How to Become Debt Free

Do you feel like you are drowning in debt? Does financial freedom feel like an impossible achievement because there is simply no money leftover after all the monthly payments are made? Or maybe those monthly payments are backed up several months and you are unsure how you will dig your self out of this one. Finding yourself in one of these scenarios is not as uncommon as you may think. In fact, according to Credit Canada, for every dollar that the average Canadian earns, $1.78 is owed.

While this debt includes both mortgage debt as well as non mortgage debt (credit cards, car payments, etc), the fact remains, debt is debt and it strips us of our financial freedom regardless of what category you put it in. Your mortgage provider will be the first in line to tell you that mortgage debt is considered “good” debt because your home will increase in value and often carry a lower interest rate. This may sound great when you are about to purchase that oversized home that you can’t really afford, but, at the end of the month when you have spent every penny and are still no further ahead, you won’t be comforted by your bankers “good vs bad” mantra.

So how do you get ahead and secure financial freedom? There are many books out there on precisely this issue and there are as many different methods as there are books. I’ve compiled eight steps to help you get organized and take control of your finances simply and effectively. The only limiting factor is how motivated YOU are to get there!

Grab a piece of paper and a cup of coffee and let’s get to work.

You can also check out Dave Ramsey’s Every Dollar Budget Template to record the following information.

 

Step One

List your total income at the top of the page. This includes any and all income that comes in on a regular monthly basis.

Step Two

List ALL your debts from smallest to largest. This is Dave Ramsey’s snowball method for paying off debt. Once you have listed all these debts you will then write the minimum monthly required payment beside each debt.

Step Three

List all other monthly expenses. This will include your mortgage or rent, groceries, cell phone, internet, insurance, living expenses, gas, etc. Get as accurate a picture as you can of what exactly you spend each month in any given month.

Step Four

Subtract your monthly expense and minimum debt payments from your total monthly income. It should look like this:

Income – (monthly expenses + minimum debt payments) = Leftover Balance

Are you in the positive or negative? Many people will probably find that they are in the negative or barely hanging in there by a thread. This is where a budget is going to help you get on the right track.

Step Five

Prepare a budget. You are going to need to start cutting down in certain areas so that your monthly expenses are reduced. In order to start paying on those debts and eliminate them you need to have some money leftover after the monthly expenses and minimum debt payments are made. This is not as scary or daunting as it sounds. To get ideas on where to cut down read my post Money Saving Tips for 2020. This post lists 10 steps you can take to cut down on your monthly costs and save some of that hard earned money to put towards financial freedom.

Prepare your budget and stick to it each month. Set aside a certain amount of money for each of your categories. This includes thinking of what you are going to spend on things like eating out, coffee, entertainment. If there is no room in your budget for these extra indulgences then you need to cut it out completely.

Looking for an awesome budget planner that will help keep you on track? Check out Dave Ramsey’s Every Dollar Budget Planner.

Step Six

After you have determined where you can cut down on expenses (perhaps you have changed cell phone plans, downgraded to a smaller house or sold your car to get rid of those pesky car loan payments) you should have extra money that you didn’t have before. Calculate exactly how much you will save and recalculate step three.

Step Seven

With additional money leftover after your expenses and minimum payments have been made, you should save enough of that money and put that into an emergency fund. This is Dave Ramsey’s Emergency fund step. He suggests having $1000 in that fund that will go towards unexpected emergencies that pop up here and there. This is a crucial step. You don’t want to jump on the band wagon paying off your debt only to have to jump off as soon as an unexpected emergency comes up. You want to be prepared for those emergencies.

Step Eight

With your emergency fund in place, NOW you are ready to get serious about paying off debt. Remember the list of debts you recorded from smallest to largest? You are going to put everything you’ve got leftover into the smallest debt. Why? Because once you have paid off that debt you will be that much more motivated to pay off your next smallest debt. You want to keep the momentum going and get those debts out of the way so that you have more money to start putting into the larger debts. This is the snowball debt effect. Remember, you are still making the minimum payment on ALL your debts but you are throwing everything you’ve got at the smallest debt.

Once you start working through these steps you will find that getting out of debt is actually something you can achieve! Keeping motivated and staying on budget are key to paying off those debts and getting your finances in order. Go over your budget each month and track how you have done in the previous month to keep yourself on track.