Last week, I shared my story on how I became debt-free on a low income in 4.5 years. I didn’t think so many people would relate and find inspiration from my debt-free journey. It received more than 3,000 page views in less than 48 hours, which was a bit overwhelming to me.
It’s my most-read article, and I keep receiving messages and emails from people asking for more tips on how to get debt-free, how to stay motivated when paying off debt, mistakes people make while paying off debt and how to stay out of debt when they’re debt-free.
Here’s to The Wealth Tribe that’s determined to attain the #debtfree status!
Click here to download an easy to use debt-free calculator
How to get debt-free
To attain debt-freedom, you need a debt-free plan
The first step is to figure out your starting point by calculating your net worth.
After that, you can pick one of the following proven debt payoff plans or debt pay off strategies depending on your budget, income and goals.
1. The Urgency Method
This method involves making a list of all institutions and people you owe, then assigning each debt an urgency tag. The urgency tags could be;
- Very urgent
- Not urgent
- To clear immediately
- To pay in X days/weeks/month/years
After assigning the tags, it becomes obvious which debt you should tackle first.
2. The Snowball Method by Dave Ramsey
Step 1: Make a list of ALL your debts from the smallest to the largest except your mortgage. Ignore the interest rate.
Step 2: Pay the minimum amount due on each debt except the smallest.
Step 3: Pay your smallest debt in full. If it’s a big debt and you’re unable to pay it in full, pay as much as you can.
Step 4: Repeat the process until you’ve paid all your debts.
The amount you were paying on the previous smallest debt should be rolled over to the new smallest debt.
Note: A minimum payment is the smallest amount out of what you owe that the financial institution requires you pay each month.
3. The Avalanche Method
If you’re a lover of cold-hard numbers on spreadsheets then this is the method for you!
Remember that we ignored interest rates with the snowball method? With Avalanche, the interest rate is what determines which debt to pay first.
Step 1: List ALL your debts from the highest interest rate to the lowest. Ignore the amount/size of the debt.
Step 2: Pay the minimum amount due on all your debts except the one with the highest interest rate.
Step 3: Pay the full amount of the debt with the highest interest rate. If you’re unable to pay the full amount, pay the highest amount possible.
Step 4: Repeat until you’ve paid all your debts.
For all the details on how to apply the 3 methods, why the methods work, how to choose one that suits your goals, practical examples and the debt tracking sheets you need, refer to this article.
How to stay motivated when you’re paying off debt
1. Choose the right payment plan
The debt payoff strategy you choose will determine whether you achieve your debt-freedom journey or not.
For example, if you’re a lover of cold-hard numbers on spreadsheets and do not rely on motivation to crash your financial goals, use the Avalanche method!
If you need to see progress with each debt that you pay so that you don’t lose hope, use the Debt Snowball method.
The goal is to achieve debt freedom by consistently crashing each debt without giving up along the way.
2. Pay yourself first
Yes, prioritize getting out of debt, but ‘paying yourself first is the first rule of curing a lean purse learnt from the book The Richest Man in Babylon.
You shouldn’t pay anyone else before paying yourself.
Having this money will keep you motivated, it’s also a visual representation of your progress.
3. Reward yourself
Getting out of debt is hard. After working tirelessly, you have to part with your money at the end of the month. It’s worse if you’re stuck in mobile-money loans or credit card debt as these have extremely high interest rates.
If you don’t track this progress, you will lose motivation and you’ll give up. This will lead to more debt through compounding, which is the cycle that keeps people in debt forever.
Track your progress and reward yourself after hitting every milestone. Be careful not to overindulge as it beats logic!
4. Get clear on your why
I hated having to subtract my liabilities (debt) from my assets when calculating my net worth at the end of every month. As soon as I got excited about the progress in my net worth, I’d immediately remember that I owe the government (student loan)! I hated that moment. That was the source of my motivation.
Why is debt freedom important to you? If you don’t have a clear reason why getting out of debt fast is important to you, it’s hard to stay motivated.
5. What will your life be like after your debt is paid?
Creating a debt-freedom vision board could help you to stay committed up to the end.
I used to fantasize about what I would do with that extra $100 per month. I thought about how fast it would grow if I invested in the stock market or any other lucrative investment.
Back in 2018 when I owed $1,173.61, on a printing paper, I drew a staircase with 234 steps, with each step representing $5. I put this up on the wall next to my bed. I would mark each step with a pink highlighter every time I paid $5 and gave myself a pat on the back.
Debt freedom doesn’t have to be boring. Make it fun, create a debt-free vision board that represents how your life would look like if you attained debt freedom. Pin it next to your bed to serve as a reminder and motivation to keep going!
6. Plan for fun so that you something to look forward to
Life is for the living.
Even when you’re in debt, you’ve got to live a little.
Getting out of debt is hard, the idea is to make constant significant progress which doesn’t mean that you imprison yourself from anything fun.
You can choose to go extreme on your debt payment by cancelling all luxuries, but I’d advise you against it as it’s not sustainable.
7. Surround yourself with like-minded people
My close friends live debt-free. When we talk about money, they would encourage me to keep going.
When I had $500 remaining in debt, I shared my excitement with my friend. Since his life is dedicated to sarcasm, he asked ‘You have debt? Don’t you read your blog?!’
8. Document it
I’m certain I wouldn’t know half as much about money and wouldn’t be as dedicated to the financial freedom journey if I didn’t document my journey on this blog!
Having you guys ask many questions and share your journeys keeps me inspired and dedicated to share my knowledge and act right.
Do the same. Start a blog or keep a journal about it. Documenting your journey, publicly or privately keeps you motivated.
How to stay out of debt when you’re debt-free
Many people attain debt freedom and then immediately fall back into the debt trap. I don’t blame them and I don’t think I’m immune to the same because we live in a world that is designed to keep us stuck in debt.
For example, my bank just doubled my credit card limit without my consent. They should have at least waited for me to celebrate a full month of debt freedom before shoving such a temptation down my throat!
To avoid such temptations, you should have a plan for your money after you attain debt freedom. I have enjoyed debt-free living for less than a month. I took the time to come up with a plan to help me stay out of debt forever, or for as long as it’s financially smart. I’m certain these tips will help you too.
1. Build strong financial habits
At the beginning of this year, I wrote about how to set financial goals that lead to results.
One of the challenges that I had always faced when setting life goals, financial goals included is that I never felt like I was making tangible progress towards achieving the audacious goals.
Do you have a similar experience? Where every new year you feel like you’re not getting there? That maybe you should give up on your audacious goals and write down smaller goals instead?
From conversations about money I’ve had with my friends and The Wealth Tribe community, a lot of people face the same challenge. And a lot of us also knew that we’d be millionaires by age 30.
But then we became adults with jobs and multiple responsibilities and we soon realized that nope, we weren’t accumulating the millions as fast as we’d hoped.
If you want results, forget all your goals, focus on building good financial habits.
The same concept applies if you want to stay out of debt when you’re debt-free. What will you do on a daily, weekly, monthly and yearly basis to stay out of debt?
Financial Habits Tracker
Download the best Financial Habits Tracker to help you attain debt freedom!
The best book on habits
2. Build an emergency fund
Not having an emergency fund is one of the reasons most people fall into the debt trap, and stay there for longer than they should.
After attaining the debt freedom status, you should make sure you always have 6 months (or more, depending on your lifestyle and unemployment rate in your country) of living expenses saved.
This money should be easily accessible and not invested in high-risk investments. The best place to invest your emergency savings is in a Money Market Fund.
Here is a detailed guide on how to build an emergency fund.
3. Have a plan for the money you were using to pay the debt.
Ideally, you should come up with this plan before you are debt-free.
I have read stories of people who attained debt freedom then went ahead to overindulge in the celebration of this milestone. They ended up in debt again.
How will you use the money that was previously spent on debt payment? How will you prevent yourself from spending this ‘extra’ money on impulse purchases?
My plan is to invest that money in fixed income securities. That will go towards ensuring that I have the perfect retirement plan.
4. Don’t put yourself in situations where you have to borrow
One of the dangers of publicly declaring that you’re debt-free is that people assume that you’re wealthy and that you have a lot of money available for lending.
This will open floodgates of people asking you to lend them money on any random day of the month.
Due to guilt and other factors, you might be tempted to lend too much which will lead to debt if the borrowers are unable to pay back on time.
Ideally, you should keep it a secret to avoid this problem. Otherwise, to avoid sabotaging your financial freedom journey, include black tax, charity or money that you can comfortably afford to lend in your budget.
5. Review your finances every end month
You may think that doing it every month is loads of work, but remember that we’re wired to spend before we save and invest.
Hyperbolic Discounting which is “the tendency for people to increasingly choose a smaller-sooner reward over a larger-later reward” is our default setting. You have to fight hard to get past this mindset if you want to stay out of debt.
This habit is a perfect way to control your expenses on a monthly basis instead of waiting until you find yourself in debt.
All the questions that I use to audit my finances on a monthly basis are here.
6. Stay ambitious
The debt-freedom status is something that a lot of people will never attain, sadly.
Congratulations on getting there! After you celebrate, as I did, go back to your goals and set the next ambitious goal!
This will prevent you from getting back into debt and celebrating for too long, both of which will sabotage your financial freedom journey.
7.Think about your relationship with debt going forward
We live in a world that’s determined to keep us buying more than we need.
To avoid the numerous temptations, you should also take time to think about your relationship with debt going forward. Do you want to stay debt-free for life?
Debt is a financial tool that you can use to attain other goals if used wisely.
I’ll keep using my credit card to pay all my bills and pay the debt in full at the end of each month as a way to earn reward points and improve my credit score. If you’d like to learn how to do the same, read this article.
Why should you be debt-free? Is being debt-free worth it?
There are two ways to make a guaranteed return in the investing world:
- Pay down debt (none of your money will be go towards paying the interest rates)
- Save on taxes.
Everything else is not a guarantee! Debt freedom should therefore be top of your financial priority list.
I would also recommend that you learn how to use debt as a tool to achieve your goals. Learn the difference between good and bad debt. Learn the system and use it to your advantage.
I shared how different my life is now that I’m debt-free here. There are many advantages such as reduced anxiety, better sleep, you achieve your goals faster, and your net worth grows faster.
Yes, in many ways, being debt-free is worth it!
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