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Being in debt to a bank, credit union, or another person is one of the main things that holds so many people back financially. Instead of working for ourselves, we spend hundreds of hours every year working to make someone else wealthy.
How demoralizing is that?
Instead of making money that will help us live a comfortable life, we are making money that we have to instantly give to a bank. Have you ever noticed that banks have the nicest real estate in every major city? They are able to buy those fancy buildings because of all the interest that you and I have paid to them over the years.
Now, I’m not mad at banks. I just want to keep all of the money that I make instead of using it to buy new furniture for the bank’s lobby.
In other words, I want to get out of debt.
Fortunately, I have figured out how to do it. However, getting out of debt is not an easy or quick process. It takes a lot of time and energy, but it is possible to do.
My credentials
If I’m trying to increase the amount of weight I can bench press and get stronger, then I probably want to talk to someone who has done this before. The best teacher for me would be someone that used to struggle while lifting the 45 pound bar, but now can bench press 300 pounds or more.
Fortunately for you, I’m that person when it comes to debt.
Eight years ago, my wife and I had $442,500 in debt! Even though we are both teachers and make modest teacher salaries, we were able to get rid of most of that debt. As of this writing, we only have $44,000 in mortgage debt remaining and are working to pay this off quickly!
We got rid of $398,500 in debt.
Like I said before, it wasn’t easy to do. It definitely took a lot of time and energy. But we did it and you can too!
Step 1: Start with your why
When doing anything, you first have to figure out why you are doing it. If I asked you to set aside $500 per month, I guarantee that you would want to know why. How will setting aside this money make your life better?
If I told you to get up at 5 AM every morning to go running, you would need a reason to leave your comfortable bed before you would be able to convince yourself to get up. Does running make you feel good? Are you training for a race? Are you trying to lose weight or just be a happier person? Why should you go running?
Once you know why you should do something, then it’s possible to actually make a plan to do it. If you know that running makes you feel better, then you may be able to convince yourself to get out of bed, even though 5 AM is really early.
So why do you want to get out of debt?
It’s definitely not going to be easy. Like I said, I’ve been working on getting out of debt for eight years. But it is going to be worth it.
My why
I wish that I had a simple, 5 word reason that explains why I want to get out of debt. It would certainly make for a great tagline for this article.
Unfortunately, I can’t boil down the reason why I want to get out of debt to a simple 5 word phrase. But instead, there are many reasons why my wife and I want to get out of debt.
We want to travel more, have an option to retire one day, and help pay for our 3 kids to go to college. We also used to pay around $40 in interest payments per day on our debt. As teachers, that meant that we each spent the first hour+ of each day working to pay down interest!
Basically, we want to have freedom to do anything that we want to do. Getting rid of the albatross of debt helps us get that freedom.
Your why
Do you want to retire before age 65? Even if you love your job, you may be forced to leave because of circumstances beyond your control.
Are there hobbies and activities that you love to do? Wouldn’t it be nice to have more money and time to devote to these activities?
Do you have a bucket list full of travel ideas? Although there are easy ways to get free travel, having a bit of money will help you travel to every place on your bucket list.
In other words, why do you want to get out of debt? Try to come up with a few ways that your life will become better when you get out of debt. If you can create a 5 word phrase that explains why you want to get out of debt, then do it! If not, create a list of reasons why you want to get out of debt. Internalize this list. Realize that getting out of debt will change your life in so many great ways.
Getting out of debt will set you up for success in so many areas of your life.
And after you have your “why,” then you can focus on how to actually start getting out of debt.
Step 2: Create a visual reminder
I’m a strong believer that we need to see our goals every single day or week. This allows us to be constantly reminded of them and encouraged to meet them. So since getting out of debt will be a big goal, we need to somehow have a visual reminder of this goal.
It may be as simple as writing down “Get out of Debt” and putting it on your bathroom mirror. Or we may need something that is more visual and motivational.
- If you have $100,000 in student loan debt, then perhaps you can divide a sheet of paper into 100 squares. Every time you pay off $1,000 on your debt, you can color in one square.
- If you owe $80,000 on your home, you can put 800 marbles in a jar. When you pay off $100 worth of debt, you can take a marble out of the jar.
- If you have 9 different credit cards that you owe money on, you could make a picture frame and put a chopped up credit card inside the picture frame every time you pay one off.
Since my wife and I wanted to get our kids involved and excited about paying off debt, we had them create a block of Legos where each Lego represents $200 worth of debt. It’s been exciting to see this block of Legos decrease in size over the past few years. The kids enjoy removing a few pieces every time we pay off some debt.
Step 3: Find out how much debt you have
In order to create a visual reminder of the amount of debt that you have, it helps to actually know the amount. Debt guru Dave Ramsey recommends listing your debts from smallest to largest. I am a bit different from Dave Ramsey in that I recommend listing my debts by interest rate instead of by their size. I would rather work towards paying off a $6,000 credit card loan at a 16.9% interest rate than a $2,000 car loan at 6.9%.
Either way, it won’t really matter too much. The important thing is to make sure that you list every one of your debts, including your mortgage.
Next to each debt, you should also list the amount of money that you have to pay each month, or your minimum payment. Some of these may change each month, but you can just use the amount that was on your statement from last month.
Here’s an example of what this list can look like.
| Debt | Amount | Interest Rate | Minimum Payment |
|---|---|---|---|
| Home Depot Card | $230 | 20.9% | $25 |
| Amex Card | $6,457 | 18.9% | $220 |
| Car Loan | $13,254 | 7.9% | $337 |
| Student Loan | $54,340 | 6% | $680 |
| Visa Card | $1,200 | 4.9% | $35 |
| Mortgage | $139,524 | 3.99% | $904 |
| Total | $215,005 | $2,201 |
Notice that the minimum payments on this sample list are $2,201. Yours may be higher or lower, but imagine if you didn’t have any debt. You would get back all of these minimum payments that you have to pay on your debt.
Instead of paying minimum payments you could save, invest, give, or even spend more.
All because you were able to get out of debt!
Step 4: Get started and get radical
I know that most people don’t start their adult lives out planning to get into thousands of dollars of debt. But unfortunately, we look up one day and realize that we’re there. We somehow managed to wander into debt.
However, even though it is easy to wander into debt, it is impossible to wonder out of it.
To get out of debt, you have to get fierce, radical, and completely committed to the process.
You won’t get out of debt by sending $10 extra to your credit card company each month! You won’t get out of debt with the change that you find in your couch! You won’t get out of debt by working 1 hour per month of overtime!
Instead, you will get out of debt if it becomes a top priority and it is one of the main things that you commit your money to every single month. So how can we do it?
Create a budget
I know that people are scared of the word “budget.” But c’mon, all that a budget does is tell you how you want to spend your money. If you want to buy some plants from Home Depot, just put this money in the budget. Then you will feel like you can actually spend the money.
A budget can actually be freeing instead of limiting because it allows us to spend money on stuff that we actually need or want, without having to worry about not being able to pay for it at the end of the month.
Once you create a budget with your spouse or significant other, work to actually follow this plan. If you need to go outside of this plan that you agreed on, talk to your spouse beforehand and agree that you are changing the budgeted amount.
Create a philosophy
If you’re in debt and you buy a soft taco from Taco Bell for $1.39, it’s kind of like you just financed that soft taco. Even worse, if the highest rate on your debt is 20.9% on a Home Depot card, then it’s kind of like you just financed that soft taco with a 20.9% interest rate.
If you knew this before eating the taco, would you have bought the taco?
Soft tacos from Taco Bell are one of my all time favorite fast foods, so I probably would have bought the taco if I was really hungry. But this is important to think about.
If you’re in debt, then everything you buy prevents you from paying down your debt.
Obviously, this doesn’t mean that we should stop buying everything, but instead, it means that we should keep this in mind with every purchase that we make.
Don’t add to your debt
When we were at the beach last week, my kids were working on creating a huge hole. But just to mess with them, I threw some dirt into the hole every time they went into the water to swim.
Actually I didn’t, but wouldn’t it be horrible if I did? They might never be able to complete the hole. Of course, the same thing goes with our debt. If we have $215,000 of debt, but we add a few hundred dollars of debt every month, it would be impossible to ever get out of debt.
So if we’re trying to get out of debt, then we have to make a commitment that we won’t add to our debt. The budget will help with this, especially for the little expenses. For bigger expenses that pop up every so often, it helps to make sure that we have a plan to handle these expenses. I like to save for these expenses in a separate account, so that they aren’t something I have to put on the credit card and never pay off.
Stop the cycle of car debt
I was driving with a couple of friends down to a running race last month. One of the guys has a real nice truck, so I was kind of lounging in the backseat, relaxing in total comfort. The owner of the truck mentioned that he only had a couple more years of payments on this truck and that he would be excited when the payments were gone. He also mentioned that he looked at some of the brand new Ram trucks and was really impressed with some of the features on them.
Fortunately, he decided not to buy one of the brand new Ram trucks. If he really wants to get ahead, then hopefully he will also decide to break the cycle of car debt by buying a used truck next time with cash.
Stopping the cycle of car debt may be tough, especially if you are used to having nicer vehicles. But wouldn’t it be nice if you didn’t have to pay a $500 auto payment to Chrysler each month? Not only would you avoid the financial disaster of buying a new car, but you would have $500 extra per month!
Work more
You may feel like you work all the time and that it is impossible to get ahead financially. You get up at 6, leave for work by 7, and finally drag yourself home at 6 after another long and difficult day.
It’s a difficult life to live, but it’s something that you, me, and millions of people do every single day of the week. And to be completely honest, the last thing that most of us feel like is working extra after we get home.
But … what if we have a purpose for our extra work? What if we used our extra work to pay off our excess spending, not so we can keep spending more and more and more, but instead so that we can get out of debt forever? Instead of sending thousands of extra dollars in payments to the bank every month, what if we could keep this money and use it to get off the treadmill of 12 hour work days?
Then … could we work a little more? Maybe we could start a side hustle that ends up paying us way more money than our current job. Or maybe we would just work a few hours of overtime knowing that every single extra dollar we make would go towards paying down our debt.
If you are going to work more, then you must have a purpose to do so. Paying down debt can give you that purpose.
Send every extra dollar to your highest interest rate debt
You and I occasionally get a check in the mail, some birthday money from our parents, or even a refund from our insurance company. It might be a check as small as $25 or one larger than $500, but we both occasionally get extra money throughout the year.
It is tempting to throw this money into our checking account and then use it to buy a new cell phone, pair of jeans, or a GoPro. But then in two years, all that we would have to show for our windfall is an old cell phone, a worn pair of jeans, or a broken GoPro.
Instead, we should always use any extra money that we find to pay off our debt.
I know that this might not be as cool as a new cell phone, but this extra money is money that we didn’t really count on … so we might as well put it towards something useful!
Lower your interest rates
It might scare you to know that my wife and I had over $50,000 in credit card debt in the past. You may be thinking that this guy on Life Before Budget can’t really be a debt payoff guru if he was paying 19.99% interest on some credit card debt!
And … honestly … you’d be right. Paying 19.99% interest makes it almost impossible to get out of debt.
However, before we used our credit cards to get free travel, we used them as a tool to help pay down our debt. Instead of paying a 19.99% interest rate on our credit card debt or even 6.99% on a car loan, we used balance transfer offers to pay interest rates of 0-4%.
Unfortunately, lowering your interest rates isn’t really talked about by most debt “gurus.” Even my man Dave Ramsey doesn’t really focus on it. And … I get it … lowering the interest rate by itself won’t be enough to get out of debt.
However, what if you lower your interest rate and get radical with paying down your debt? Then this debt will disappear!
There are two great ways to get your interest rate lowered.
Way #1: Call up the credit card company or bank that currently has your rate and simply ask for the rate to be lowered. They may tell you no, but they will never raise the interest rate just because you asked about it!
Way #2: Shop for a lower interest rate. If you have a mortgage, you may want to call a few mortgage companies and try to refinance your loan with them. Keep in mind that if you only have 12 years left to pay on your mortgage, then you should not refinance into a longer-term mortgage. Never turn a 12 year loan into a 30 year loan!
If you have consumer debt like a credit card, student loan, or a car loan, then you may want to look for a balance transfer offer from a credit card you already have or a new credit card. I probably used balance transfer offers 5 or 10 times while I was working to get out of debt. I even used them to lower the interest rate while I was paying off part of my mortgage (although I really wouldn’t recommend this).
Balance transfers are simple: All that you have to do is apply for a new credit card that has a good balance transfer offer. Many credit cards charge a balance transfer fee of 3% (or so), but you’ll get a 0% interest rate for 12 or 18 months.
The key is to make sure that you are working during this time to pay down your debt so that you don’t have to go back to that huge 19.99% interest rate. For a list of credit cards with good balance transfer offers, just check out this link.
What about the mortgage?
One of the touchy subjects in the personal finance community is the issue of paying off the mortgage early. Should we? Shouldn’t we? Does it even matter?
I can definitely see both sides of the argument. On the one hand, mortgage interest rates are pretty low, so we may get a better return if we invest our extra money in the stock market. But on the other hand, it really would be nice to not have to send $1,000 or more to our mortgage company every single month.
To determine if you should try to pay off your mortgage early, you may want to ask yourself this question: If my home was paid off, would I go to the bank and take out a mortgage loan in order to invest this money?
My simple answer to this question is that I wouldn’t … so my wife and I are working to pay off our mortgage early. You may answer this question differently and may decide to keep your mortgage around a bit longer.
Step 5: Celebrate the wins
With my philosophy of Life Before Budget, I feel that we should never wait for a certain milestone before we begin to live our lives.
We should never let our money dictate what we are going to do in our lives.
However …
When you work real hard at a goal, it’s important to celebrate the accomplishment of that goal. Especially if that goal has taken you months or years to accomplish. Therefore, make sure that you celebrate when you pay down your debt!
Did you just pay off a credit card? Toss some steaks on the grill and have a celebration!
Did you just pay off a car loan? Use that car to go on a great vacation!
Did you just get rid of your student loans? Let’s celebrate by burning the (non-important) paperwork in a huge bonfire!
Make sure that you live a great life while you are getting out of debt, but also make sure that you celebrate when you reach each milestone!
You can do this! You can get yourself and your family out of debt! And then imagine all of the great things that you will be able to accomplish with that extra money!
It’s worth it … now let’s get started!!!
Let us know what you are doing to get out of debt in the comments below.
And thanks for reading!
~Nathan
Let’s keep living a great life … with the help of money. So what’s next?
- You can travel for free by using rewards credit cards.
- You can check out the next post or the previous post and continue to learn.
But no matter what you decide to do, let’s leave the ordinary behind and take action today!
6 Comments
Anonymous
“If my home was paid off, would I go to the bank and take out a mortgage loan in order to invest this money?” I like thinking about this question from this perspective. Nice.
Life Before Budget
It just convinced me that I would rather get rid of my mortgage than invest extra money.
Dan
Great stuff, congratulations and keep and the good work.
Life Before Budget
Thanks, Dan! We always have to keep plugging away at the debt.
Kate
Great post, Nate. Saving this one for reference!
Life Before Budget
Thanks, Kate! Getting out of debt is so important in every aspect of our financial lives. Good luck with your journey!