How To Be Debt Free | Part 1
Starting small and setting goals.
A Debt-Free Life is a topic that often comes up when we talk to people about our motivation for downsizing and simplifying our lives. Simply put, we were not happy spending the majority of our income on debt. Instead, we wanted to reduce our monetary output and increase our experiential input. We want to use the money we earn to help create amazing experiences for our family, and we want to spend less of our money on paying off debt.
What's the first step towards becoming Debt-Free?
Step #1 Towards Debt-Free Living: Develop A Plan!
That answer probably annoys you to see, but it's the truth. When we decided we wanted to work towards a Debt-Free Life, we knew it was going to involve creating a plan, and we had to be realistic. We knew that this plan would largely involve simplifying our lives. We knew we were going to have to get rid of a lot of stuff, sell our home, figure out our new living situation, reprioritize our finances, and more. It’s ironic that in order to simplify life you have to get through an initial time of frantic distress in order to reach the end goal. But we knew it was going to be a lot of work up front, which is why planning was a vital component.
Most of the people we speak with about living debt free think it’s “smart” and “a wonderful idea”. Most people say something like, “oh I wish I could do that!” Immediately I think people think about those advertisements they see about how you can be Debt-Free in 6, 12, 24, or 48 months. While these schemes may seem inviting with the idea of alleviating debt very quickly, their approaches often have a low success rate, and can often drive people into making quick decisions that may affect their lives negatively over time. So let’s forget about those quick-debt-free schemes all together. In a later post I will provide some good tips to help you lower your monthly payments, and alleviate the burden of your debt, such as with debt consolidation.
For those of us in the real world (no, not the MTV show, get that out of your head!), let’s remember that a Debt-Free life is not going to happen overnight. As such, you have to carefully plan for this journey. We need to be fervent, and explore all available options, all available resources that will fit within our means to help us alleviate, and hopefully eliminate our debt. This is why the first step in achieving the all-too-rare Debt Free Status is to develop a plan.
Antoine de Saint-Exupéry says it very well; “A goal without a plan is just a wish.”
So what should this plan look like? It starts with a budget!
Being Debt-Free means you are a highly motivated and organized individual. You probably keep a close eye on your finances, keep track of your spending, and have a budget you try to stick to. If that’s not describing you, then the first thing you need to do is create a budget. Begin by figuring out where your money is currently going.
If you’re not already involved in your finances, and know exactly what your money is being spent on, then get ready for some dramatic revelations.
Start by contacting your bank (if you enjoy those stacks of continuous printer paper with all of those holes on the side, and you don’t already bank online…) and ask for copies of your bank statements for the last 2 to 3 months. Sit down at your dining table with a cup of tea or coffee, or if you’re nervous about learning where you spend your money, perhaps go for something stronger. Now begin analyzing your statement. Write down the things you’re spending the majority of your money on; bills, mortgage, rent, food, entertainment, coffee, eating out, etc.
Congratulations! This is the beginning of you taking control of your money. Now that you have an idea where your money is going, you can start creating your budget. We do not need to re-invent the wheel here people. Why waste our time with that?
Don’t worry about creating a budget out of scratch.
There are thousands of budget templates available online for free. I’ll include one at the end of this post that we have used in the past. Remember to start small, and don’t overcomplicate your budget in the beginning. Start with the basics, and after a few months of learning the ins-and-outs of budgeting you can start using more descriptive budgeting templates. You will quickly learn what works for you, and you can start customizing your budget to fit your lifestyle.
So where IS your money going? Let’s answer a few questions…
1. What is my total debt amount? (Credit cards, mortgage, auto loans, student loans, etc).
2. What is my total monthly debt payment? (Payment for all debt combined).
3. What is my net income? (Your income after all taxes and deductions are taken out).
4. Subtract the total debt payment from your monthly net income. What is the remaining amount? This is your available income each month.
These are important numbers to know. Total debt. Monthly debt payments. Monthly net income. Remaining available income.
Memorize these numbers. Think about these numbers every day. Our answers to these questions a couple of years ago is what pushed my family to re-evaluate our lives. We did not like our answers to these questions, and vowed that we would change them. We knew the path towards eliminating debt would be difficult, but we were ready for the challenge.
We knew we would be giving things up, living in a smaller space, and not spending as much money. We knew we would have a strict budget, and would do our best to stick to that budget. We also vowed not to accumulate more debt in this process, so credit cards and loans were not an option for us. We also knew we needed to build up our savings in the process. We knew the next few years would be filled with difficult decisions, but we also knew that the benefits would far exceed our expectations.
Stay motivated! Remember your end-goal.
No matter your plan; whether it is to be Debt-Free in 2 years, 5 years, or 10 years, taking control of your finances and creating a realistic budget that you, your spouse, and your family can stick to and maintain will more than set you up for success.
And remember, a Simple Life is a Happy Life!