5 Steps to Living Debt Free

When you’re bouncing cheques and struggling to pay your bills every month, you’re not in control of your money. When you are constantly checking your credit card and account balances to be sure you can afford what you’re buying, your money is controlling you. 

Carrying large amounts of debt can create an ugly cycle. You borrow money and then struggle to make the minimum payments, and when the next emergency strikes, you’re forced to add to the burden of debt, continuing the cycle of borrowing and slow, expensive repayment. 

Freeing yourself from debt is one of the most powerful gifts you can give yourself. With the right plan, you can easily reduce or eliminate your debts and enjoy like debt-free.

Organize your spending with a budget

Your first step in freeing yourself from debt is to see how much you’re spending every month and then to take control of that spending in a healthy way. A budget doesn’t have to be constrictive, but it can help you get debt-free faster by giving yourself healthy limits on what you can spend and when.

Start your budget by tallying up your income and spending over the past months. Look hard and what is essential and what you might be able to skip for a few months while you get your spending under control. 

Make categories within your budget to help you control your spending in certain areas. You don’t need to deny yourself the things you enjoy but do give yourself a limit. Go out with friends once per week, for example, instead of three times, so that you can enjoy the savings. In fact, a common pitfall with budgeting is to make the budget so strict that you get angry or frustrated and abandon your plans altogether. 

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Make your money work for you

An ideal plan for paying down debt is a temporary one. You’re hopefully not going to be paying down debt for the rest of your life, so consider what you can do in the meantime to really make your money work for you. 

Some individuals get ambitious and try to make it a full year without buying anything but groceries. Others set strict food budgets and eat very simple basic meals for a set period to free up even more cash. Still others sell the second car and make do with just one in a household. 

You don’t have to do anything extreme if you’re not comfortable with a big lifestyle change. You can free up cash more simply by cooking two meals per week without meat. Or cancel your cable service and opt for a streaming service or two instead. Bring your lunch to work and only go out to eat with friends on Fridays for a few months until you feel like your budget is back under control. 

Get creative and look for ways to scrape up $10 or $15 in different areas and soon you’ll have an extra $100 or $200 per month to use for debt payments. 

Examine your resources and put them to use

You know you need to pay down debt as quickly as possible, and the more cash you have at hand, the easier that will be. Do you have items around the house that you can sell? Consider cleaning out your house and using that cash to get started on your debt payments.

Your biggest resource, however, will be the extra money in your budget. When you built your budget, you hopefully had a decent amount of money left over at the end of every month. You don’t have to have a huge amount of money as a resource to start paying down debts – that amount will grow in time.

There are several strategies for the best way to pay down debt, but one of the easiest is to “snowball” your debt by paying down the smallest loans first and “rolling” that minimum payment into your budget as you tackle the next debt, and the next, and the next. Each credit card or loan you pay off frees up more money, making your payment on the next loan larger, eventually helping you wipe out debt faster than you ever thought possible.

If you’re not sure of the best way to handle your specific financial situation, a credit counselor may be able to help. Be wary of anyone who seeks payment for their services since there are so many free resources available. Avoid companies that require you to turn your debt over to them to pay off as well, often situations like that can create a bigger mess than you started with. 

Reap the rewards of success 

It’s a powerful feeling when you pay off your first credit card. It gets even more exciting when you pay off several and you see the possibilities of extra cash in your future. As you make progress, you can track your success both in your bank account, where you are paying fewer credit card bills every month, and in your credit score. Every card you pay down and eventually off will boost your credit score tremendously.

If you’re working to free yourself from debt, a good FICO score shouldn’t be a sign to run out and open more credit cards, but that good score might be useful if your long-term plans involve buying a home or replacing a car down the road.

Use your motivation to enjoy the future

As the end comes into sight and you realize you’re paying down the last few debts, consider taking a bit of that pay-off money and stashing it in savings. That way when the holidays come around or another emergency strikes, you won’t risk putting yourself right back in debt again. You need a reserve of cash to avoid using credit for future purchases.

To avoid any risk of this, when you make your initial budget, consider setting aside a small amount of money per month for future holiday purchases, emergency funds, and other routine payments you know to plan for like HOA dues or insurance bills. Putting that money into savings a bit at a time will help you stay on track with your debt payments and eventually live completely debt free.

As you near the end of your debt payments and are looking forward to having all that extra cash in your budget, consider loosening up the budget just a bit as a celebration, but taking most of the money and stashing it into long term savings. You can save for any future stints of unemployment, retirement, your children’s college funds, and your own goals and plans. 

When you have control of your own money, enjoy the feeling of success. You’ve earned it.