Part 2/4 – How to pay off debt and become debt free
Now that we have a better understanding why we create debt, let’s look out for these pitfalls and try to avoid them. In most cases, where encouraged or inclined to overspend and make debt because we have expectations of a great lifestyle. Ironically, debt has the opposite effect; it enslaves us, limits our lifestyle options and puts a heavy load on our families. Debt might bring short-term gratification but ultimately robs us of a better future. Armed with this knowledge and conviction, let’s find a long-term solution to tackle and pay off our debts. Let’s start to love the good life.
Here are sequential steps to follow to become debt free:
Have a family meeting to help them understand the current situation and the sacrifice it will take to be debt free. Without this buy-in, they might undermine the overall financial goals.
Armed with solid information and a conviction to build a better, debt-free future, we need to commit to paying off our debts. It will be hard, but with a made-up mind, daily motivation and the realization of our own fallibility we can win this fight, one day at a time. I am reminded of Zig Ziglar’s encouragement: “People often say that motivation doesn’t last. Well, neither does bathing – that’s why we recommend it daily.”
This is essential to “stop the bleeding” so that our debt does not increase any further and we can draw a financial baseline for ourselves. Depending on how serious the situation is, it might be necessary to remove the temptation to spend completely. Move to an all-cash system, cutting up all credit cards, or putting them in safekeeping inside a bank safe.
Balance it and live by it. Seek help if required. This is probably the most difficult part of the debt-free process, but it is essential because it will help us to set boundaries around our finances. It can be a very stressful process, especially since we have to reverse old and set habits, but it is a time to be brave and push through.
Wherever possible, we need to account for our finances before we even have the opportunity to spend it. This means setting up automatic payments for all liabilities, investments etc. Do this before your salary gets paid into your bank account.
The government provides us with a great example; the reason why the government always gets paid is that of payroll taxes; they make sure our employers pay them first before we get paid. We need to do the same thing to our most important priorities, pay them first before anything else.
This allows us to have our own, liquid, cash-flow. This prevents us from making more debt in the event of a financial emergency. A rainy-day fund of 3 to 6 months, of expenses, is ideal. Having a rainy-day fund in place helps us to tackle our debts with confidence.
There are many ways to pay off debt. Not all are equal and unfortunately, most of them are either impossible to achieve or too simplistic. The Debt Snowball method is a realistic method of paying off debt and one that ensures much better results. The plan is based on paying off the debt with the lowest balance first, then the one with the second lowest balance etc.
Once one debt is paid off, the payment for that debt is then added to the payment for the second debt and so the process continues until all debts are paid off; hence the name debt “snowball”. The method is recommended by Dave Ramsey and one that the author agrees with too. These “Dealing with Debt” series of articles referenced the debt snowball plan exclusively as a method to pay off debt. The automated debt snowball file, created for you, can be downloaded here.
However, before using the file, we recommend that you read through all parts of the “Dealing with Debt” article and the article dedicated exclusively to the use of the debt snowball plan & file. This ensures that you have a solid understanding of the philosophies and use of the debt snowball plan and file.
Keep your finances top of mind by reading and/or listening to materials from trusted sources. The importance of this cannot be overstated. As humans, we typically achieve what we keep the top of mind and we can keep our finances a priority by filling our mind with great material on a daily basis.
The majority of people don’t like reading, but other great options are audiobooks, podcasts etc. We have a lot more time available to educate ourselves than what we think. Here is some quick math to prove it: Take an average commute, back and forth to work, every day.
This amounts to us sitting approximately 32.5 working days (8 hours per day), every year, in our cars, the bus, or the train, usually unoccupied. That is more than a working month of our lives, every year!
Imagine using this time to educate and empower ourselves with audio books etc. Many people have become experts in their field by doing this. See our list of resources here for you to reference.
Accountability is often associated with control or punishment, but it should not be that at all. It provides guidance, perspective and safety for those choosing to be teachable and humble in an accountability partnership. I have invested in a personal coach. She asks me tough questions about my goals every month so that I can have a better chance of achieving them. Find someone who understands accountability, is good with their own finances, and cares for you, then ask them to partner with you.
Even pay them, because your future is worth it. Pay them you ask?! It is very simple; would you pay someone $200 per month to help you save $500 per month? The math makes the benefit of paying a capable person very clear.
Besides the financial benefit, when you pay someone, you keep them responsible and motivated. Remember, sometimes “free” accountability means cheap or nothing at all.
Someone once said, “Most people aim at nothing in life and hit it with amazing accuracy”. When you set goals, you have a pathway to follow so you can provide for your future and enjoy your life, guilt-free. Set personal and financial goals. Write them out. Display them for yourself and review them daily.
Once you have paid off your debt, assign your money immediately to investments. Find a trustworthy, licensed, financial planner from a referral source. They will provide you with solid advice on how to invest your money wisely. Unless you know exactly what you are doing, I don’t recommend self-investing. It is too easy to procrastinate and not invest at all or invest in the wrong vehicles.
The above is not an exhaustive list and you might be able to add other steps to the list or switch them around to make better sense of it all. Above all, I hope it helped you. Feel free to give us feedback at any time.
You can also find the specifics of our debt snowball plan here.
For Disclaimers please see “Disclaimers” and other pages in the Debt Snowball Plan file.