I’m not a huge Dave Ramsey fan. I’ve listened to his show from time to time and read his books. He can be entertaining, and he has helped a lot of people. But his dogmatic–“I’m right and you’re wrong”—approach to personal finance rubs me the wrong way. But he can be inspiring about getting out of debt. And one day several years ago after listening to his show, I pulled out a piece of paper and wrote the following—“I will be debt free by the age of 50.”
I was 40 when I made that promise to myself. I’ll turn 45 later this year. And last month marked a significant milestone in my journey to get out of debt—I paid off my last school loan, leaving just our mortgage as our only remaining debt.
Five years ago our non-mortgage debt consisted of school loans and a home equity line of credit. The home equity line was the result of several purchases, including a kitchen renovation and consolidating some credit card debt. We made the last payment on the home equity just a month before paying off the school loan.
In total, my wife and I paid off $237,428.13 in debt in less than five years.
So how did we do it? And more importantly, how can you begin and finish a journey toward a debt-free life?
Based on our experience of climbing out of debt, there are 4 important steps that you need to take if being debt free is your goal:
- Stop going into more debt
- Reduce your interest rates
- Be aggressive, but not insane, about paying down debt
- Find a way to earn extra money to help fuel your debt paydown
Stop going into more debt
This has become a bit of a cliché, but it is without a doubt the most important (and hardest) step if you want to tackle your debt. Unless you are teetering on bankruptcy, paying your debts is the easy part. But staying away from new debt, now that is a challenge.
So we started paying cash for cars, paying off credit card debt in full each month, and just saying no to big purchases we couldn’t afford. Once you develop the habit of living without debt, you’ll likely find that your quality of life has not changed a bit.
Here’s what we found to be important to avoid piling on more debt:
- An Emergency Fund: You’ve no doubt heard it a thousands times, but an emergency fund is a must. Even before you begin to pay extra on your debt, having some money set aside will help you handle unexpected expenses and give you a wonderful feeling of control over your finances. I’d recommend building up a one-month cushion before paying extra on debt. Once you have a month’s worth of expenses saved (in a high interest savings account, of course), then you can begin paying down debt while continue to build your emergency fund at a slower pace.
- Save for big purchases: It’s absolutely critical that you include in your monthly budget the cost of large purchases (car, education) and periodic expenses (car insurance and vacations).
- Plan to have fun: You shouldn’t deprive yourself of any and all fun. I firmly believe that being debt free is not actually the goal, but rather a means to a life full of choices and endless possibilities. But what’s the point if you’re miserable for years while you work your way out of debt? More importantly, most people cannot maintain total financial deprivation for long. And just like a yo-yo diet, the result can be even more debt than you started with.
Reduce your interest rates
This one is simple. Take a look at all of your debt, and take steps to reduce the interest rates on each loan. If it makes sense, refinance your mortgage or home equity line of credit. We refinanced our first home once, and we are refinancing our current home now. Refinancing a home is the single best way for most folks to lower their monthly expenses. But you should also look at refinancing your car loan or even personal loans.
And if you have credit card debt, use 0% balance transfer credit cards to lower your rates. We did this for several years and the result was significantly lower interest payments and less time to get out of credit card debt.
Be aggressive, but not insane, about paying down debt
I alluded to this above, but it’s critical that you be realistic about how quickly you can pay off your debt. Dave Ramsey speaks of gazelle intensity when it comes to getting out of debt. That’s a great image, but we need to be careful.
To me, balance is important in all aspects of life, including finances. As a result, my wife and I invested in retirement accounts and our emergency fund while we paid down our debt. While this meant it took us a bit longer to get out of debt, it helped us develop the habits of saving and investing, and it provided a solid financial foundation for our family.
One tool many have found helpful in paying down debt is Ready for Zero. The site helps you make a plan to get out of debt, and it can help you get out of debt faster.
Find a way to earn extra money to help fuel your debt pay down
This last one was our secret weapon. When I started the Dough Roller in 2007, I had no idea that it would turn into a business. But over the past four years I’ve launched several websites that combined generate a full-time income. And I’ve kept my job at the same time, which has allowed us to put the income from the business toward our debt (and now savings).
I’m not suggesting you start a website necessarily. But I am saying that if you can find a way to generate extra income, it will super-charge your efforts to pay down your debt.
I’ll be covering each of the above topics in more detail over the coming weeks. But until then, here are some more resources to help you tackle your debt: