Six Steps to QUICKLY Pay off Debt and Become DEBT FREE
We had $120,000 of debt when we got married. With this amount of money you could:
Travel the world 5 times.
Feed a family of 4 for 15 years.
Buy 283 shares of TSLA (in 2020)
Attend over-priced private colleges, buy fancy cars, and spend the first three years of your marriage paying it off.
Can you guess which option we chose?
If you guessed the last one, you’d be correct.
We got married shortly after getting out of college, about the same time the first bills from our student loans were coming in the mail. We were both just beginning our careers, and as you can imagine, living paycheck to paycheck because a very significant portion of our income went toward payments every month.
However, we were able to pay everything off in less than three years. The first $60k took about two years, and the last $60k we paid off in 11 months.
We went from living paycheck to paycheck and having very little financial sense, to paying off an average of $40k/year and being 100% debt free in less than 3 years.
If you’re wondering how we did it and how you can become debt free yourself, the fastest way possible, keep reading because we’ll be outlining step by step what we did and how you can do it too. Spoiler alert - we didn’t follow any special formulas or do anything sophisticated. All we did was follow some very basic steps we’ll be going over here:
STEP 1: Figure out EXACTLY how much you owe and who you owe it to.
Becoming debt free was one of the simplest things we’ve ever done, but also one of the most difficult.
Step 1 can be done today. On a sheet of paper or excel document, make a list of all the debts you have. Car notes, student loans, credit cards, medical bills, family loans, etc.
We’d recommend listing these from smallest debt to largest debt. Include the balance, monthly payment, interest rate, and who the debt is owed to. If you have a primary mortgage, you can write that down but keep it separate at the very bottom.
If you have debts on investments that are putting money in your pocket every month, such as rental properties or similar, DO NOT include those. We’re just talking about consumer type debts that don’t do anything other than take away your income.
See our debt payoff organizer (linked here).
STEP 2: DETERMINE YOUR INCOME AND MONTHLY EXPENSES
This step can also be done today and over the next month. You’ll want a baseline for both of these which you can more or less predict every month.
Income:
If you’re on a salary, this should be easy. You may already know exactly how much you get paid. But if you don’t know, pay attention to your paychecks this month and take note of the amount. You can also look through your previous 2 or 3 months of paychecks and take an average. Also, if you’re getting a raise soon, take note of that too.
If you’re self-employed and your income fluctuates, do the same thing. Monitor and write down your income for this month. Go through your bookkeeping software and look at your income for the previous 12 months. What is the minimum you can rely on every month?
Spending habits:
This may take an hour or two, but the best way to do this is to go back and look at the last month or two of bank/credit card statements to see what you’re spending money on. Break your spending down into categories: rent/mortgage, groceries, utilities, going out to eat, gasoline, clothing, insurance (life, auto, property, etc.), phones, internet, and so on. Add up everything in those categories and total everything out for the month.
Also track your spending for this month. Everything you spend money on this month, write down under the categories you listed above.
If you’re getting overwhelmed tracking everything down, don’t worry - this is normal. There may be a lot of information to organize, but it will be well worth it in the end. Because once everything gets organized, keeping track of your expenses in the future will be a lot easier.
Also include all the debts you listed in step 1. The objective here is to get an accurate representation of the money leaving your pocket every month.
STEP 3: MAKE A BUDGET BASED ON YOUR MONTHLY EXPENSES
This step you can also do today. There’s a lot of stigma attached to budgeting because I think people misunderstand what it’s actually supposed to be for:
It is NOT something that’s supposed to weigh you down every month.
The purpose of a budget is to help you be intentional with your spending, so every dollar you spend has an assignment.
It should be something that puts you back in charge of your money, rather than your money being in charge of you.
Some examples or resources for budgeting:
Mint.com (free for budgeting).
YNAB (YouNeedABudget.com) ($7/month).
A budget will allow you to plan EXACTLY where you want to spend money every month, so you don’t get to the end of the month and wonder where all of it went.
Getting out of debt will be next to impossible if you don’t do this step. The way we recommend doing this is to list your expenses from most important to least important. Food, rent, utilities, gasoline, etc. should be at the very top. Things like going out for coffee with friends should be at the very bottom. That way if you need to cut anything out, you can work from the bottom of your budget and go up.
If you’re bad at this at the beginning, don’t worry. Give yourself some time to hone in on everything. It took us about 4 months before we got on the same page and got into a groove with budgeting.
STEP 4: SAVE A SMALL EMERGENCY FUND
Now that you have an idea of what your monthly expenses are, it’s time to save an emergency fund. Regardless of whether you’re in debt or not, an emergency fund is a must-have. It protects you against life happening and also against the risk of having to go into debt for an emergency (or into more debt while paying everything off).
Dave Ramsey recommends $1,000 as a baby emergency fund. This is one point where we disagree with him.
If we had only had $1,000 in the bank while we were paying everything off, there would have been multiple occasions it wouldn’t have been enough, and we would have been forced to go more into debt.
So on one hand, you don’t want to save too much money for the emergency fund, because the more time you spend saving money, the longer you’re in debt.
But on the other hand, you also don’t want to have too little saved because that will leave you exposed financially when unexpected events happen. We recommend saving between 1-2 months of basic expenses in a savings account, as a starter emergency fund. For most people this will probably be between $3-6k. This is NOT TO BE TOUCHED except for an emergency. Emergencies would include things like:
Unexpected hospital visit.
Something breaking on your car.
Losing your job.
Emergencies do NOT include things like running out of cash for that bracelet you really wanted.
So, how do you save an emergency fund?
All extra income, after expenses are paid, should be transferred over to this savings account. Pay minimums on all the debt until this step is complete. More than likely you already have a little in savings, so this step shouldn’t take more than a month or two. If you already have this much in savings, great.
STEP 5: START PAYING THINGS OFF
By now you should know three things:
1) How much you owe
2) Who you owe it to
3) Your income and expenses.
You should also have a starter emergency fund in place.
So now it’s time to start paying things off.
Every extra cent you have from your income, after all of your expenses are paid, goes toward debt. You shouldn’t have any extra cash at the end of the month, because all extra cash should be used to pay off debt. There are a number of different ways you can do this:
Pay off debts from smallest balance to largest balance. (This is the Dave Ramsey approach and has strong psychological benefits from our experience)
Pay off debts from largest interest rate to smallest interest rate. (This is called the debt avalanche and the idea is to save the most money on interest)
Pay off debts from largest monthly payment to smallest monthly payment.
We used a mix between the first and third methods. We also wouldn’t say any one method is better or worse than another; each has advantages and disadvantages. The most important thing is to be consistent, so pick a method or two that fits best for you and stick to it.
One last thing to mention in this step - if you’re in the negative after all your expenses are paid, go back and look at your spending habits and see if there’s anything you can cut out. Are there any frivolous expenditures you don’t absolutely need to have? If so, get rid of them on the budget. Examples: going out to eat, going to the movies, spending $80 on drinks on the weekends, Starbucks, etc.
If you’ve eliminated everything you can from your spending but you’re still in the red, you’ll want to start thinking about ways to make more money. Getting another job, asking for a raise, transferring to another company that will pay more, starting a side business, etc. We did all of those.
STEP 6: HOW TO SPEED THINGS UP
Here are some potential ways you can speed up the process of becoming debt free:
Sell stuff. Is there anything you have sitting at home that you’re not using anymore? Many people have things lying around just taking up space that they’re not using, that they could sell to someone else and use the proceeds to kick start becoming debt free.
Debt consolidation. This does NOT get rid of any debt but could possibly save you money on interest. If you can consolidate multiple debts into one debt, and get a better overall interest rate, this may be worth looking into. Be careful and do your research if you decide to do this.
Get more work. We had 5-6 jobs during most of this process. We were able to pay down $60k the last 11 months because our income was between $10-12k/month from working so much. It’s not fun but it’s very effective. And only temporary.
We hope all of this information helps you kick start your debt free journey, and gave you some ideas of how to help that process move faster. This journey is difficult, but as the saying goes, “all things in life worth doing are.” We want to encourage you that it is possible, and you can do it.
-Mike and Brit