Five Beginner’s Steps Towards Living Debt-Free

Have you ever dreamed of financial freedom? Who hasn’t? Here are five steps for beginners to take towards knocking out debt and saving money for retirement. Even if you have a huge debt load this system will work if you work at it. If you have dug a debt hole and want to fill it back in, here’s how.

Stop using credit cards. Just don’t do it!

This first step sounds easy, but it takes a lot of discipline. You can cut your credit cards up, or you can seal them all into an envelope in a safe place and wrap the envelope in duct tape to make them inconvenient to get to. Our credit cards are currently sealed in an envelope, wrapped in packaging tape, and stashed in the bottom drawer of a dresser. Pay for absolutely everything with cash. Anticipate the times in your year when you usually resort to buying things on credit: birthdays, holidays, vacation, for example. Save extra money ahead of time to cover those anticipated extra expenses.

Save money in a savings account to cover unexpected expenses.

This is one of the suggestions that Dave Ramsey makes in his series of books and workshops on getting out of debt. The bottom line is: Plan ahead. Life happens. Someone needs surgery. The car breaks down. The washing machine gives up the ghost. In the old days, you would have just taken out your credit card and taken care of the situation by sinking yourself deeper into debt with a shrug of your shoulders and a sigh. What can you do? The answer is: Plan for disaster. Save up money just for such emergencies. The amount you keep in your emergency fund depends on your lifestyle and family size. For us, it’s $1,000. But you might decide that $500 is enough, or that you can’t sleep at night without $2,000 or more saved back for rainy days. An important addendum to this step is: Remember to replace the money. If you have to hold off paying on your debt snowball (next step) for a month, that’s fine. Your emergency fund is your insurance against using credit cards.

Use the Debt Snowball method to pay off all your debts.

This is the cog that turns the wheel in debt reduction. For a comprehensive explanation, read about it in a Dave Ramsey book, or other authors who use the “debt snowball” terminology. The basic idea is to pay off your consumer debt (credit cards, loans, car payments) one at a time, beginning with the smallest debt and moving up to the biggest one. Ramsey admits in his book The Total Money Makeover (Thomas Nelson, 3 rd edition 2009) that it is counter-intuitive to pay off debt from the smallest to the largest. It makes logical sense to try to pay off the largest one first, because that’s the one that eats up the most interest. But paying them off smallest to largest has important psychological and motivational reverberations. You can pay the smallest ones off quickly, leading to a sense of success and accomplishment, and this provides momentum for continuing to pay off the bigger, longer-term debts as well. The debt snowball works like this: Pay every account as close to the minimum payment as you can without triggering a higher minimum on the next bill. Add up how much money you would have normally paid on every account, subtract your new minimum payments from that amount, and use the difference to pay on your smallest debt. The first month we did this, we were able to pay off the smallest debt completely. When the smallest account is paid off, add its payment amount to the debt snowball amount (your saved money from paying only minimum payments) and apply that to the next smallest debt. In this way, by adding your payment from the most recent bill paid off to the saved amount from paying minimums on everything else, the “snowball” gets bigger every month. The first month you might be paying an extra $200 on your smallest debt; a couple of months down the road, your debt-blasting snowball will be $400, and by the time you get to the big guys, you may be paying as much as $1000 or more a month on them, which will blow that debt load out of the water amazingly fast!

Live beneath your means for the rest of your life.

This is a permanent change in your lifestyle. Take pride in it. Don’t buy anything with a credit card. Don’t borrow money. Save up money until you can get what you want with cash, debt-free. Budget. Keep track of every expense, and don’t forget to budget in “fun money”: movies, dinner out, vacations. Take pride in your financial wisdom and creativity. Search for inspirational stories from people who have gotten out of debt. You will find some great ideas for living debt-free. Many people make huge sacrifices that pay off in the end: moving to a smaller house, renting until they can afford to buy a house, buying used vehicles, cutting out land line phones and using pay-as-you-go cell phones, sharing lawnmowers between families, and much more. Remember that the payback is financial freedom. No longer will you live tied to consumer debt. Your paycheck will be yours, and even household bills can be creatively shaved so you can save more money. When you finally knock out consumer debt, then it’s time to put more into savings and investments. Create the future you want by making your money work for you instead of the other way around.

When your consumer debt is gone, increase your mortgage payments as much as you can.

The last monstrous account, for most families, is their mortgage. Once you free up room in your budget from paying off consumer debt, start hacking away at the mortgage. Get out your calculator and pick a time, not an amount. How fast can you pay the house off and still live comfortably? Five years? Eight years? Ten? Fifteen? Pick the absolute shortest time you can live with and go for it. Keep your focus. Imagine daily the freedom gained from not having to pay a house payment, or car payments, or credit card payments ever again. Intend to succeed, and you will.

What should you include in your consumer debt list? Everything except the utility bills and the mortgage. You may end up with medical bills in your debt snowball if they are large, but as a general rule try to keep medical bills in the utility bills pile (and keep them current). Our debt snowball “hit list” includes credit cards, a dentist bill, two medical accounts we incurred for surgeries, a car loan, and a loan for buying tires that my husband racked up. Over time we have knocked out the tire loan and several credit cards and are well on our way to the “big guys” – the higher balance credit cards and the car loan. Our debt payoff plan has not significantly crimped our lifestyle, although we are all more careful with money as a result.

We have inspiration to spur us onward, which I think is an important element in getting out of debt. We have several family members who have gotten out of debt, have paid off their houses, and are now saving and investing at an amazing rate. So find a hero to look up to. That really helps.

Most importantly, don’t go backwards, go forwards. The next steps after these five baby steps involve saving and investing your money. Go forward. Never borrow again. Live frugally, creatively, and in financial freedom. You can do it if you put your mind to it. Here’s to your debt-free life!


Dave Ramsey, The Total Money Makeover, Thomas Nelson 2009 (3 rd Edition).

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