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You can get out of debt, it’s possible but not easy. You’ll feel rich and powerful once all that nasty debt runs away from you but for that, you need to take some strong decisions TODAY! I’ll try my best to make things simple but you’ll have to listen to what I say.
Getting out of debt is all about making the right decisions and acting on those right decisions with full force.
Below I’ll be discussing a few key points on how to get rid of debt, then I’ll teach you how to make decisions that will make sure your financial situation doesn’t turn into a disaster again. But first, let’s talk about our bad friend debt.
How debt can negatively impact your life
Debt is like a sugar-rich chocolate bar. It’s tasty, makes you feel amazing but it does worse than you wish it would.
Debt Encourages you to Spend More
We all like free money, and that’s exactly what debt makes us feel about money. It gives us false hope by encouraging us to spend money we don’t have.
The feeling of getting something for nothing is awesome but eventually, you’ll have to pay what you took and more (interests). And trust me paying someone your hard-earned cash isn’t a good feeling.
Debt Leads to Stress & Medical Issues
We worry about the little things in life, naturally, we will worry about our biggest expense debt! Thinking and planning about how you could pay off all your debts is a stressful and very difficult thing to do. The stress caused by debts can lead to health issues.
All this leads to more medical expenses, more stress and less money to wipe out debt from your life. The deeper you’re in debt, the more likely you are to face problems.
Debt Can Affect Your Social Life
You’re stressed, worried, trying to figure out a shortcut to eliminating debt forever, in all this your social life takes a toss too. Anytime your friends, family, spouse tries talking to you, you react furiously because you’re stuck in debt.
I’m sure you’ve come to realize the ill effects debt can have on your life. However, it’s not permanent, we can work hard and come out of this situation joyfully.
Debt-Free Living Is All About Speed
The most common form of debt people possess is Mortgage, it’s also the largest loan most individuals take in their lifetime. How fast can you pay off these loans? The longer you’re stuck in this debt trap, the more you’ll end up paying the banks through interests.
So your primary has to be to pay off your debts in the fastest time possible. This means no investments, no spending on anything unnecessary. All your money should be diverted to getting rid of loan payments.
Some people drag their loans for 20 or 30 years by paying the minimum amount each month. That might seem comfortable but what’s more comfortable is not having to pay someone else more money than they should be making. Let me explain.
If you have $2,00,000 of debt at a 5% interest rate for 20 years. If you follow along this path, at the end of 20 years, you’ll be paying a whopping $1,16,800 in Interests.
But let’s say you decide to do things with speed, you want to be debt-free in 5 years, you’ll then be paying $30,000 in interest. (values are approximate)
What do we understand from these two-time frames? We took the same amount of debt – $2,00,000 but we would pay almost 4 times the amount we would pay if we become debt-free in 5 years.
My question to you is, why do you want to pay so much money to someone when you can keep this money for yourself. Think about it…
Is it Possible to Live Without Debt?
Tackling debt is just like losing weight to get in shape. Ask any nutritionist and they help you make a good diet plan which you must follow strictly to lose some weight.
Similarly, if you want to get rid of debt, you need to pay it in full and ensure you never buy things on credit ever again.
If you use cash and spend wisely, you can easily get out of debt forever. but If you have no financial plan, tackling debt won’t be an easy task.
I’m willing to teach you how if you promise me to do it religiously! Keep reading…
7 Steps To Get Out Of Debt
1. Write Down Your Debts & Try Making Sense Of It
You need to be clear as to how much debt you currently have. Often we forget to pay off one of our credit card debts and thus end up paying penalty charges.
To avoid this, let’s write down all the debts you have taken that haven’t been paid in full yet.
Write the amounts, interest rates and time frame. Now think about why you took each debt and was it worth it! Thinking about a past debt and trying to make sense of the purchase is important as it helps you to not make the same mistake moving forward.
Generally, 70% of all debts are unnecessary and could have been avoided in the first place.
2. Get Strict With Yourself
Why are you spending so much money on things you can’t afford? Why are you making your life harder than it already is? The only way your situation gets better is by you being strict with yourself.
Force yourself to cut costs and make more money. Forcing and being strict is not the best way to handle the situation but it gets the work done.
You get any bonuses or incentives, they all go towards debt payment. Stay on a spending freeze, no you don’t have the liberty to spend a lot of money till you’re done with debt.
In this step, you need to convince yourself to pay off your debts asap and not waste money till you do that.
3. Pour Money In Your Emergency Fund
Before we start being aggressive with paying off debts, having a safety net like a fully-funded emergency fund is a must stop. Your emergency fund is going to be extremely useful when the days are dark. If you don’t have one yet, here are the steps to create an Emergency Fund:
1. Create a new savings account
Go to your bank and open a new savings account. The purpose of an emergency fund is that it should be available to you at all times, so putting your money in a savings account is the best way. It may pay you very less interest but it’s highly liquid (means you can withdraw money anytime).
2. Put 6 months of living expenses in this account
Most financial experts suggest anywhere from 3-6 months of expenses should do the job and while that’s great advice, you’re putting most of your savings towards paying your debts so you need to save at least 6 months of expenses in your emergency account.
If you want to put some more, feel free but don’t put less than 6 months in this account.
3. Never touch this savings account unless it’s an emergency.
An emergency fund is not an account for your daily needs nor is it for other expenses. Your budget should include all such expenses.
Your emergency fund is only for those instances where you need money and you don’t have it. It’s for real emergencies. So don’t touch this money unless you’re stuck in something big.
4. Customize Your Budget
Your debt payment plan is going to play a major role in helping you achieve Zero Debt. Creating a budget can easily help you repay your debt faster. That’s why I urge you to create a customized budget that is divided into needs and wants.
The simplest method to create a budget is following the 50/30/20 budgeting rule (with a few tweaks!) Now the 50/30/20 budget rule says that 50% of your income must be necessities, 30% should be wants and 20% should be savings. If you want to learn more about the 50/30/20 rule, check out my blog post on it below!
For anyone with a normal lifestyle, this budgeting system works perfectly, but you’re not in a normal situation, you’re in debt! All we need to do is use the same principles, tweak this budgeting system and solve our debt problem. Here’s how we’ll do it.
Step 1: Write down all your expenses (Only Needs)
I want you to write down all the expenses you incur in a month. Take some time, analyze, look at your bills and make a note of these expenses.
We’re talking about ‘Needs Only” so don’t include expenses like when you spent money on a burger or watched a movie. Once you have this number, calculate the percentage value.
Step 2: Wants will not exceed more than 5%
This is only a temporary situation. I’m not asking you to keep your wants under 5% forever, that’s dumb! Till you get to pay off your debt, it would be wise to cut down on any expense that isn’t helping you to wipe out debt.
Your monthly expenses need to be minimum and your credit card spending must be zero. So for some time, keep your wants less than or equal to 5%.
Step 3: Save some & Pay off debt
Now you’ll have a lot of money left due to all these extreme savings. Now you’ve got to save a small part of it in your bank account and put the rest of it towards your loan payments.
5. Get A Part Time Job
If you have $1,00,000 in debt and you earn $24,000 a year, you’re going to take at least 4 years before you pay off that debt, assuming you save as much as you can.
I don’t know who said this but it makes total sense, “You can only save as much as you make” so if you make $24,000, there’s no way on earth you’ll be able to save more. What you can do is make more money!
That’s why you must get a job immediately. Take up any job you get, be it before or after your real work, be it below your status or above. What matters is you get a job and start working enough to make a lot more money.
All this excess money from your second job will go towards your debt repayment plan.
Please don’t tell me you can’t get a job because you’re not qualified enough or because there aren’t any jobs. I know for a fact that no matter where you live, there are always jobs you can take up to make some extra cash.
You could be a delivery of food or products, you could be a driver, you could work as a teacher or a gym instructor or salesman or bartender or a receptionist.
There are so many more part-time job ideas I have, you can check them out here – 22 Easy Part Time Job Ideas. Working super hard is tough, but it’s a sacrifice you must make to get out of the debt trap.
But if you want to earn extra income by starting a business, feel free to do that.
Here’s a popular article that should help you make money:
If you want to be a freelancer, here’s your in-depth guide – How To Be A Profitable Freelancer In 2022
You can check out my other article to make money online – Make Money Posts.
6. Start Paying Off Your Debt Using Debt Snowball
Now that you have more money coming in every month (assuming you’ve taken up another job or starting a side hustle), it’s time to pay more than the minimum monthly payments you’re currently paying.
But instead of randomly allocating extra debt payments, try using the debt snowball approach. First, you’ll need to list down all your debts in order from the smallest to the largest.
Then your job is to put all the excess money towards paying off the smallest debt first. Let’s say you have 4 debts – $2000. $3000, $4000, $5000. You can make additional payments of $300 a month. You take this $300 and put it towards paying off $2000 completely.
As soon as your first debt vanishes, you should have more money to pay off your other debts fast. (minimum payment of debt 1 + extra money you’re willing to pay)
Follow this process till you finish paying off every single debt you ever had. Debt Snowball is designed in such a way that it helps speed up the debt-free process while motivating you throughout the journey.
7. Have Some Patience
Here’s where most people mess up. While working more hours, living frugally and using Debt Snowball will surely speed up your debt-free journey, you need to be patient.
Don’t get overexcited in the process of eliminating debt; you end up buying more things in credit thus falling into the debt trap again.
It’s natural to be happy seeing the progress you’re making, the money you’re bringing home each month is exciting! You need to be patient. After all, you got into debt because you made some bad choices. So be calm and be consistent.
How To Be Debt-Free Faster: 5 Simple Tips
Now I’ll share with you some tips that I feel will have a great impact on your debt payment plan. These tips will be simple, logical and most of all they will sync with the steps provided above. The equation for debt-free living is simple – Make More Money + Save More Money.
1. Stop Investing Money
You need to stop investing money for the time being. This is because you need all the money you can get your hands on to repay your debt.
Stop putting money anywhere and everywhere. All you need is an emergency fund (with 6 months of living expenses), a saving account (with little cash) and the rest directly goes towards debt repayment.
Don’t complicate things and waste time investing your money when you still have a debt to repay. Mathematically it does make sense as investing gives you good returns but money isn’t an emotional game is it! Once all this money is utilized to pay your debt, start investing.
2. Learn To Say NO
You and I have friends. These friends may call you out quite often for parties, celebrations, game night and so on. I want you to say NO to them almost all the time. That’s because you can work a part-time job or work on your business and earn cash.
You need to put your priorities before their priorities. Your goals aren’t the same as theirs, you need to achieve your dreams, right? So That means NO parties, NO dinners and NO expensive habits before you’re debt-free.
After you’re debt-free you can go to these parties but please don’t be a fool and spend too much. I don’t want to see you reading this blog post again to get out of debt. Once you’re out of debt, never come back 🙂
3. Follow The No Spend Challenge
Have you heard of the No Spend Challenge? The No Spend Challenge is a spending plan that refers to a period of time where you refrain from spending money on wants.
During this challenge, you’re allowed to spend on basic expenses like bills, rent, utilities and other necessities but you’re going to not spend on anything else.
It’s a fun challenge where you learn how to live frugally while being happy. Most people opt-in for a no-spend week or a no-spend month.
If you’re new to the whole ‘Let’s save money, I suggest you start with a no-spend week. Once you’re good at managing your finances, then follow the no-spend challenge.
I have a 30-day no-spend challenge printable that you can use. It’s free, just put in your email and it’s yours!
4. Use Cash or Debit Cards To Pay
You’ll always come back to debt if you plan on using credit cards. You need to take those credit cards and burn them down (for good). Your bad habits got you into thinking of debt and your credit cards provided you with funds to do it. Unlearning bad habits isn’t easy but what’s easy is destroying your credit cards.
This may be a tough process for you if you’re the guy relying on credit money each month but it’s necessary so you’ll have to do it. Instead, use cash and debit cards, every time you spend something, it’ll pinch you as this money is yours and it’s getting over. I’m sure you will pay close attention to what you’re spending if you use cash or debit cards.
If you do make regular credit card payments, you can continue using credit cards as they do have a few perks but if you’re in deep debt due to credit cards, make a promise to never use credit cards again.
Take The Right Decisions
Now to the most important point in this entire post, What got you into debt? Was it the huge house or a smooth ride in that expensive car or a high-end phone to show off? Was it the urge to study at the most prestigious college in town?
NO, It was your Decision that got you into debt. You decided to take the chance to buy the item even when you knew you didn’t have the money to pay for it. You took a leap of faith and got into a game too tough to play.
Let’s say you won the lottery tomorrow, now you’re thinking this lottery money will help me solve all my debt problems. It won’t. You’ll pay off all existing debts but till the time you don’t learn to make the right decisions, there is no possible way you’re done with debt.
If you work out 2 hours a day, eat only healthy clean foods, you’re surely going to get a six-pack and a good body. Now if you start eating junk food again, your awesome body won’t be so awesome anymore.
Just because you paid your debts doesn’t mean you can’t fall into debt again. The only way to ensure you don’t make bad choices is by learning to make the right decisions.
Every time you feel like buying something (especially something expensive), ask yourself, “Is it going to be useful in the long run?” and “Is this something that I Really Need?”.
Simple questions like these will help you make the right decisions and keep you away from your bad friend debt.
Here’s what right decisions look like:
1. You create a good emergency fund for times like this
2. You want to buy the latest phone, you save enough, then buy it.
Dave Ramsey says it all the time, try buying things in cash, it makes life so much simpler. Some expenses like a house can get difficult to buy in cash, so you could either stay on rent (read renting vs buying) or you can take a loan (but create a quick strategy to repay it).
If you want to learn some more strategies and tips to improve on taking the right decisions, you must take a look at my article on Impulsive buying.
Can you get out of debt with no money and bad credit?
Getting out of debt on a low income is possible but it’ll take you some more years to achieve zero debt.
If you have bad credit, first you should read this article to improve your credit scores – How to Improve Credit Scores, then start working 2-3 jobs and saving money. All this change at once will be tough to manage, just remember – make money, save money and pay your debts.
Is it better to be debt-free or have savings?
Being debt-free is better than having savings because debt is a burden and no one wants burden right! Save 10% of your income in a savings account, the rest should be used to pay off your debts. Use the Debt Snowball method to speed up the debt repayment process.
How do I pay my debt if I live paycheck to paycheck?
Work a part-time job on the weekends or in the evenings. You can also cut your expenses to create some cash but working an extra job or starting a side hustle is your best option if you’re living paycheck to paycheck.
It’s Easy To Get Out Of Debt
You have to pay all the debt you took from the bank. There’s no avoiding it, you could use Debt Consolidation loans or Debt Settlement services but I suggest you be careful while doing these things.
Paying your debt fast boils down to having more money and saving more money. You can have more money either by working more jobs (part-time jobs) or starting a business (like freelancing). You can save money by living frugally, budgeting and learning effective money saving strategies.
The faster you pay your debts, the less you’ll pay in interest and for that, you need more money.
So Instead of googling for tricks and smart strategies to get out of debt, I suggest you spend that time looking for a job or working towards your side hustle while living below your means till the time you get rid of all your debts.
After that, you should increase your spending provided you follow all the tips in this article – How to Avoid Falling in Debt (Forever).
Start investing all the excess money you have into low-to-medium risk investment options.
Read More >>> How to Invest with Little Money: 17 Lucrative Ways
It’s time to clear your debts, it starts with taking the right decision over and over again. All the best. If you have any questions or want to share your experiences with debt, let’s chat in the comments.
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