How good is it going to feel when you’re debt free for life? Imagine the tension falling away from your shoulders as you relax your mind and body. It’s going to feel great, and I want to help you get there.
Becoming debt free and staying that way is one of the most important things you can do in your life. Failure to do so will have far-reaching effects, which you may already be experiencing.
Almost three-fourths of Americans are stressed about money, and it’s easy to understand why. Most of us are living paycheck-to-paycheck, average credit card debt is over $6,000, most couldn’t come up with $500 in case of an emergency, and money is a leading cause of divorce.
It’s time for a change, and I’m going to share 7 steps that can help you make that change.
I’ve been helping people to get out of debt and become financially successful for 20+ years as a financial advisor. I’m honored to be named to Investopedia’s list of the top 100 financial advisors many years running. I share that because I’m confident I can help you.
Here’s what we’ll cover:
- Are you ready to do what’s required to be debt free for life?
- Your financial facts
- Preparing for emergencies
- Rule #1
- Growing your security
- Eliminating credit card debt
- Achieving financial peace of mind
- The way forward
Are you ready to do what’s required to be debt free for life?
There’s no hack or easy fix that will get you out of debt. It will require work and sacrifice. If you’re not interested in doing that, there’s no reason to continue reading.
Let’s start by answering some questions:
- How have you tried to improve your finances in the past?
- How did you go about it (be as specific as possible)?
- How long have you been feeling like you need to make a change?
- Have you tried anything that worked?
- How has being in debt affected you (monetarily, psychologically, physiologically)?
- How frustrated are you right now?
Are you ready? Let’s get started.
Your financial facts
It’s essential to know your cash flow, budget, and balance sheet. These are your financial facts and this is step one.
Understanding your cash simply means knowing how much money you have coming in, and how much is going out. It’s easy to fall into the bad habit of not paying attention to your transactions on a monthly basis. If it’s been a while since you’ve logged into your financial accounts, you’ll need to go back and review your spending. From my experience, you’ll be able to find recurring charges you’ll be able to cut out.
Here’s a blog post on cash flow if you’d like to dig deeper.
Without a budget, you don’t have a plan for your money. A budget tells us if we’re on track to reach our financial goals, or if we’re behind. This is a foundational part of your financial future, and a requirement if you hope to get out of debt.
You can dig deeper by reading this blog post on budgeting.
When we’re in debt, our balance sheet isn’t pretty. But it’s essential to know your assets and liabilities. You can download our Personal Financial Statement which can also help you track your cash flow and budget.
If you’d like some additional help, check out our Get a Budget course.
Preparing for emergencies
In the introduction, I mentioned how a majority of Americans wouldn’t be able to come up with $500 cash in case of an emergency. This is unacceptable.
Step two is to get $1,000 saved in an account that’s separate from your every day checking account. $1,000 is enough to cover most minor emergencies like car trouble. This is the beginning of your emergency fund.
Don’t skip this step.
Step three is to follow the golden rule of personal finance; pay yourself first. When we live paycheck-to-paycheck, we pay everyone else first and wait till the end of the month to pay ourselves. The problem with this approach is that there’s rarely any money left over for us.
When we pay ourselves first, we place ourselves and our priorities above everyone else’s. Which is where they should be. Here’s how you pay yourself first:
- Open a savings account and set up automatic transfers at the beginning of every month. This is how you fund your initial $1,000 emergency fund, and how you’ll eventually complete your emergency fund.
- Enroll in your company’s 401(k) and set up automatic contributions. Starting with 1% is better than nothing. If your company offers a match of your contribution, work to contribute enough to receive the full match as soon as possible.
- If your company doesn’t offer a 401(k), you can open an IRA and set up automatic contributions at the beginning of every month.
The idea is to create a new habit of saving money every month. It’s ok to start small, and you’ll work up to setting aside at least 20% of your after-tax income for your financial priorities.
Growing your security
Step four is getting one month’s worth of expenses saved in your emergency fund. When you’ve reviewed your cash flow and set up your budget, you’ll know the amount you’ll need to save. Once you’re at one month’s worth of expenses saved, you’re ready to attach your credit card debt.
Eliminating credit card debt
If paying yourself first is the golden rule of personal finance, staying out of debt is silver. Debt is a burden on many of us. Not only does it prevent us from pursuing our financial goals and priorities, it prevents us from going after other things we want to do. As if that weren’t bad enough, the average interest rate on credit card debt is over 20%.
But you already know debt sucks. Let’s create a plan for getting out.
You can use a blank piece of paper, open a doc on your computer, or use the Personal Balance sheet I mentioned earlier. The first step is writing all your debts, interest rates, minimum monthly payments, and companies.
Next, go back to your cash flow and budget; figure out where the money will come from to pay the balances off. You’ve got two choices; you can earn more money, or live on less.
Earn more money
If you’re in the right career, what will it take to earn more money? A promotion? A new certification or designation?
To earn more, will a change be required? What will be a better fit for you and your family?
If you’ve got extra time, attention, and energy, there are hundreds of side hustle opportunities to earn extra money.
Live on less
Nobody likes to think about dialing back their lifestyle. I’ve never taken a vow of poverty, and I don’t expect you to either. But in order to get out of debt, you may need to make sacrifices.
Therefore, reviewing your transactions is so important. You’re looking for opportunities to make cuts. Think of any cuts as temporary. Once you’re out of debt and on track for success, you can always add things back in.
Once you’ve figured out how to free up cash, it’s time to figure out how long it will take you to pay off your debts. If you’ve got $6,000 in debt, and can put $500 a month towards it, it’ll take you right around a year to make it happen.
In service of helping you get out of debt, you can access our Get Out of Debt course for free.
Achieving financial peace of mind
Once you’re out of credit card debt, it’s time to figure out how you’ll be debt free for life. The next step is to get financial peace of mind.
You get that via a fully-funded emergency fund of six month’s worth of expenses.
Before I go any further, I know this won’t be easy and may take you a long time to do. But it’s worth it. Once you’ve got it, you’ll have peace of mind. You’ll feel a sense of safety and security. You’ll be in position to pursue financial prosperity. And that’s what I want for you.
Just as you created a plan for paying off your debt, do the same for saving six month’s of expenses.
The way forward
Being debt free with an emergency fund will give you the headspace to look to the future. It’s time to crystallize and clarify your goals. I like to think about goal setting using six key areas:
- Career and financial
- Personal development
- Peace of mind
Within each area, you’ll make goals and plans for how you want your future to look. When we take the time to write our goals, we exponentially increase our odds of achieving them. To help you do this, you can access our Goals course for free as well.
This is a story of commitment. Financial success and debt free living is available to you, but you need to do the work to get it.
I’m interested in helping you to do it. Let us know how we can better support you.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
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