Would it surprise you to learn that there are only three steps to living a debt-free life? The concepts are simple, but living them out in real life can be quite a challenge. Nonetheless, if you follow all three steps, it’s unlikely that you’ll ever suffer the painful consequences of high debt again.
Step 1: Live beneath your means
In order to get out and stay out of debt, you must learn to live beneath your means. Spend less than you make. It sounds simple, but for most of those who are in debt, this is the biggest challenge of all.
Living beneath your means requires a conscious choice on your part to live a lifestyle that enables you to have extra money left over every month. In our culture, that can be hard. We feel compelled to spend to keep up with everyone else, or to have the biggest, brightest, and newest of everything.
Changing your mindset can be the hardest thing to do, but it’s the only way to successfully get rid of debt. You don’t need as much “stuff” as you think you do. Learn to enjoy the challenge of seeing how far you can stretch a dollar – by furnishing your house with flea market finds, buying your wardrobe at a thrift store, and scaling back on gifts at the holidays.
Figure out how much money you make, and what your expenses are. If you are spending more than you make, it’s time to cut back. Some people can just make a few changes – such as eliminating extravagant vacations – and be back on track. Others need to make drastic changes, such as trading in expensive vehicles for more modest cars, moving to lower-cost housing, or canceling cell phone and cable TV service.
In order to eliminate debt, you must live on a pay-as-you-go basis. This means paying cash (or check) for everything. You must commit to not using credit except in the most dire of emergencies.
Step 2: Apply all surplus income to debt
Make a chart of all your debts – credit cards, consolidation loans, payday loans, auto loans, school loans, loans from mom, whatever. For each loan, list the total amount due, the monthly payment, and the interest rate. Then total up the minimum monthly payments to discover how much money you are paying on your debt each month.
Using the surplus money that you found in your budget in step one, begin applying it against your debt. If there are several small debts you can get rid of quickly, you may want to put the surplus against those just to pay them off quickly. Otherwise, put the surplus money against the debt with the highest interest rate, while still paying the minimum payments on the other debts.
When you get rid of debt number one, take the money you were using to pay that debt off, and apply it to debt number two (still paying the minimum required payment on all other debts). When debt number two is paid off, take that chunk of money (payment money for number one and number two) and apply it to debt number three. Continue this way until all your debts are paid off – whether it takes you two years, ten years, or more.
As your debt principal shrinks over time, creditors may lower your minimum payments. But don’t fall into the trap of paying less, or you’ll never be debt-free. Continue paying as much as possible against each debt until it is paid off. As long as you don’t add to your debt by taking out more loans or running up more credit cards, this method will guarantee you success.
Step 3: Stay out of debt
If you don’t want to end up right back where you started, it’s important to stay focused. Here are a few tips to help you stay on track.
• Continue to spend on a cash only basis as much as possible.
• Don’t buy anything on payments unless absolutely necessary.
• Save for the big stuff, don’t finance it.
• Create an emergency fund that you can turn to instead of credit cards.
• Always, always focus on spending less than you make.