Becoming Debt Free

One of the first steps in reaching financial independence is escaping the bondage of debt. Debt keeps you from saving and investing the money you need to reach your FI goal. I despise being in debt! I look at interest payments like a fine for not properly managing my money. I have been debt free for almost nine years now and I don’t plan on ever going back.
Debt is everywhere. You can get a loan for just about anything these days. If you are like me, you probably get a few dozen new credit card offers a week. We live in a world where we don’t have to wait to receive instant gratification. See a brand new shiny object that you just gotta have, put it on credit. It hasn’t always been like this. Credit used to be reserved for things like buying a house, big ticket items. My grandparents had to wait and save up the money if they wanted to buy something new. I encourage you to be like my grandparents in this regard.
So you are already in debt, what do you do now? The first thing you have to do is make a budget. Yeah I said the b-word. If you are in debt, you probably don’t know where all of your money is going in the first place. Making a budget lets you see what is coming in every month and more importantly where all those hard earned dollars are going. Track everything you spend money on for a month. Review your regular bills, your credit card statements, and your bank statements. Be honest with yourself and develop a true accounting of where you stand. You can use tools like Everydollar.com or PersonalCapital.com.
Now that you have a budget, the next thing you want to do is find things to eliminate from your budget so you can attack your debt. Be ruthless in this endeavor and cut, cut, cut. Once you are out of debt you can loosen the reigns a little, but until then I want you to be laser focused on eliminating debt. You may have to stop going out to eat. You may even want to sell your expensive financed car and buy a cheap used one. The point is we want you to have extra money every month so you can take big swipes at your debt.
There are two popular ways to tackle paying off debt. One is the debt snowball and the other is the debt avalanche. In the debt snowball you list all of your debts from least to greatest dollar amount. Then, while still making the minimum payment on all of your other debts, you attack the smallest debt with the extra money you have carved out of your budget. Once you have paid of the first debt you move to the next smallest debt and so on until you have paid them all off. The debt snowball is nice because you get a little encouragement each time you pay off a debt. This builds momentum as your snowball gets bigger and bigger.
With the debt avalanche method, again you list out all of your debts. This time however, you put them in order from highest interest rate to lowest interest rate. Again, while still making all of your minimum payments, you tackle the highest interest rate debt first with all of the savings in your budget. After you have paid off the first debt, you move on to the next highest interest debt and so forth. The debt avalanche method makes the most sense financially because it pays off your higher interest rate debt first, saving you the most money in the long run.
I recommend a hybrid of the two methods. I recommend paying off your lowest two or three balances first, then focusing on your highest interest rate debts next. This allows you to gain the mental momentum of the debt snowball and the savings that comes with the debt avalanche.
This will not be easy. Depending on the hole you are in, it might take several years to dig yourself out of debt. YOU CAN DO IT! I recommend making a debt payoff chart or some visual representation of your progress. Review your budget from time to time and make sure there is nothing else you can cut back on. You may want to find a way to make extra money while you are tackling debt, so you can pay it down even faster. Don’t give up. Just think of all the things you will be able to do and all of the money you will be able to save once you have broken the bonds of debt.
Are you getting out of debt? Debt free already? Which do you like better the debt snowball or the debt avalanche? Comment down below. As always, thanks for reading.

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