Nine debt-free steps to get out of debt for good in 2020
Paying off your debt can seem like a lifetime chore. In fact, taking years to pay off debt is the #1 reason most people quit in frustration and never ditch the burden.
By the end of this video, you’ll have the nine-step process to get out of debt no matter what your income or how much you owe.
I’ve used this strategy to pay off over $15,000 in credit card debt and know others that have paid off tens of thousands more. You'll be able to use this process to get out of debt fast, maybe even by the end of the year.
A Complete Debt-Payoff Strategy
I’ve been wanting to put this video together for a long time. We talk a lot about beating debt here on the YouTube channel but I haven’t yet put together a complete debt-free video so that’s what we’re going to do today.
I’m starting off with six quick ways to find extra money to pay off your debt. Six tricks that helped me pay off over $15,000 in debt and that will help you find money in your budget.
I’ll then give you three more steps to completely pay off your debt by the end of the year, from payoff strategies to facing those biggest challenges to debt free.
I’ve got to put a little warning here first though. Getting completely debt free in a year, whether you’ve got five thousand or fifty thousand in debt, it’s going to mean some tough decisions. You need to commit to taking these nine steps I’m going to share and seeing it through to your debt-free future.
Making Your Debt Payoff Goals
Our first step here to debt free, and this one is crucial before anything else, is to sit down and make your goals real.
Making those goals real doesn’t mean just thinking them out for five seconds. It means sitting down and creating a story with what you want your life to look like. What will you do on a daily basis when you’re debt free? What will it feel like? How will your life be different?
Write out this story on a piece of paper. Then start making your debt payoff goals. How much do you want to pay off in three months, in six months?
You’ll use some of the other steps in the video to create these goals but the idea is that you have some shorter-term goals of how much to save and how much debt to pay off.
These smaller goals are going to feed into your longer-term one-year goal. They’re easier to reach than that big goal and they’re going to motivate you to keep going when you reach them.
Easy Budgeting for Debt Payoff
With your goals done, it’s time to write out your monthly budget, where your money is going.
Now I know I just lost half of you. This isn’t a budgeting video. We’re not going to be spending time skimping and cutting from your budget but we need to know where the money is going.
Using Spending Challenges to Pay Down Debt
Once you have that done, your first big money-saver is going to be to plan spending challenges. I love these for quick little bursts of saving money and they’re really going to reveal a lot about your spending.
The way a spending challenge works is you take one item from your budget, something you have a little control over like buying clothes or other shopping. Then you’re going to challenge yourself to cut that spending in half or cut it out completely over the next two months.
We’re not talking about going cold turkey and not spending anything. We’re talking a short-term challenge of a couple of months and on one or two spending items at a time.
These spending challenges work on so many levels and I guarantee you’ll love them as much as I do.
By only taking one or two items from your budget, you’re not trying to skimp and save every penny. You can still have fun. You’re just experimenting cutting back on a few things at a time.
Besides saving a lot of money, this is really going to show you what you don’t care about in your budget. Even after the spending challenge, you’ll find that some of these things don’t matter that much and you’ll keep saving money.
A blogger friend of mine, David, used this spending challenge idea for just six months and saved over $18,000!
Because these spending challenges are only a couple of months, they are super-easy to keep. You’re not trying to go a year without spending, it’s eight short weeks so you’ll always see the finish line.
What’s great is that eight weeks is right around the time it takes to build new habits and break old ones. Even if you go back to spending a little more after the challenge, those new habits are going to drive you and help you save easier.
Getting Rid of Junk and Getting Rid of Debt
Next is to do a complete clutter cleanse. Don’t worry, I guarantee it’s much easier than it seems.
A clutter cleanse means going room-to-room in the house and pulling out everything you don’t need, everything you don’t use. This means that treadmill you never used, those movies you never watch, even the furniture you never sit on.
Anything that isn’t being used regularly or making your life happier, it goes on Craigslist or eBay or where ever you can sell it. Old clothes can go to a consignment shop, videos and books to half-price books to sell.
Not only are you making a little extra money here to help pay off your debts, you’re also seeing what you don’t use. It might be a tough reality to face that you wasted your money buying some of this stuff but it’s that wakeup we all need to keep from wasting our money on more junk.
How a New Car Makes You a Slave to Debt
Our fourth step, and this is going to be another tough decision but it’s one that a lot of people need to make, is taking that cold, hard look at how you’re getting around every day.
I like watching the Dave Ramsey show, the call-ins where people talk about how much debt they have and then Dave yells at them for a few minutes. It’s kind of a stress-reliever, right?
What always amazes me about these, and you see this on 90% of the calls, is how many people have new car payments they can’t afford.
Seriously, people just don’t seem to see how a $600 new car payment is wrecking their budget. That’s the average new car payment according to the National Automobile Dealers Association and when you compare that to the average used car payment of $378 a month, that’s over $200 you could be saving every single month!
The NADA estimates that buying a used car just three-years old instead of buying new will save the average person over $130,000 over their lifetime. We see here that buying the same car just four-years older can save you over thirty grand, for one car.
Besides the payment itself, insurance and registration are going to be more on a new car.
Now I’m not saying you can’t have nice things or that you should never buy a new car. Enjoy your money! We don’t have a lot of time on this earth and you have to enjoy it. But you can’t enjoy life if you’re constantly stressed out from the burden of that debt. So you need to take a look at what’s parked in the driveway.
If it’s a new car and you have more than $20,000 in debt, sell that sucker or trade it in. Get a used car that’s going to save you a few hundred a month and use it to pay down your debt!
How Lifestyle Creep Keeps You in Debt
Our fifth debt-free step here is going to be to fight lifestyle creep. This isn’t like fighting the creep down the block, lifestyle creep is how your spending seems to rise along with your income so you’re always stuck in that paycheck-to-paycheck curse.
How is it that we get tax refunds or a raise every year but never have enough to save. You work overtime but the money just seems to evaporate into thin air.
It’s that problem of lifestyle creep. Our budget always seems to grow to eat up whatever income there is.
Fighting lifestyle creep just means writing out that budget, knowing how much you’re spending and then making that effort to not spend more just because you’ve got a little extra. The best way I’ve found to do this is to assign all your extra money to that debt payoff plan or to a retirement investing account.
By having a place for that extra money, it stops being extra and that temptation to fill the gap with extra spending goes away.
It might not seem like it will save much but I’d say this one has saved us the most money. I started the blogs and online assets in 2014 and we had to really budget our money tightly at first. I made just $35,000 that first full year but have grown it to over $90,000 in 2018. By not letting our budget grow as fast as our income, we save over $36,000 a year for retirement.
Freeze Your Credit Card to Get Out of Debt
Our final money saving trick here before we get to those three debt payoff strategies is going to be to freeze your credit card, actually physically freezing it.
This might seem a little extreme but it’s going to help in a few ways that most people don’t realize. McDonald’s found that people spend 56% more when they use their credit card, you just don’t get that mental accounting that limits your spending when you pay with cash.
Now I’m not saying to cut up your cards. I’ve got a credit card I use for business spending and it’s always good to have one for emergencies if you don’t have an emergency fund. Sending your credit back to the ice age is going to still keep that option but it makes you think twice about spending.
How to Pay Down Debt Fast
Just those six money-saving hacks are going to give you thousands to work with to pay off debt fast. None of them are terribly difficult and I guarantee you they will help put you back on track.
Now I want to share three more debt strategies, ways to pay off your debt and restructuring your debt to get it paid off as fast as possible.
The first is how to prioritize your debt payoff, and it’s amazing here how just a little tweak in how you pay your bills can mean a huge difference in getting debt free.
There are two debt payoff strategies that I’ve talked about on the channel quite a bit, the avalanche method and the debt snowball method. Picking one of these two strategies is going to help you save money on interest and motivate you when budgeting gets tough.
In the debt avalanche method, you list out your debts in order of interest rate from the highest rate to the lowest. You still have to make minimum payments each month but you use any extra money, money we found from those six savings strategies before, to make extra payments on those bills with the highest rate.
This method makes the most sense financially because by paying off those high-rate debts first, you’re saving money. A lot of times, these high-rate debts are going to be the highest payments as well so paying them off faster is going to free up a lot of room in your budget.
That other method, the debt snowball method, means listing your debts by order of amount owed from smallest to largest. Here instead of making those extra payments to the highest-rate debt, you’re paying more on the debts with the lowest amount owed. That means you’re going to see these small debts fall off your list faster.
And while that avalanche method might save the most money, that snowball method is hugely motivating. You’re going to see those debts fall off your list fast and that’s going to help you keep going with your budget and saving money.
But even if you’re not following a specific debt payoff strategy, I want you to try just putting an extra $15 a month to ditching your debt. Do more if you can but even this small amount is going to go a long way and save you a lot of money.
For example, here we see four payment plans for a traditional 30-year mortgage. Making normal payments would mean 360-months on the loan but putting an extra $25 a month to the loan, you pay it off twelve years earlier and save over $63,000 in interest. That’s more than sixty-grand in savings for less than the cost of that venti venti mochachino.
Use some of those six savings strategies we talked about earlier though and put an extra $200 a month to that same mortgage and you’d shave seven years off the loan and save over $46,000 in interest.
Lowering Your Interest Rates to Get Out of Debt Faster
The next step after picking one of these debt payoff strategies is to get your rates lowered on the debt you have. The average American owes over $16,000 on credit cards with an average rate around 18%. That means you’re paying almost $300 a month just to pay the interest charges.
That’s going to make it impossible to get out ahead so we’re going to focus first on these cards to lower our rates.
The first thing you can do is just call the credit company and ask for a six-month introductory rate. Tell them you’re thinking about a balance transfer to a zero percent rate but you’d like to stick with them if they’ll match the offer.
A lot of times, this is all it takes. Getting a six-month introductory rate on that $16,000 average balance means you’ll save over $1,400 on a call that takes all of five minutes to make. If your credit card company won’t lower your rate, then start looking for those introductory rate cards and make a balance transfer.
Either way, you’re going to be saving money that you can put into faster debt payoff.
Consolidating Debt Payoff
Another option is going to be to just consolidate your debt into a personal loan. This means taking out a signature loan from a site like personalloans.com to pay off those high-rate cards.
Even if you can lower your rate 4% on a personal loan, you’ll still save hundreds of dollars and you’ll get fixed payment and a payoff date instead of that hamster wheel of credit cards.
Making More Money to Pay Off Debt
So now you’ve got six savings ideas and two debt payoff strategies to help you pay down your debt but I want to talk about one more step that most people miss and one that is critical to creating your financial future.
The problem is that so many people living paycheck-to-paycheck are only looking at their finances from one side of the equation. They get into debt or are trying to get out ahead and they immediately go to budgeting and saving money.
But how realistic is that when your budget is already cut to the bone? They say you can’t squeeze blood from a stone and you can’t save money from a budget that is barely enough to make ends meet as it is.
Instead, what I want you to do is to look at this from the other side of the equation. Don’t look at it simply from the side of saving money but actually making more money as well.
This doesn’t mean getting a second job. It can be as simple as spending just five or ten hours a week in a side hustle, making that extra $200 a week to help pay down your debt faster. You’re not only going to be getting out of debt, you’re going to be happier because everything isn’t depending on skimping and cutting your budget to live like a miser.
Doing all this, you’re going to be amazed at how fast you pay off your debt. I’ve talked with people in the channel community that have paid off over twenty grand in a year from using these ten steps. It’s a great feeling when you get out from under that constant burden of debt and I want you to feel it.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.