Are You Ready to Be Debt Free?
I remember the day it hit me like a ton of bricks. I didn't just dislike being in debt. I loathed it. I had reached my ultimate tolerance level, and wanted to rip the bills to shreds in a screaming rage.
That would have been very satisfying, but not especially effective. Instead, I decided right then that no matter what, we were going to have our debt freedom sooner rather than "eventually".
If you feel like that too, then let me help get you started. I'll be honest right here...we aren't debt free yet. But we wiped out over a dozen debts worth thousands of dollars in less than 2 years. And we did it by following these steps:
1. Have the Money Talk
If you are a couple, then it takes two to get into debt, and back out. Usually.
Sometimes two people get together and only one person comes with debt. Or maybe neither person had debts, but they accumulated after the relationship began.
No matter which situation you start with, you can't fix it until both adults have the money talk.
Note: This discussion should not be about pinning the blame for debt on either person. Focus instead on making the decision to get rid of the debt once and for all.
Once you've had the talk and gotten all excited about the prospect of being debt free, you start planning. But you can't make a plan unless you lay everything on the table.
Sometimes two people get together and only one person comes with debt. Or maybe neither person had debts, but they accumulated after the relationship began.
No matter which situation you start with, you can't fix it until both adults have the money talk.
- -Discuss how much you owe
- -Discuss how nice it will be to get rid of some or all of your debts
- Be honest about how much debt affects your current lifestyle.
- -Discuss income to debt ratio
- -Discuss the option of budgeting
- -Decide how to organize your debts and payments
Note: This discussion should not be about pinning the blame for debt on either person. Focus instead on making the decision to get rid of the debt once and for all.
Once you've had the talk and gotten all excited about the prospect of being debt free, you start planning. But you can't make a plan unless you lay everything on the table.
2. Get Naked
About your money, that is.
Get a notebook and seriously write down every single expense that goes out.
Think deep and hard about those little splurges, tiny debts, and small loans to friends as well as all of your major expenses.
Where to start? Start with some of these if they apply:
- Your utility bills
- Your monthly debt payments (loans, credit cards, mortgage, etc.)
- Monthly subscription or membership fees (even if you pay yearly)
- Gas
- Monthly grocery estimate
- Eating out expenses
- Entertainment expenses
- Non-food expenses (paper goods, toiletries, pet food, etc.
- Prescriptions and doctor co-pays
- Insurance
- Extras (salon trips, clothing, vet or groomers bills, etc.)
- Estimates for the "little things" that add up: ATM fees, late fees, penalties, donations, fast food or snacks on the go, compulsive purchases at the store each week, etc.
- Cost of gifts and parties on average
- Any monthly services you might use, such as lawn maintenance or housekeeping.
And of course, write down how much comes into your house every month on average.
Note: You can look through your old receipts to get an idea about all of your spending.
3. Find Your Outgoing-to-Incoming Ratio
Total up the outgoing number and the incoming number. Its gonna be a sad sight, most likely. Its okay to feel breathless and overwhelmed.
Its not impossible to fix what you see.
You can start by making a dot chart.
4. Make a Dot Chart for Your Expenses
Divide your outgoing expenses into two columns. The first are your actual debts. The stuff that can, eventually, be paid off.
The other half is living expenses. (You might want to include your mortgage in the living expenses, since it will usually be the biggest debt on your list.)
Pick out three markers in different colors. Go down the column of living expenses and put a different colored dot by items that fall into these three categories:
⦁ Stuff you can cut out completely
⦁ Expenses you can cut
⦁ Stuff you can't control or cut lower
For example:
A green dot beside things you can't control or lower (mortgage payment, internet, doctor's bills, etc.)
A red dot beside things you can try to adjust or lower (insurance rates, number of times you eat out, phone plans, etc.)
A blue dot beside things you could stop buying/using right now (magazine subscriptions, cable, etc.)
Now you can move start building your ideal budget...
The other half is living expenses. (You might want to include your mortgage in the living expenses, since it will usually be the biggest debt on your list.)
Pick out three markers in different colors. Go down the column of living expenses and put a different colored dot by items that fall into these three categories:
⦁ Stuff you can cut out completely
⦁ Expenses you can cut
⦁ Stuff you can't control or cut lower
For example:
A green dot beside things you can't control or lower (mortgage payment, internet, doctor's bills, etc.)
A red dot beside things you can try to adjust or lower (insurance rates, number of times you eat out, phone plans, etc.)
A blue dot beside things you could stop buying/using right now (magazine subscriptions, cable, etc.)
Now you can move start building your ideal budget...
STOP! It's Time to Create A Reward
5. Decide on a Reward
For a household to become debt free, everyone has to work together.
Here is the cold, hard truth: the journey to debt freedom is going to be very frustrating at times. It will be incredibly boring at times too.
And that is just for adults who understand the what's going on. If you have children, it's going to be even harder for them. They may not feel very enthusiastic at all about new spending rules or budgets.
This is why a reward should be part of the plan from the beginning. Essentially, being debt free is a reward in itself. The natural side-effect of being debt free is to have more money in your savings account, and hopefully a little more wisdom about managing it for the future.
But...that is also boring. Really. It is. Once you get to the other side, you are going to want (and deserve) a treat. Since you don't want to get back in debt, it's wiser to pick one single reward that everyone wants, instead of going on wild shopping sprees with your newly saved cash.
This will help immensely even if you don't have children. You and your partner will have times you want to give up on your budget too. Whatever reward you choose, put it in plain sight and talk about it often.
As you pay off debts one at a time, start budgeting in some savings for your big reward.
Here is the cold, hard truth: the journey to debt freedom is going to be very frustrating at times. It will be incredibly boring at times too.
And that is just for adults who understand the what's going on. If you have children, it's going to be even harder for them. They may not feel very enthusiastic at all about new spending rules or budgets.
This is why a reward should be part of the plan from the beginning. Essentially, being debt free is a reward in itself. The natural side-effect of being debt free is to have more money in your savings account, and hopefully a little more wisdom about managing it for the future.
But...that is also boring. Really. It is. Once you get to the other side, you are going to want (and deserve) a treat. Since you don't want to get back in debt, it's wiser to pick one single reward that everyone wants, instead of going on wild shopping sprees with your newly saved cash.
This will help immensely even if you don't have children. You and your partner will have times you want to give up on your budget too. Whatever reward you choose, put it in plain sight and talk about it often.
As you pay off debts one at a time, start budgeting in some savings for your big reward.
6. Make Your First Budget
You, and only you, can create the perfect budget for your needs. Those dots are going to give you some great inspiration though.
In fact, if you've gotten this far, you probably already have the skeleton of your budget in place.
Things to consider when making your budget:
When you write out your budget, be elaborate. Go through your dot chart and delete expenses you can comfortably live without for now.
Budget for how much you want to save. If it doesn't work the first time, you can tweak it as you go.
You can create a comfortable budget (that still allows for spending money) or go extreme. Just remember that the longer it will take to pay off all of your debt, the harder it will be to stick to a very extreme budget the whole time.
In fact, if you've gotten this far, you probably already have the skeleton of your budget in place.
Things to consider when making your budget:
- How much of your spending is non-negotiable (can't be lowered or stopped.)
- How much you want to put into savings for paying down debt.
- How much you want to put into a regular savings fund or emergency fund each month.
- How much of your negotiable spending (non-necessities) can you trim away?
When you write out your budget, be elaborate. Go through your dot chart and delete expenses you can comfortably live without for now.
Budget for how much you want to save. If it doesn't work the first time, you can tweak it as you go.
You can create a comfortable budget (that still allows for spending money) or go extreme. Just remember that the longer it will take to pay off all of your debt, the harder it will be to stick to a very extreme budget the whole time.
7. Adding Up Your "Saved Money"
Right now, let me say that the secret to paying down debt is to start doing it today. Don't wait for a perfect time to come around...create a budget, trim down your spending, and start applying that saved money to your debts right now.
If you go through your dot chart and are able to cut out a lot of expenses (really easy on paper) then you can add those numbers up and see how much you will theoretically save each month.
That is your magic number. The number of extra dollars that you will have in your bank account.
Now, what are you going to do with them?
If you go through your dot chart and are able to cut out a lot of expenses (really easy on paper) then you can add those numbers up and see how much you will theoretically save each month.
That is your magic number. The number of extra dollars that you will have in your bank account.
Now, what are you going to do with them?
8. Setting Up Your Payment and Savings Plan
Now it is time for The Plan. How are you going to pay down your debt? There are several options:
1. Paying off the smallest debt first then rolling that extra cash towards the next biggest debt.
2. Paying down the largest debt first.
3. Paying down the debts with highest interest rates first.
4. Paying the oldest (or newest) debt first.
5. Paying extra on all debts.
6. Paying based on personal sense of urgency (i.e. paying medical bills or private loans from relatives first).
Which method you choose is highly personal. The good news is that if you don't like the plan you start with, you can always change it as you go.
This is also the time to consider your savings account. You might want to put every penny towards debt, but you could end up deeper in debt if some unforeseen emergency happens and you have no savings.
Many gurus recommend having a certain, set amount in your savings before you start working towards debt payoff. How much is up to you.
The only problem with building your savings before you start paying off debt is that you are delaying your plan. Another option is to simply add your savings number into your budget for each month.
You can also dedicate a percentage of any extra money you make towards savings. This won't start you out with a comfy financial cushion, but if you stick to the plan, you should see your debt going down and your savings going up each month.
What if you have more than one savings account? You have to decide if you are going to continue to add money to different accounts such as retirement or college funds. Whatever you decide, don't forget to add it to your budget!
9. Stick To The Budget
The hardest part will be sticking to your budget for the long term. In the beginning it's really exciting, but after a few months you may start feeling some budget burn out.
Battle this by:
- Keeping your financial goals in mind.
- Visualizing that sweet, sweet reward.
- Tracking the progress you've made so far.
- Occasionally treating yourself with something inexpensive and fun.
- Join groups of other people who are working on similar goals. Support each other!
10. Bring In Extra Income
This is a lot easier said than done. I heard the groan, and I feel ya.
But boosting your income will help you pay off debt faster than simply cutting out a few trips to Target.
There are tons of ideas out there for earning some extra cash. Most of these though are just one time things (selling your stuff), but they can help you get motivated.
Side hustles are a popular way to earn income. These are basically odd jobs that you do on or offline, and some can turn into a steady cash stream.
Some popular online side hustles include:
- Blogging
- Freelance writing or design
- Selling art
- Selling crafts on Etsy
- Working as a virtual assistant
- Filling out surveys
- Microtasking
No matter how little you bring in, it can help. Even 45 dollars a month can knock off a considerable amount of small debts over the course of a year if you stick with it.
11. Pay Off Your Debts
Well, duh! Right? Yet there a lot of people who start out with good intentions, then sort of accidentally forget to apply the extra money towards debt.
Your brain will come up with all sorts of uses for the extra cash at first. It will whisper to you in line at the bank..."Shouldn't we buy that new bedspread now, before we knuckle down to this budget thing? Ours is sure looking shabby..."
When that doesn't work, it will switch to guilt..."What if we need this for something later this month? What if one of the kids needs something? We should save it for awhile...just in case."
Whether that little voice is urging you to spend on a "necessity" or squirrel the money away for a rainy day, you will have to learn to tune it out.
Stick to the plan, spend wisely, save well, and don't forget to send those payments off before your brain can argue.
Does it work? You bet! It has been over 18 months since we sat down and decided to eradicate debt from our lives with serious dedication. It has been slow and not-fun. We have made progress, then lost ground. By sticking to the plan though, we eliminated all debts except our mortgage.
You. Can. Do. This!
Don't forget to grab these free printables!
You. Can. Do. This!
Don't forget to grab these free printables!
|
|
|
Right click, save and print as many copies as you need. What you see here:
- Financial journal page (for tracking your thoughts, frustrations, achievments, etc.
- Debt overview chart
- Blank list template (use for tracking or organizing anything in your budget binder. You can open the image in PicMonkey and add your own text in just a few seconds for custom list pages.)
Do you think being debt free would make your life better?
|
And check out this post for a list 25 Personal Finance Blogs that will keep you motivated and educated through your debt freedom journey!
RSS Feed
