Paying off debt is one of the best things you can do for your family, your sanity, your bank account and your dream of living a simpler life. Think of how amazing it would be to make decisions based on something besides money.
Without debt you can…
- spend money without guilt or worry
- save money at a faster pace
- give money away to people and causes you care about
- do work that you love instead of work that pays the bills
If you’ve had enough of bill collectors, full mailboxes, ridiculous interest payments and living paycheck to paycheck, take the first step and pay your smallest debt off completely. Let’s back up one step. I am a Dave Ramsey girl, so I have to recommend that you save $1000.00 first. That emergency fund will keep you on track during your debt repayment and protect you from emergencies. (Applebee’s is not an emergency. Neither are shoes.)
4 Steps to Kill Debt
Honest Inventory. Once your $1000 is safely tucked away make a list of your debts. Don’t include regular monthly bills, just the other stuff. Include old medical bills, car loans, credit cards, student loans and anything else that you can pay off and be done with. Keep your mortgage separate if you have one. You can go after that later.
Think Small. Next, organize your list of debt from the smallest amount owed to the largest amount owed. Don’t worry about the different interest rates, or the most aggressive bill collectors. They’ll all be gone soon enough.
Attack. Pay your minimum monthly payment on each bill each month, but allocate any additional funds each month to your smallest debt. When it’s paid in full, get notification from the biller that your account is paid and closed and save that documentation in a folder or digitally.
Dance. Now it’s time to celebrate. You may have 9 more debts to clear, but you just paid one IN FULL. Do a little dance, and then use your excitement of accomplishment as momentum to start on the next smallest debt. Repeat until you are finished. (no matter how long it takes)
If you are determined and intense about your plan to be debt free, you won’t be dining out much or shopping while you are paying down debt, and that’s ok. Your consumption habits will change as a result, which will help you from incurring this debt ever again.
Read motivational books and blogs while you are paying down debt to stick to your commitment.
- The Total Money Makeover: A Proven Plan for Financial Fitness
- Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century
- Wake Up: Break Free from Advertising Influences
When people ask me how I quit my job and started my own business, the first thing I tell them is that I paid off my debt. It was the most important step.
Please support each other in the comments section of this post. If you are debt free, encourage those that are getting started. If you are getting started, ask questions, make a commitment, and get ready for a new life.
Great advice Courtney!
I’ve been working towards becoming debt free for a little over a year now, and have around 18 months to go. I actually started by paying the ‘extra’ on the card with the biggest debt – but your advice is sound in that you should select one and pay minimum payments on the others.
I’ve now managed to get the debt down to a level where I have consolidated onto an interest free card (for 15 months) – which should see the back of it.
It’s not an easy journey and can be frustrating at times but I am determined to become debt free and as with most things in life it can be achieved, one step at a time.
Steve
Steve, Congrats! Let your frustration turn into determination and as Dave Ramsey likes to say “Gazelle Intensity”. Your debt free day is coming and it’s gonna feel good.
People are amazed when I say we have absolutely no debt but our mortgage (and we are working on paying that off well ahead of time.) And no, we are not rich. In fact, technically speaking, I our family’s gross income is pretty much at the federal poverty level. And we live quite well! I am fortunate to be married to a man who thinks paying interest is almost as bad as one of the 7 deadly sins. 🙂 The trick for us is simple…if we don’t have the money, we don’t spend it. Using credit is just not an option. Credit cards, when used on occasion are always paid in full at the end of the month. We also choose to live without things that some folks find necessary (like cable tv, cell-phone bills, etc.)
I can honestly say that being debt-free is WELL worth any sacrifices necessary to make it happen.
Thanks for the inspiration Michele!
My husband and I are debt free and in 5 years hope to be done with the mortgage, as well. With 3 kids under the age of 13, sometimes the money gets tight, but we are committed to living our lives with the cash on hand. The trick for us is to resist the temptation to constantly look for ways to earn more (“get a bigger shovel” as Dave Ramsey says). The art of contentment is sometimes tricky.
Carrie, It’s ok to want more, but refocusing on what you have and how you are creating a low stress lifestyle for your family will always bring you back to contentment.
We are debt free!! Love Dave Ramsey too. He is informative, motivating and entertaining 🙂
I’m with Michele above. We are far from well off either. It isn’t about having tons of money it is about spending less.
We are self-employed also and debt free makes that so much less stressful. We took on a bit of debt to buy a new car last fall and I stressed about it so much. It paid off in Dec (4 months) and I feel free again 🙂
I’m working on it — diligently paying off debt by debt. Once I’m completely out of debt, then I’ll reevaluate my savings… after I do a happy dance, of course.
Becoming consumer debt free was one of the best decisions my husband and I have ever made. Not giving most of our money away to creditors each month has lowered our stress levels tremendously.
Being in debt is stressful. Knowing that most of your earnings are spent before the paycheck even arrives is a stressful way to exist. Becoming debt free eliminates that nagging anxiety that accompanies constantly worrying about making ends meet.
Thank you so much for linking to my e-book as one of the resources you recommend to stay motivated while killing debt. For me, becoming fully aware of how advertising messages were influencing my spending patterns and desires allowed me to begin resisting extraneous purchases that once felt necessary.
We heart Dave Ramsey! We have student loans and a mortgage, but no car debt or credit card debt (but it wasn’t always that way). A few months ago, for the first time, we bought a new-to-us car and wrote a check for it (we got a smaller, more fuel efficient car to replace the giant, gas guzzling SUV with 150,000 miles on it). It felt GOOD. Next, we look forward to kicking Sallie Mae to the curb, as Dave says.
One of the most influential books I ever read was “Your Money or Your Life” which you mentioned in your post. I grew up in a home where debt=bad so I came to adulthood with a determination to never have consumer debt. Fortunately I married a man who agreed with me. We’ve never had consumer debt and now are facing retirement in a few years completely debt free. Free!
You can do it too. Just decide you’d rather be debt free than have that thing which would put you in debt.
We paid off $82,000 in debt in under two years using the method you described.
The strangest thing happened after we wrote our debts down and started paying them off: random money came our way. My husband, a musician, received a large songwriting check out of the blue. We got a huge tax refund and received a family gift of money. It was like the universe heard our commitment to get out of debt, saw how we were cutting bills and selling stuff, and wanted to encourage us.
Good luck to all of you paying off debt. It’s hard work but so worth.
I’m a Dave Ramsey fan too. I started using his “snow ball” approach in 2007 when I was $45,000 in debt and on the verge of bankrupcy. I have since gotten out of debt and started a new career as a Financial Security Advisor. Now I teach this approach to everyone I meet and help people protect their assets and save money for retirement.
5 years ago I never dreamed I’d ever by in a possition to give other people financial advise!
What’s your take on mortgage debt? We live in a high cost of living area and have a modest-size townhome. I don’t think it would be practical to downsize and we’d pay just as much if not more than our mortgage payment for rent.
For the most part I encourage my clients to think about the consumer debts and the mortgage as separate entities. Mortgages and property in general should be looked at as an investment, not as an expense. However if you are currently “underwater” on your mortgage, meaning you owe more than the house is worth it might be time to cut your losses and downsize. Regardless of your situation, banks and mortgage companies are extremely competitive with one another, it never hurts to get a second opinion and see if moving your mortgage to a different company could possibly result in a lower overall monthly payment. Even with the penalties for early cancellation it may make sense in the long run if you can save a few basis points on your rate over 4 or 5 years.
Hi Courtney, since finding and reading your blog and then Dave Ramseys book (recommended by you) I made the decision to get out of debt beginning January 2012 and be out of debt by December 2012. I was $15,000 in debt and have currently paid off my debt by 60%. I am so happy doing this and like others have found that I actually have extra money to pay on my debt.
The hardest thing I did was to use my savings to pay on the debt. It was so difficult because that was my safety net. It was the best thing I have done and I look forward to being debt free and staying that way.
Paying off debt is very catchy. I look for things in my home to sell to place that money on my debt.
I enjoy reading your blog and look forward to being debt free in December.
Regards, Lynne
I am finally debt free and I like it. I feel weight off my shoulders and I have money to spend without feeling a pinch.
The only thing I might say as advice (especially if you have automatic payments set up…I learned the hard way) is to go above your minimum payment at least $50. If $50 is too steep, then no less than $25. This helps with interest rates and if your card decides (Discover) to up their fees based on external things (not you), then your auto draft payment will cover that increase. Believe me, they will NOT inform you properly like they are supposed to do. But going above is just good practice anyways.
The other advice is to not close ALL of your credit cards like I did. I should have kept one open, but I was just tired of them. Now, that I’m financially stable, it’s proving difficult to get a card open.
I didn’t have any debt until I started working a realized that I couldn’t earn enough money to support myself so I went to school to get an education. I incurred about $28,000 in student loans. I still was not able to rise above poverty level income after 8 years so I went back to school. This added another $40,000 to my total debt. I have one medical bill totaling about $400 and a couple thousand left on my car aside from my other debt and I am unemployed, looking for work in my field of graphic design. Since I don’t have a mortgage I think this isn’t too bad. I want very much to be able to earn a “living” wage and pay down my debt quickly. I’m super good at living economically since I have been poor most of my adult life. Any suggestions???
Stephanie, Instead of looking for employment or while looking for employment, use your site to run your own business. If you are open to freelance gigs, get our name out there. Email me if you would like more ideas!
My mom gave me Dave Ramsey’s book when I was 18 and made me read it. Because of the decisions my husband and I made at the early part of our marriage based on this book, we worked full time and went to school to keep from going into debt while in college.We were able to save up for the adoption of our first child without going into debt. We are debt free and I can stay home with our 4 kids and have a 3 month emergency fund. It truly takes the anxiety out of your life.
We are currently paying down our credit card debt. If everything remains as it is currently, we should have the credit card paid off around July. And then have the school loan paid off in October. After that we will be having our 2nd child with insurance that does not cover maternity, so our debt will go back up for a while, but we hope to pay it all off shortly after the baby is here.
It’s so true that getting rid of debt changes everything. So many of the choices my husband and I have made over the last couple of years sound impossible to other people, and I realize it’s mainly because we don’t have any debt to worry about anymore.
I, too, have been working my way out of debt. I paid off all my credit cards in January. Then I had to charge $1000 in tuition for the last class I need for an editing certificate. I’ll be able to pay that off when I get paid for the philosophy course I am scheduled to teach this summer and I’ll be able to add another $1000 to my emergency fund as well. I’ve completely redone my budget so that I can live off of my stipend. It’s a strict budget but just about workable. I’ll graduate with my PhD in philosophy next May and I’ll have around or just over $100,000 in debt from student loans (all from graduate school; undergrad was free). Because I’ve redone my budget now, so long as I get a job that nets me what my stipend currently is, I’ll be able to pay the bills when I graduate (this could be done on a part time job). Anything more can be used to pay down the student debt. It’s hard, especially when I realize that I could have minimized my debt a lot sooner, developed better money habits sooner, built up a good emergency fund sooner. Still, it’s a relief to have a plan.
I really love the advice, but I’m not sure what to do when the only debt I have is one enormous student loan (now down to $72,000 after 8 years of paying on it). Having only one debt means that I never experience the intermediate joys of paying off smaller debts.
I try to live as frugally as possible as a single person. I don’t have a TV or cable, no ipod or e-reader, I drive an old car, and I never go on vacation. I spend a lot of time at home watching netflix on my laptop or reading books from the library, and I have a roommate to help with the expenses.
I’m very committed to paying off the rest of my loan in the next 6.5 years (when I turn 40), but how do I keep my spirits up in the meantime?
Perhaps you can set milestones? Decide that a celebration is in order every time you get down to a round $10,000. That’s certainly a significant number that deserves celebrating!
Great suggestion!
I’m on the path to debt freedom! While my student loan is pretty small, I racked up a distressing amount of credit card debt while in college. All it takes is living just a bit above one’s means, coupled with a few out-of-country vacations. Ouch.
However, by my snowball spreadsheet, I should have absolutely everything (including student loans and car) completely paid off by December of 2013. Being a math nerd I love tinkering with the spreadsheet to see just how soon I can be debt free if I make small adjustments. The trickiest thing right now is keeping myself from ‘overspending’ on my debt! I tend to get a little overexcited and put more cash than I really should into the debt freedom plan, leaving me a bit short for other necessities. I could certainly have worse problems!
Can you tell me about the spreadsheet? Did you create it or download something from the net?
I appreciate your blog, but I think there are places and times to get more radical.
We sold almost everything we had, went to living on 1/3 of what we were making, and gave up many of our (somewhat) bad, costly habits.
Although saving the $1000 is probably a good idea, but we have not done that do date. We have been using the George Muller “system” of finances – when things come up, we pray and trust God and He always provides. Sometimes truly miraculously!
We have no debt so we don’t have to kill it. We have credit cards, but pay in full each month. Since higher education is heavily subsidised in Belgium, we don’t have student loans.
Still, when we were looking to buy a house last year, we looked with scrutiny at our expenses. We bought a house that’s now being built, and are paying off the mortgage (not yet the full monthly fee, because we haven’t spent the whole amount of it yet) and renting an apartment at the same time. When we will have to pay the whole monthly fee for our mortgage and rent (at least a couple of months that will be the case), our budget will be rather tight, because it takes up some 60% of our monthly income. To prepare us for that time and to save up as much money as we can so we can get our house fully equipped as fast as possible, we have been living more frugally the last couple of months. And we are doing fine. Making ‘week menu’s’ each week so we don’t buy too much food, packing lunch to go to work, resisting on buying clothes and books etc… It feels good to save for a ‘greater purpose’ and makes me realize I don’t need new stuff from time to time to feel good.
Great thoughts here and on your advice I got the Dave Ramsey book! I am going to print out this post to and put it in my new notebook that I titled I am financially Empowered it’s time to get real! Thanks for the extra push!
I definitely agree that paying off debt is the first and most important step towards living your life how you want. I only have 2 months left until I’m completely debt free, and I’ve done each one of the steps listed here. What step had the biggest impact for me? Surprisingly, it was reading other financial blogs and books for inspiration. While decreasing expenses and increasing income helped a TON, nothing keeps you on track like reading other people’s stories/struggles. For many of us, paying off debt is a long road. Thanks for the encouragement Courtney!
Hold up. Be more cautious about flippantly saying, pay off your card and then close the account.
You should all be aware that a big part of your credit score is the length of your credit history. If you close your oldest account, your credit score *will* drop, probably significantly and probably won’t “recover” for a long time. Even closing cards that aren’t your oldest could reduce the “average” length of your credit history, thus hurting your credit score.
Do some searches about whether you should close an account before you do so. Many bloggers have written about it. Of course, if you can NOT maintain the self-control to not start charging on a paid-off card, yes, close it and the credit score consequence will be better than racking up more debt.
My only rebuttal to you Skylar is this; Credit Scores are only good for people who actually want to be in debt!
If your goal is to go through life debt free, as I council all of my clients to strive to, then you can get by quite nicely with one pre-paid credit card and a limit of $500 The only time anyone actually needs a credit card is as a form of I.D. for renting a car or hotel room. Aside from buying a house, if you can’t pay for something in cash or a cash equivalent then you can’t afford it and as I’ve said in previous comments to this thread, a mortgage is not a consumer debt, it’s leverage for an investment.
Even something as simple as paying your hydro bill on time will give you a credit score and walking into a bank with 10 or 20% down on a mortgage goes a long way to buying enough credibility to get that dream home.
Of course I must quality my comments here be reminding the readers that I’m in Canada, were sane bankers live, maybe the rules are different in other parts of the world.
I also advocate no debt except MAYBE a mortgage (personally, I’ll probably continue renting), but student loans are also a necessity for many people (of the ones who actually have a good reason for pursuing a degree). Unless your parents are wealthy or you can afford to do school part-time and work full-time for 5-8 years, at least one student loan will probably occur in your life. In addition to the length of your credit history, another large part of your credit score is the variety of credit sources. They want to see how reliable you’ve been in a wide variety of situations.
I don’t know how it works in Canada, but in America, credit scores are consulted for everything from if a deposit will be required to open a utilities account (and if so, how much of a deposit is required, which could be hundreds of dollars), whether you can rent an apartment (and sometimes, creating a extra deposit), part of background checks for applying for ANY job (they have to get your permission first, but any employer can require it. Many financially-related fields require it as standard practice), as well as applying for those aforementioned student loans (yes, even government-provided ones are not automatically granted). For those who choose to get a mortgage, the amount of your downpayment may get you a loan you might not otherwise have “enough credit” to qualify for, but it won’t save you from an interest rate as much as 2-3 times the interest rate of someone with a “more developed” credit history. Large downpayment or not, without a record of credit-related behavior, you’re still a risk, and interest rates are calculated to approximate that risk.
People in a consumer debt situation have already built a credit history based on a variety of credit sources, why take away that asset by closing those accounts? Keeping the accounts open won’t hurt you and can only help you, so long as you don’t abuse it. (I advocate closing at least some accounts-not the oldest one, no matter what-for the people with an American “average” number of cards, which is over 10 or so.) If someone physically can’t control themselves from spending by a) removing the card from their wallet, b) hiding it, or if necessary, c) freezing it in a bowl of water in the freezer, then yes, they should close the accounts. But people with even a minimum of self-control? Yes, they should keep at least some of them open. If they lack that kind of self-control, closing an account isn’t going to do much help because obviously that consumerist/impulsive personality is going to manifest itself in different areas or through different methods. In that case, the proper route is probably long-term therapy to determine the causes and triggers of this behavior, rather than closing all your accounts and calling it a day. The deeper problem will still be there.
All valid points but I still think one credit card is plenty.
By the way, the average in Canada is 3. 10 is enormous and usually causes problems with your credit score as well. If you keep applying for credit, even if you somehow manage to keep all the bills paid, it counts as a negative against you. Too much credit, is just as bad as not enough.
Things where a good credit score helps you in the USA:
*Insurance Rates – the trend is for insurance companies to
*Online Savings Accounts(see Ally bank, paying .95% APY, requires good credit score)
*Apartment Applications – Studies have shown low credit scores equate to likelihood for late/no rent payments. Also, when I renewed my lease last month, they wanted to increase my rent $150. I showed them my improved credit score, and they lowered it to a $90 increase. That $720/year savings thanks to good credit.
*Employment in Positions of Trust – In the past, I’ve been turned down for IT jobs at financial institutions because my credit score was low. They equate a low score with low trustworthiness.
*Security Clearance – When I first got my Dept of Defense security clearance, they made me fix my credit before approving me. It took over a year but it was better than them just denying it to me.
Notice that I have mentioned any debt products because the benefits of good credit for those are obvious.
Also note that you don’t have to carry debt for the most part. Paying credit cards off monthly in full monthly is pretty good by itself. If you need a boost for a special event(such as home loan), you should diversify with installment loans( signature loan that you put in savings and you pay it off over 6-12 months.
can you please help me:
i have bank loan by 7200 USD monthley im paying 303 USD,
and car loan 9333 USD monthley im paying 285 USD
VISA card balance is 3200 monthely im paying 133 USD as interst and paying 400 USD in the account.
what is concern me is the bank loan and the VISA 10400 USD
i want to get out of it, i want to marry and i have 5 months to get out of it
my total sallry is 1732 USD after taking out the car loan it will be 1447 USD.
please help im done with debts i need your help to start saving money and to start my new life without loans.
thanks
Mohammed Hagawi
Hagawi, I’m not a financial advisor, but I recommend following The Dave Ramsey Plan and he will recommend selling your cars. With a less expensive vehicle paid for with cash, you can devote more resources to your other debt.
i dont know what to say, i just came here running from the debts, the idea that im having loans it keep spining in my head.
Thanks Courtney for your recommendation, and for your answer.
Hagawi.
Hagawi, I promise it gets better. You are doing the right thing by addressing the debt you have. Now, let go of the guilt and spinning thoughts and do what it takes to pay it off. Life gets sweeter once you are debt free and even on the way because you know you are working to live a better life. Keep me posted!
Hi Courtney, a thousand miles starts with one step, i set plan to start paying the visa in four months, why is that!? visa is taking monthly 5 percentage interst = 160 USD, and no way to go back to VISA card again, once this done, im going to take another step to pay the bank loan, now i reduce the bank loan to be from 7200 to 6600 USD. and im going to reschedule my wedding party for more 5 months, i hope she will agree for that and her parents so, its great to have someone like you Courtney leading us to be free of debts, ill keep you informed.
Thanks
Hi Courtney, I told you will be the frist to know! I paid the visa, left for the bank only 50 USD, and the they discounted there dedaction rate.. My Mom helps me.. Thanks to her, and for you either.. I feel free..
Awesome! Awesome! Awesome! Tips… I am all for everything you said. I absolutely love that you put this out there like that, because while those of us who understand these concepts are commenting on this material; it is extremely important for the lay man to read it, processess it, understand it and then put it to action!
I will definitely be creating a link to your page, because it seems like we have similar agendas– driven from a passion with regards to money management.
KUDOS!
XO,
Nerissa
Hi great article,
I am starting today to get rid of $26,000 in credit card debt. Yes I am ashamed, but not for much longer I have made the first step today and I am proud now as well. I have been looking at sites all day and have come up with a budget to get me debt free in 20 mths. I earn over $70,000 a year and have an 8 year old. I have worked out the payments each fortnight for each card there are 3 and the lowest amount is the highest interest charged amount. This will be paid off in the first 5 months.
Do you think this is achievable? I think it is and I am going to give it my best shot!
Hi Karen,
Congrats on working on your debt. Clearly shame has no place here. You are doing a great thing for yourself and your child. Stay focused and committed and you can accomplish anything!
Keep me posted.
Courtney,
Thank you so much for the words of encouragement. I am so pleased, week one of my journey and I have stuck to the budget!
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