When you’re in debt, there are so many consequences. For example, if you’re not debt free it may be difficult to get a car, a home or even a job! That’s right, some employers will check your credit before they hire you.
If you’re in debt, there are steps you can take to become debt free. In this guide, you’ll learn how to:
- How to become debt free without feeling the pinch
- How to stay out of debt so that other aspect of your life will be easier
- Tips and tricks for budgeting and living within your means
It’s time to get out of debt. Here’s how to do it!
1. Find out how much you’re really making
Your employer may have given you an hourly rate, or you may be employed on salary. Either way, you may not be getting paid as much as you think you are. Once you factor in taxes, for instance, you’re probably making far less than your job description promised.
You’ll also need to factor in the days and weeks that you don’t work. As an example, if you’re an hourly employee and you get a week or so off for a summer holiday or the winter holidays, you obviously won’t be paid.
Sit down with your income statements or pay stubs and determine just exactly how much you’re getting paid each year. Then, divide that amount by 12 and you’ll have your monthly income. That’s what you’ll use as a baseline to work with.
- You’re probably not being paid as much as you think you are
- This is especially true for hourly employees
- Sit down and figure out your true annual income, then divide by 12 for a monthly baseline
2. Figure out exactly how much you need each month
There are basics that you’re absolutely going to need to pay for. Your rent or mortgage, your utilities, your student loans (possibly – we’ll talk more about this later) and paying down your debt are just a few examples. You need to find out exactly what you need to earn each month just to cover the basics.
Budget it all out on paper. Go back through your bills or contact your utility provider to find an average cost of water and electric. Remember – this is just the basics. Rent or mortgage and car note for instance. Do not include food, childcare, cable, cell phone or other “extras.” There are lists available online to help make sure you list them all.
Add all of the basics together and this is what you need to be earning each month to stay debt free. Hopefully, you are! If not, you’ll need to make some adjustments.
- Make a list of the basic costs of living that are essential to you
- Do not include childcare, entertainment or even food
- The basics are fixed costs that can not be changed
3. Know what your debts are
If you’re in a nation where you can get a copy of your credit report, do it today! If not, talk to a representative in your area who can look into your financial portfolio to determine precisely what your debts are.
You may owe a monthly amount for a credit card. You may have back due taxes. Amounts in collections with a third party agency. Some odd amount an old landlord says you owe. It could really be anything from an old eviction to a movie of the month club.
Find out exactly what you owe, and to whom. Is there something you can pay right now? Today? Do it! This will help you become debt free faster – after all, that’s one bill out of the way, right? But knowing exactly what you owe will help you know exactly how much you’ll need to set aside toward bills each month.
- Get a copy of your credit report or speak to an attorney about finding out exactly what you owe
- You can’t be debt free if you don’t know what your debts are
- If there are bills you can take care of today, go ahead and do it!
4. Find out what you’re spending money on
Each month – or day, if you like – keep track of where your money is going. You obviously need to know what you’re spending money on in order to find out where you can save it. Write down everything – your bills, sure. But don’t forget about the pack of peanuts at the gas station and the tip you left to the barista at the coffee shop. Every. Single. Dollar.
Only when you know the “extra” stuff you’re paying for will you be able to determine where you can cut back and what your daily expenses are truly like. You may be surprised to learn what you’re spending your hard earned cash on. From movie tickets to cigarettes, every dollar you spend counts.
- You can’t put money aside until you know where it’s going
- Keep track of every dollar you spend for a month or two
- You’ll be surprised to learn how the little expenses add up quite quickly!
5. Check for debts you don’t recognize
You’ve probably heard of the many instances of credit fraud and identity theft all over the world. This is more prevalent in some nations than others, but it could very well happen to you!
If you see debts you don’t recognize, you’ll have to find a way to dispute them. Depending upon where you’re from, this may be through contacting the lender, through a dispute with the reporting agency or even with an attorney.
It’s important that you don’t just pay these debts or ignore them entirely. Fraud is a real thing, and someone out there took out loans or created accounts in your name, he or she can do it again! Get to the bottom of it, as continued fraud will never lead to a debt-free life.
- Be sure you recognize each of the debts on your record
- If you don’t, do your research as you may be a victim of fraud
- Fraudsters will prevent you from ever being debt free
6. Are you earning enough?
In some cases, people get into debt because of poor financial planning or decision making. In other cases, it’s simply because they’re not earning enough. Bills pile up and loans are acquired, making the amount of debt that much larger.
You need to honestly evaluate whether you’re earning enough money to cover your expenses. If you’re not, it’s okay. You have a few options. The first option is obvious: find a new way to earn income. Begin applying for higher paying jobs or pick up a side gig or two. We’ll discuss this more later.
The second is also obvious, but may seem difficult at first: you lower your expenses. This may mean moving, negotiating with utilities companies or trading in your vehicle for a less expensive model.
The point is this: if you don’t have the means to support your current expenses and lifestyle, you’re going to need to make it so that you do. Otherwise you’re not going to be debt free, as you’ll continue to accumulate bills and loans just to make ends meet.
- You need to determine if your income is enough to support your lifestyle
- If it’s not, it’s time to make some changes
- You’ll never be debt free if you’re earning too little to pay the bills each month
7. Determine what expenses are flexible
Your rent or mortgage probably isn’t going to be negotiable. In fact, those costs may even go up. However, there are expenses that you may think are fixed costs that really aren’t. Take childcare, for example. Childcare is super expensive if you’re bringing your kids to a daycare center or a private school. To save money, look into a group childcare share or home daycare options.
Your food budget is another. Do you really need to eat out three times each week? Even when you’re home, it’s almost guaranteed that there are ways to cut back on food costs. We’ll discover a few of these in later sections.
Transportation costs – do you need both vehicles? Sure, you may not be driving both, but you’re still paying for insurance, taxes, registration and maintenance on both cars.
Entertainment is a huge one. People pay for Netflix and Hulu and HBO and cable and internet. You don’t need all that! The same goes for your cell phone. Look, back in the days before Android we did survive. Our GPS system was called a map. We didn’t have internet on our phones – in fact we didn’t even have internet for a very long time.
Re-evaluate your expenditures and be honest with yourself – what can you do to make your cost of living cheaper to help you get debt free?
- Some expenses that you think are fixed are really not
- Entertainment and cellular service are good examples of this
- Even childcare, food and transportation costs are flexible if you do your research
8. Consolidate your student loans
It’s not uncommon for a college graduate to have two or more student loans they’re paying down each month. Sometimes, a graduate will have as many loans as one per year of school attended!
Now, it may seem that that makes sense, but in all actuality, it is a huge problem. See, as you’re paying off your student loan debt, the loan agencies will first apply your payment to your interest rather than your principal. That means you’re literally going nowhere, or progressing toward being debt free at a snail’s pace.
Talk to lenders about consolidating your student loans. This might be as simple as a phone call and a few signatures if your loans are all through the same lender. If you used multiple lenders, you may need to speak to a third party agency to consolidate your student loans.
When you consolidate your student loans you’re increasing your ability to pay toward the principal on your loans and not just the interest. That will make if easier for you to pay the loans off and be on your way to becoming debt free.
- Most college students and graduates have well more than one student loan
- When you pay your monthly loan payment, you’re mostly paying on the interest
- Pay more on the principal – the actual loan amount – by consolidating your student loans
9. Examine your mortgage
If you’re a homeowner, you may want to consider your mortgage to see if you can bring your monthly costs down. There are a few ways that this may benefit you, including a lower interest rate, a shorter mortgage term or lower monthly payments.
Simply using rough numbers and not including interest, let’s assume you owe $30,000 on your home that you’ll need to pay off within the next 15 years. After talking to the lender, you may be able to refinance that principal to allow you to pay off $30,000 over 20 or 30 years instead. That can literally halve your monthly payment.
A more favorable interest rate will also be an obvious benefit to you. If your credit has improved, or if standard rates have dropped since you first obtained your mortgage, you can apply to take advantage of lower monthly rates.
Here’s the trick to becoming debt-free. If you do qualify for a lower monthly payment, plan to pay the same amount as you’ve been paying all along. That way your payments will be going more toward principal than interest and you’ll pay it off more quickly!
- Refinancing your home loan is a good way to reduce your monthly payments
- When you do reduce those payments, plan to pay the same amount as you have done
- Doing this, you can be debt free in as much as half the time!
10. Examine your vehicle expenses
If you’re driving a Porsche but have a Pontiac budget, it’s time to rethink your car. Take a look at what you’re paying for your car loan each month and see if there’s a way you can bring that amount down. Trade your car in for a smaller vehicle, or refinance your auto loan in the same way you would a mortgage.
But be sure to think beyond the loan! Sports cars, for instance, have higher insurance premiums and sometimes higher repair costs. Large trucks will cost you more for fuel than a compact car or sedan. Local taxes may be higher for one type of vehicle than another. Calculate exactly what you’re paying each month and figure out how you can bring that amount down.
As with any of your other loans, to become debt free, plan to pay the same amount that you’d been paying previously. This will allow you to pay off your vehicle more quickly and own your car or truck free and clear.
- You can refinance your car in the same way you’d refinance any other loan
- Try for a better interest rate or lowered monthly payments
- Pay the same amount you were previously paying each month and own your car debt free more quickly
11. Cancel your credit cards
Do it today, if you can. Some credit card issuers won’t allow you to fully cancel until your balance is paid in full, but at the very least cut them up or shred them and don’t make any more purchases. Then, as quickly as possible, pay off the remaining balance and cancel the account.
Now, if you’re in the process of looking for a new house or similar, it may be in your best interest to have one account open. Keep that account’s spending at $0, though, to avoid getting yourself into further debt.
To put it simply, to be debt free you should avoid lines of credit that will get you further into debt. If you must, keep one credit card open and hand it to your mom or your sister for safekeeping. Only use it in case of emergency, like medical expenses or auto accidents. Hopefully, you’ll never need to!
- Credit cards are a leading cause of debt all around the world
- Cut up your credit cards to avoid the temptation of spending
- If you must, keep one open line of credit but don’t keep the card accessible
12. Make more money
This is another obvious way to become debt free, but making more money doesn’t necessarily mean you need to quit your job and become a lawyer. Instead, why not find a few unconventional ways to pay down your bills?
Now that you know exactly what your bills are, it should be easy to begin paying them down. But with what money? You already know your paycheck covers just the basics. Where is this extra cash going to come from?
Well, you can feel free to use your imagination! You can walk dogs or tend gardens. You can be a freelance graphic designer if design is something you’re good at. You may choose to rent out a room in your house, or even your garage if you’re not using it. Someone can use it as a workshop, right? You may even choose just to sell some of your old things.
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It doesn’t really matter how you make the money, so long as it’s legal and that you put it aside. If you need to, open a separate bank account dedicated solely to paying down your bills, and deposit earnings from your side gig into that account as you earn them.
- You don’t have to get a new job to make more money
- You can create a side job doing what you love
- Be sure you’re using the money you earn from your side job to pay down your debt
13. Speaking of separate accounts…
It’s probably a good idea to get a separate account anyway. That way, as you begin to cut back on your expenses, you can be diligent in transferring what you would have spent into that account. For instance, imagine you cancelled cable. That’s probably around $80 per month you can put into this new “debt free” account. Simply commit to the transfer and your savings will grow very quickly.
It’s not just cable and cell service, either. Cut back in little ways. Quit smoking. Make your coffee at home. We have listed oodles of ways that you can cut back on day to day living expenses on this site. As you read through our guides, choose a few you like. Then, instead of spending $4 on coffee each day, you’ll be able to transfer $20 each week into your new account. That’s over $1,000 each year!
If you like, you can automate this process. There are certain savings accounts that will automatically withdraw from your checking each week, bi-weekly or each month. Calculate what you would have been spending on extras and have that amount automatically deposited into your new account. One and done!
- Set up a separate account that’s dedicated to saving to become debt free
- Deposit what you would have been spending on a gym membership, streaming video or anything else into your new account
- There are some savings accounts that will automatically do this for you
14. Try snowballing your debt
Again, you now know what your debts are. It’s time to tackle them in a logical order, right? Why not try snowballing them?
To snowball your debt, you’ll need to list each of your accounts from minimum to maximum total. Your minimum could be something as small as a library fine. Your max is probably something like a student loan or your mortgage.
Cut back on your monthly spending in the way we talked about in previous posts, and then deposit the savings into your new account. Continue to pay your normal obligations like credit card bills, mortgage payments and student loans, but just the minimum.
Now, if you’ve followed the steps above, you’re going to have some excess income. You’ve been depositing that income into your new account. Once you hit a dollar amount that allows you to pay off the smallest bill, pay it! You can then cross it off your list and move on to the next one.
You’ll still set aside the same amount of money each month. Just because one debt is paid off doesn’t mean you have extra cash in hand. Instead, deposit it into your new account until you have enough to pay off the next biggest debt, and so on. Before you know it, you’ll finally be working on your largest debt and well on your way to becoming debt free.
- Snowballing your debt is a very effective way to become debt free
- You’ll need self-discipline to use the snowball method
- There are many resources online that go in-depth about the snowball method of reducing debt
15. Avoid debt consolidation companies
There are companies out there that promise they’ll consolidate your debt, raise your credit score and have you sneezing rainbows … all within a month! Please do your research before you hire one of these firms. Sure, there are legitimate companies out there who will negotiate with the people you owe money to. But a vast majority of these people operate in a sketchy way. Here’s what we mean.
A debt reduction agency will have you sign a contract, in which a certain amount of money will be drafted from your bank account on a predetermined schedule. This money is supposed to be used to pay down your debt, once it accumulates to a certain point.
Of course, there is a fee for the service – after all, they’re doing work for you! They’re contacting the people you owe money to and trying to talk them down into forgiving or settling your debt. Meanwhile, your “savings” account is growing.
However…
Many people who have used these services say they simply don’t do what they say they’re going to do. They collect their “fees” and never do the work of negotiating your debts.
Folks, you can do this yourself! You can take money and put it aside into a savings account while you talk to the people you own money to. Try to see if you can reach a settlement amount, or if you can pay in full and have the item removed from your credit report.
What’s more is that you’ll be earning interest on the money you deposit into your new account rather than paying money to someone who doesn’t do anything on your behalf. Yes, debt is overwhelming, but you most certainly can do it yourself. Information is available online, at your local library and even through social media as to how you can DIY the debt reduction process without hiring a third party scammer.
- Many debt reduction companies are scams
- Debt reduction companies usually offer no more than you can do on your own
- Research the DIY options to becoming debt free before hiring a third party
16. Ask family for support
You don’t need to set up a GoFundMe or beg your friends and family for money to help you become debt free. All you have to do is be honest with them and with yourself. Tell your loved ones that you’re trying to improve your life and become debt free. That means you’re also trying to save money and not overspend.
You’ll be surprised at the reaction you’ll receive. At first, your friends and family may “forget” and encourage you to go out for drinks on Thursday night or to dinner on Saturday. Stay strong! After a while, you’ll start to see a change.
Instead of a trip to the theater with your buddies on the weekend, your buddies will begin to suggest a stay at home “date” to stream the latest DC Comics movie. Instead of dinner parties, they’ll start suggesting pot lucks.
Everyone wants to live a better, debt-free life. Once your friends and family begin to see the changes you’ve made to your own finances, they’ll be quite supportive and want to follow suit!
- You need the support of your loved ones, but that doesn’t mean you need to ask for money!
- You can still hang out with the people you love, but you’ll find new and inexpensive ways to do it
- After time, they will catch on and probably do the same!
Conclusion
No one wants to be in debt. Unfortunately, debt does happen. So when you’re trying to become debt free it may seem overwhelming. With determination and discipline, you can reduce your bills steadily and surely until you’re finally living the debt free life you’ve always wanted!
