As part of our “back to basics” series, let’s explore how you can free yourself from debt—no tricks, no shortcuts, just practical steps.
Debt Reduction: A Side Effect, Not a Goal
After over a decade of studying personal finance, I’ve realized that reducing debt should be a result of good financial habits rather than the main focus. Debt elimination is a target—not a lifestyle. By focusing on actions that ensure you spend less than you earn, debt repayment becomes a natural consequence of sound money management.
Still, for many, escaping debt feels like an overwhelming challenge. That’s okay. Here’s a step-by-step guide to help you start and stick to your journey.
Step 1: Stop Adding New Debt
This may seem obvious, but it’s critical: stop using credit. Halt all new borrowing. Cut up your credit cards if necessary, even if other financial advisors say otherwise. Here’s why:
- You don’t need credit cards for emergencies or convenience.
- Recurring charges? Cancel them. Gym memberships, subscriptions—anything tied to credit cards—needs to stop.
Once you’ve done this, call your creditors and negotiate for lower interest rates. Use competing offers as leverage. Even if they refuse, it never hurts to ask.
Step 2: Build an Emergency Fund
Before tackling debt, save an emergency fund. Why? Without it, unexpected expenses will force you back into debt. Start with $1,000 (or $500 for students). This fund is for genuine emergencies—not for shopping, entertainment, or non-essential purchases. Keep this money in a savings account that’s accessible but not too convenient to dip into.
Step 3: Use the Debt Snowball Method
The debt snowball is a systematic way to pay off debt by focusing your efforts strategically. Here’s how it works:
- List Your Debts: Include balances, interest rates, and minimum payments. Organize them by interest rate (highest to lowest).
- Allocate Your Budget: Decide how much you can put toward debt each month. Aim for more than the sum of minimum payments.
- Target the Highest Interest Debt First: Make minimum payments on all other debts and allocate the remainder of your budget toward the highest-interest debt.
- Eliminate Debts One by One: Once a debt is paid off, redirect its payment amount to the next debt on the list. This accelerates your progress.
Variations on the Snowball
- Dave Ramsey’s Approach: Prioritize debts by smallest balance first to gain psychological wins and motivation.
- The Debt Tsunami: Pay off debts with the highest emotional burden first, even if they’re low-interest.
Step 4: Supplement Your Efforts
- Cut Expenses: Adopt frugal habits. Cook at home, cancel unused services, and rethink discretionary spending.
- Increase Income: Take on side jobs, sell unused belongings, or negotiate a raise.
- Educate Yourself: Borrow financial guides like The Total Money Makeover from your library for practical advice.
The Non-Financial Benefits of Debt Elimination
Repaying debt isn’t just about finances; it transforms your life:
- Simplicity: Fewer bills mean less stress.
- Cash Flow: Freed-up money can fund goals and dreams.
- Freedom: Without debt, you’re no longer tied to unfulfilling jobs or financial anxiety.
- Peace of Mind: A debt-free life is a calmer, happier life.
The Bottom Line
Debt repayment is a byproduct of smart financial habits. Focus on building a sustainable lifestyle of spending less than you earn. By doing this, not only will you eliminate debt, but you’ll also avoid the financial directionlessness many experience after becoming debt-free.
Stick with the process, and the debt snowball you’ve built will transform into a wealth snowball, propelling you toward financial independence. Congratulations—you’re on your way to lasting financial freedom!