUST do this next step.

Let's start with the hard part first.

Call each of your creditors (credit cards, loans, etc.) and tell them to close the account.  If they ask why, tell them you're going to become debt-free and you won't need their 'services' anymore.  This may trigger an 'escalation' of your call to a more experienced call center representative.  They probably will push back, and pretty hard - your account means money to them.  Don't let them sway you, however.  Your account also means money to you, if it's closed.  So go ahead and close it.  They won't go down without a fight. Do it anyway.  Nobody ever got rich off credit card miles, anyways.

Now, cut up all your credit cards.  Even the one in the freezer.  I used to hide one in the freezer so I wouldn't be tempted to use it.  Guess what?  I was tempted.  But when I cut up all my credit cards, guess what happened to all that temptation?  It went away.  It will go away for you, too, because you can't be tempted to use something that you don't have.  And since you called and closed the account, you can't just call up and order a new piece of plastic.  That won't help you become debt-free, anyway, so don't bother.  

Choosing Cash

Stay committed, you're doing great!

With your emergency fund in place, you don't need to hang on to these anymore.  Screw the points, most go unredeemed anyways.  Research shows you'll pay 10% more when paying with credit than debit or cash, too.  Why do you think McDonald's started accepting credit cards? Because they found that the average ticket went up nearly 40%!!  Take note: their average ticket went up not because they raised their prices, but because people actually felt less pain in their brain centers when using credit cards than they did when using cash.  Trust me, there has been enormous amounts of research conducted by the credit card companies to learn how to convince people to use their products more.  Don't fall for this trick, remember, you are strong.  (repeat after me: I am strong, I am strong, I am strong...)  Good.

That was easy.  Smile, this is fun!  You're well on your way to becoming debt-free!!

Step Four: Create Forward Momentum

Use this tip to pay off your debts faster than ever

Forward Momentum

To create momentum, you first have to get moving in the right direction.  You did that in the first step, by creating your budget.  

Now let's put those math skills to work for you.

With your list of debts in hand, organize them by their total balance, from smallest to largest.  This is the order in which you'll pay them off.  

Let's not get sidetracked with all the fancy math and online calculators available to us.  Most of us can do high school math, but that's not what the problem really is here, no sirree.  People who are debt-free don't know more math than others, they just created a plan, stuck with it, and paid off all their debts systematically.  

Gather together every dollar you can legally get a hold of after you've paid your living expenses and set aside money to live the rest of the month on, and let's PAY OFF A DEBT!! (at least a major chunk, depending on your personal situation).  If you have any money left over, then lucky you, you get to pay down (or off, hopefully!) another debt.  Keep going until you have paid down as much as you possibly can until next payday, then repeat the fun and games.

After each debt is paid off, do a little dance.  Shout out loud, "Another one bites the dust!"  Have some fun, you're on your way to becoming debt-free!!

So what happens next month when you don't have so much debt to pay down?  

Here's where you pick up some major speed.

Let's say your smallest debt was $50.  And now in your budget, you have an extra $50 floating around.  Take that money and apply it to the next smallest debt.  Do this every month, for every bill you owe, until at the end, you're paying HUGE amounts towards just a few debts.   

At this point, you may be wondering: can I do this?  Yes, you can.  An ancient Chinese Proverb states: "A journey of a thousand miles begins with a single step."  You are on a thousand-mile journey.  Take that first step.

Write in the comments below how your budget and journey to becoming debt-free are working for you.  I'd love to be able to help if you have any questions, and most importantly to celebrate your freedom from debt!

Thanks for reading.




Oct 11, 2012 11:56am
Great tips about how to stay out of the 'debt trap'. Thumbs up!
Oct 11, 2012 12:00pm
Debt was a very destructive force during an earlier part of my life. Thanks for stopping by!
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