The Ultimate Guide to Becoming Debt-Free

 

Debt is stupid. It robs you of your options. – Chris Locurto

The facts are staggering. Debt is a problem and it is getting worse.

• Average student debt increases while wages decrease.
• 40 Million Americans hold student debt.
  • 7 Million of those have defaulted on these loans.
• The average American carries nearly 4 credit cards (down from 5.5 in 2008).
• Total student loans in the U.S. have exceeded $1.1 trillion, and revolving consumer debt is $875 billion.

To be financially free and truly wealthy, you have to get out of debt. Yet, so many people are strangled by it. Not only is it hard to pay off, but it also makes it even more challenging to build your wealth in the future.

Here are some of the impacts of having debt:

• Stress: not only is there this feeling of a black cloud over you, but it impacts your family, health and relationships as well. Money issues are the #1 cause of divorce.
• Bad credit score: by defaulting on a loan and/or carrying a lot of consumer debt, you’re hurting your credit. This impacts your future opportunities, including: renting, getting a mortgage, car insurance premiums, starting a business or getting a job, and much more.
• It is harder to get a job: 60% of employers run credit checks before hiring, and some colleges hold transcripts of those that are behind on payments.
• You pay more in the future: the worse your credit, the more interest you’ll pay in the future when getting other loans. It is a self-fulfilling prophecy that you want to get out of as quickly as you can.
• Opportunity cost: instead of putting your hard-earned money to good use (investing, fun, freedom), you have to use it to pay off debts and interest.

As a result, hear this loud and clear:

Getting out of debt has to be a paramount financial priority in your life.

The good news is that you can overcome massive debt. 

• After college, I personally overcame $80,000 of debt in under 3 years (mostly student loans).
• YoPro Wealth podcast guest Jason Vitug was $78,000 in debt and has still accomplished amazing things at a young age in the corporate world and as an entrepreneur at Phroogal.com.
• Randy Brunson, one of the experts below, found himself $1.2 Million in debt just a few years ago.

You just need to learn the steps necessary to do so. Fortunately, I asked a bunch of experts for their advice on how to approach this growing challenge. Here are their responses for exactly what you need to do to become debt-free.

1. Make the Decision

Everybody wants to be debt-free, but you don’t actually do so until you do one thing: decide.

You have to decide that enough is enough, and that you’re going to commit becoming wealthy. The way to get there starts with getting out of debt.

Randy Brunson (who was $1.2 Million in debt) said, “Step #1: We decided we had to be debt free, and were willing to do anything, as long as it didn’t cross legal or moral lines, to get there.”

One of the best tips is to decide you want to be out of debt. Once you do that, things can fall into place. – Vanessa Wade

Once you make the decision and commit, the resources show up in your life to help get you there. Decide. The choice is yours.

2. Know What You Owe

“Assess Your Debt — The first step in conquering debt is finding out how long the journey will be, and where to start. Start by finding how far you have to go; order your credit report for free at AnnualCreditReport.com. Add up all your consumer debt numbers (for both spouses if married). Most consumers don’t know how much debt they have, which is why this step is so important.” – Ellie Kay, author and financial expert

You can’t fix what you don’t know, so you really need to become aware of the specifics of your debt situation. Some items you should know include:

Loan balances, payoff dates, minimum payments, interest rates, and who the lender is

“One of the first steps to getting out of debt is to educate yourself on exactly where you stand — a surprising number of people who stress about their debt aren’t even sure exactly how much they owe and to whom. You can’t craft a solution if you don’t have a good handle on the problem.” – Lauralynn Schueckler

3. Identify the Problem

Not only do you need to know your loan details, but you need to do a self-check and understand what the problem really is.

Matt Rinkey, President of Illumination Wealth, said this is a key step to start with. “Identify the debt problem – where is it coming from financially (as in, what money mistakes are you making), and what is the root cause (money habits or attitudes)?”

He then says to eliminate that problem. If it is credit cards that are keeping you in debt, then get rid of them.

Jon Dulin over at Money Smart Guides, said that getting out of debt for him had nothing to do with money.

“I had gotten myself into credit card debt after college when I couldn’t find a job. I got depressed and began to buy things because it gave me a high and made me feel better. I tried several times to get out of debt but found myself trapped in the vicious cycle. I was finally able to get out of debt when I took the time to be honest with myself and look within. I had to admit to myself that I was depressed. It was a hard thing to do, but it was the only way I was going to get out of debt. Once I admitted this and took steps to overcome my depression, I was able to get out of debt. So, my tip is to find the real cause of your debt.

The majority of times, it isn’t a spending a problem. It’s something deeper inside of you. That is why I think so many can’t break from the vicious debt cycle – they never get to the root problem. They just blame it on bad money management skills.”

4. Set Your Attitude for Success

Once you find that root problem, address it and then create an attitude for success.

“Change Your Attitude- We are made up of two things: our attitudes and our actions. We don’t have a money problem, we have an attitude problem. The main reasons we are linked to debt is tied to pride, lack of discipline, lack of contentment, and the idea you owe it to yourself. The best way to adjust your money problems is to readjust your focus and adopt a new attitude that incorporates wealth affirmations, faith, purpose, and frugality.” – Natasha Campbell, Founder & CEO at Lifestyle

Become happy with who you are, not what you have or what other people think you should buy. – Ilene Davis

5. Cut expenses.

The most important piece of paying off debt is having more money. The quickest way to ‘earn’ more money is by saving. Ken Rupert, author of the soon-to-be released book 10 Ways to Maximize Your Income, shared his O.N.C.E. system with us.

“Getting out of debt is a simplistic formula: spend less than you earn. So, the best tactic for getting out of debt (and staying out of debt) is to reduce your spending. However, this requires a change of behavior.

I use a priority system for evaluating potential purchases. I call it the O.N.C.E. Priority System.

• Obligations – income taxes
• Necessities – food, clothing, shelter and transportation
• Commitments – financial promises (existing debt)
• Everything Else – your wants and desires

When my wife and I are planning to make a major purchase, we evaluate which category this purchase would fall into. After we appropriately categorize the purchase, we then evaluate how the purchase will impact the other categories. For example, if we wanted to purchase a new car we would evaluate how this purchase will impact the categories of necessities (transportation), commitments (new debt), and if the purchase is actually needed or would the purchase of a reliable used car be more appropriate (everything else).

Operating on a priority system that evaluates the impact of major purchases keeps our feet on the ground and our heads out of the clouds. There is clarity, purpose, communication and trust between us. This priority system created for us a set of checks and balances that has positioned us to be financially stable. Because of this, we have no debt, no mortgage, and have much more financial freedom to help others and support organizations that espouse our values.” – Ken Rupert

Other suggestions for how to cut expenses are:

• “You must track your spending for at least 30 days. Then review the findings looking for leaks. Plug those leaks and use the found money for debt repayment.” – Gail Cunningham
• “Create a shopping calendar and impose wait times on unplanned purchases.” – Matt Rinkey
• “You can also try a cash-only diet. Withdraw from the ATM the amount of money you can spend each week, and when it’s gone, it’s gone. When you have the tangible money in your hand and you can physically feel it depleting each time you spend, you are much more likely to notice what you are buying and be careful about it, rather than if you just have the ease of swiping a card. You can’t spend what you don’t have.” – Elle Kaplan
• “We let our home go and moved into an apartment, began eating at home on a regular basis, reduced our cable subscription to the minimum, and got rid of our home phone, continued to drive cars we’d had for several years, and closed our credit card accounts.” – Randy Brunson

When used to pay down debt, a penny saved is more than a penny earned since you don’t have to pay interest. This is important to recognize and take seriously.

6. Ask For Help

Depending on your situation, there may be some options to help reduce your debt load.

The credit experts at Lexington Law said to ask for help:

“Many people need a helping hand at some point, and creditors are no stranger to the concept. If you’d rather not lean on family or friends, however, consider relying upon your creditor’s good graces instead. Contact customer service and explain the situation, including:

• Why you cannot pay your bill in full
• What you are able to do at this time
• How you are willing to abide by a creditor-imposed plan

When all else fails, make a deal with your creditor. Never consider this option without first coming to a written agreement. Ask the creditor to send you a postmarked letter verifying the settlement amount and a promise that they will not report a negative citation to the credit bureaus. If they refuse, it’s time to find another path. Remember that credit score protection is the goal in this case, so don’t ruin yours by making a hasty decision.”

Whether it be holding off on payments until you have the money, consolidating your loans together, foregoing a balance or reducing the interest rates, these action items can save you many thousands of dollars. National debt and credit expert, Kevin Gallegos explains some different options to consider:

• “Negotiate. Try calling creditors and asking for temporary hardship status. Some creditors may work out payment plans if you have had a true temporary hardship.
• Consolidate debt on your own or with a service (if you have many accounts with crippling interest rates).
• Consider debt settlement – now regulated by the FTC – if you cannot make required minimum payments. These businesses work on a consumer’s behalf to lower ‘principal balances’ owed.
• Consider credit counseling. It’s generally not non-profit, and reduces only interest rates. Credit counseling agencies have pre-arranged agreements with credit card companies to lower interest rates on existing debt to a creditor-issued ‘concession rate.’
• Look at bankruptcy as a last resort.”

7. Make More Money

Not only do you need to focus on the defensive strategies and habits, but to pay off debt the fastest you also need to go out and try to make more money as well. One of the steps that Randy Brunson and his family took was for his wife to go back to work full time. Many of the other experts agree.

“Consider getting a part-time job and dedicating that entire paycheck to debt repayment.” – Gail Cunningham

Adding more work isn’t ideal, but it may be necessary if you want to rid of the debt in the quickest way. Again, the goal is freedom. Figure out what is truly important to you and make the appropriate decisions to get you there.

How else do you make more money? We talk all about it in the book Make Money, Live Wealthy.

8. Have a Plan of Action

“Create a Plan of Action — You are the ruler of your financial house. You can build your plan on sand or cement. Create a financial plan outlined with specific and realistic goals to repay your debt.” – Natasha Campbell

There are two core strategies for how to pay off your loans; they’re called the snowball or stacking/avalanche methods. Kevin Gallegos explains:

“a. Avalanche:

Pay off debts by starting with the one with the highest interest rate. Make minimum payments on each debt except the one with the highest interest rate. For that, pay the minimum plus any extra you can afford. Repeat monthly until that debt has been paid off. Then, keep paying the same monthly total – but put every dollar used to pay off the highest-interest debt toward paying off the debt with the second-highest interest rate. Keep following this strategy until you’ve cleared away all debt.

b. Snowball:

Pay off the smallest debt amount first, and work up from there. Pay the minimum on all debts. Then apply any remaining funds from your overall allocated amount toward paying off the debt with the smallest balance. After you pay that off, continue paying the same monthly amount you started with. Pay the minimum on all debts, but put all remaining funds to knock out your second-smallest debt faster.”

The best option for you depends on your style. Gail Cunningham explains:

“Determine what motivates you. If your debt is large, you’ll likely need to stay with whichever plan you select for a long time.

If you’re a numbers person, you’ll realize that the high interest card is doing you the most financial harm, thus you’ll want to power pay that debt. However, it may take a while to see real progress on a large debt.

If you need more frequent motivation, power pay the smallest debt. Fairly soon you should have it paid off, and one less bill in the mailbox. That will serve to motivate you to keep going.”

9. Go!

You’ve done the background work; now it is time to go! You have to start taking action and make getting out of debt your top priority.

“All IN — I’m not a poker player, which is where the term comes from, but being “all in”, is when you put all your chips on the table and decide to play your hand. With consumer debt, it’s important to commit to getting out of debt and that ALL the money you save is going to go toward consumer debt. ALL the unexpected money that comes in (tax refunds, bonus checks, birthday dollars) will go toward paying the principle on those credit cards.” – Ellie Kay

You have to focus and pay off as much as you can without getting into further debt.

10. Make it Simple

What you have to do with anything is make it as easy as possible on yourself to succeed. Set up a specific structure so that you know how much is going where.

“I highly suggest treating debt payment as a fixed cost line item on a monthly budget. This way it’s accounted for in the budget at the first of every month and you’re not just sending in what’s leftover at the end of the month (which isn’t much for most people in this situation). I would also highly recommend setting up automated payments from your checking account. This will create discipline to know that payments are being made and you can always add more to it at the end of the month.” – Clint Haynes

Automation is another key for your success. If you set this up, you won’t have to do any work, and you won’t even realize the money is gone! The goal is to do as little of work and have as little opportunity to do with your money as you wish (because we’ll find a way to spend it if we have it!).

The experts suggested a couple of budgeting plans that you can use to pay off your debt. I strongly suggest you choose a set strategy that appeals to you and your needs, and stick to that. Any extra money can then be used to pay off debts.”Set up what I call the 70/20/10 budget, where you live on 70% of income, save 10% and use the other 20% to pay down debt. Once debt is gone, the 20% can be spent, invested, or split.” – Ilene Davis

“The 20-30-50 plan (50% of take home pay is for needs, 30% is for wants, and 20% goes to financial priorities) is a simple strategy that helps you stay on top of your finances and make sure that you put enough of your income aside to start tackling your debt. That 30% is in the middle for a reason — trim from there if you need some extra wiggle room to put towards your debt payments.” – Elle Kaplan.

Keep Going! It isn’t fun and it isn’t easy… but it is worth it. Think of the end goal by doing these things:

• You build the right habits that will enable you to build wealth long term.
• You simplify your life, and better understand what are actually wants and what are needs.
• You become free. It is like a black cloud is lifted from above you, and the feeling is priceless.
• The flexibility and opportunities you have being debt free are amazing. You can then take on more risk and invest, quit a job, start a company, or whatever it is that you want to be able to do.

Push through and pay it off. One small step at a time is all that you can do. And finally…

11. Celebrate

It is a major, major victory to pay off debt. Each step along the way should be rewarded, otherwise it won’t feel like you’re making progress.

We often celebrate when we get a big raise or promotion, but we should also celebrate when we pay off debt. You deserve it!

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The first financial accomplishment on the way to wealth is becoming debt free. I hope this guide acts the motivation and map for you to do just that.

Compound interest either works for you (investing) or against you (debt). You decide.

Action Items:

• Using the above information… “Make a road map for getting yourself to a healthier financial future, and know that soon your future self will be living debt free.” – Elle Kaplan
• “To get started, take TEN MINUTES, and shop around for auto insurance. I’m amazed that 1/3 of consumers never compare auto insurance prices. Be sure to check with USAA if you are a military family and qualify to be a member. People I’ve worked with save hundreds by comparing prices. Then take those dollars saved and immediately write a check toward your debt.” – Ellie Kay
• Make a goal: when will you become debt free? 2 years? 6 months? Whatever it is, make it happen!
• Sign up for the Delete Debt webinar where I’ll share the spreadsheet and checklist I used to pay off $80,000 of debt!

 

The Experts:

• Matt Rinkey, Founder and President of Illumination Wealth Management
• Ellie Kay, Author of Lean Body, Fat Wallet and CEO of Ellie Kay and Company, LLC
• Elle Kaplan, CEO and Founding Partner of LexION Capital Management
• The credit experts of Lexington Law
• Natasha Campbell, Founder and CEO of Lifestyle Success Unlimited,LLC
• Clint Haynes, CMFC, Founder, Financial Planner of NextGen Wealth​
• Gail Cunningham, Media Relations, National Foundation for Credit Counseling
• Randy Brunson, President of Centurion Advisory Group
• Kevin Gallegos, Vice President of Phoenix Operations, Freedom Financial Network, LLC 
• Ken Rupert, Author & Financial Stability Coach, The Vita-Copia Group
• Lauralynn Schueckler, Online Marketing Specialist of Advantage Credit Counseling Service 
  
• Jon Dulin, Money Smart Guides 
  
• Vannessa Wade, President of Connect The Dots PR
• Ilene Davis, CFP(R), MBA, Financial Independence Services (Not Just for Retirement Calculator)

Sources:
Credit Card Facts
10 Facts About Student Loans
Credit Scores Don’t Stop with Credit

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