Steps to becoming Debt Free

After years of mismanaging our money, and poor financial decisions, my wife and I found ourselves in a deep whole. We both have jobs earning a decent wage, but were still living paycheck to paycheck. When I totaled all of our credit card debt, student loans and bank loans, I was stunned to find out that we had over $58,000 in debt, not counting our mortgage. It was easy to see where all of our money was going.

It was time to get focused, and aggressively get rid of our debt.

The first step was to set up a detailed budget. In the past our budget had too many misc. categories. To be effective, the budget has to track in detail where the money is going. Every dollar that passes through has to be assigned a category, and no, “cash” is not a category. Every pay period my wife and I sit down and map out the next 3 pay periods, and also look ahead for any upcoming expenses. Every time we do that we make adjustments to the budget where it is needed.

Besides keeping us focused on only spending what we have budgeted to spend, our budget also shows us where our money is going, and gives us a clearer picture of areas where we can decrease our spending. Eating out and going to the movies is now a family treat, it’s not a regular occurrence.

The next step was to aggressively pay down our debt. I will admit that this part was hard. It takes a commitment to do what it takes to reach your goal. If there’s no money in the budget to pay extra on your bills, you have to find a way to increase your income. For me, that meant taking a second job. It’s not easy. I don’t get to spend the time with my family, and my wife has to take on more of the duties around the house. However, we both know the pain is short term, but the gains will pay off for the rest of our lives.

We use the “debt snowball” method. All of our extra income goes toward paying off the debt with the lowest total. Once it i paid off, the extra income plus the payment from the debt we just paid off go toward paying off the debt with the next lowest total. We’ll continue doing that until all of our debt is gone. Over time, the payments snowball. The more debt you eliminate, the more money you have to pay off the next debt.

Once you become debt free, quickly build up your savings so you can avoid going into debt in the future. Getting rid of your debt isn’t easy, but living with debt is much harder.