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3 Easy Steps to Become Debt-Free
- Stop accumulating debt
- Create a budget
- Choose a payment strategy
- Stop accumulating debt
The first step to eliminating all of your debt is to stop accumulating it. If you want to be debt-free, it is important to avoid taking on new debt as much as possible. Putting an end to new debt will also help isolate and pay off your existing debt.
Avoiding new debt may require a mindset shift. Debt has been normalized in our society, and is often viewed as necessary when buying a vehicle, going to college, buying a house, or financing other large expenses. Some debt may be needed on a temporary basis, but that decision should not be taken lightly, and all debt should be minimized in terms of both amount and duration in order to limit loan interest. Paying loan interest is paying a premium for not having enough money to buy something in the first place, so we recommend minimizing this as much as possible.
If you make it a priority to not take on any new debt, it will really help you create a more manageable plan for how to tackle the debt you already have. The steps below will assist you in creating your debt elimination plan in order to achieve a debt-free and financially free future.
- Create a budget
After committing to avoiding and paying off debt, the next step is to create a budget. An effective budget will help you look back on previous spending to find opportunities to save more money, which can be used to pay off debt. A budget will also help with planning out future spending in order to meet your financial goals, including becoming debt-free.
There are a number of effective budgeting methods out there that can help you reduce spending and save more money toward paying off debt. Three of the most effective budgeting approaches out there are the 50/30/20 rule, envelope system, and zero-based budget (ZBB). The 50/30/20 rule involves spending 50 percent of your income on needs, 30 percent on wants, and 20 percent on savings. The envelope system requires major spending categories to be assigned to envelopes to ensure that money is not overspent for any one category. The ZBB method requires starting from zero and creating a specific budget every budgeting proud. To learn more about each of these budgeting approaches, read our “3 Best Ways to Budget Your Money”.
There are also several budgeting tools out there that can help you use the budgeting methods described above to save more money and pay off debt. These budgeting tools can help with digital envelope budgeting, ZBB budgeting, using a budget for investing, and budgeting for couples. Check out “6 Best Budgeting Apps for Saving Money” to learn about our top-rated budgeting tools.
- Choose a payment strategy
Once you are able to successfully budget your money, you will have more money to contribute to paying off debt. The next step is to determine the best way to repay debt. Two highly effective debt payment strategies are explained below to help you determine which method will work best for you.
One of the most popular debt payment strategies is the snowball method. This payment strategy involves paying off debt in order of smallest to largest debt amounts. This creates a “snowball” effect by building momentum with small victories and can quickly reduce the overall number of debts that need to be repaid.
Another very popular debt payment strategy is the avalanche method. The avalanche method involves paying off debt in order of highest to lowest interest rate. By using this strategy you can quickly reduce loan interest, which is always working against you while trying to pay off your debt. Once the highest interest rate debt is paid off, you can move on to the next highest interest rate debt until all of your debt is paid off.
The main advantage of the avalanche method is that it will result in less interest paid and a quicker overall debt repayment than the snowball method. The snowball method may still be preferred in some cases since it can eliminate smaller debts quicker which will help you save more money to contribute toward paying off bigger debts later. Both methods require for there to be money available after making minimum payments on all debts to contribute to paying those debts off sooner, which may not be possible for everyone.