Getting out of debt and staying out of debt is an essential principle to becoming wealthy. Millionaires don’t have car payments, and they don’t carry a credit card balance. They don’t need to borrow money, because they HAVE money. If you minimize the monthly payments that you pay every month, you’ll have more money to invest and pay for large purchases. Fortunately, I have already written a debt elimination plan on Money Crashers, and I will reference those posts for you to read again or for the first time. Here are my five steps to getting and staying out of debt.
Step 1: Save up a small emergency fund. You’ll need a $1,000 or $2,000 saved up before you can start aggressively paying off debt so that you can pay cash when life’s little emergencies come up while you are paying off the debts.
Step 2: Create a written budget. This is an essential step. You need to know where your money is going, and you need to have a sense of control with your money. A written budget will give you control and tell you where your money is going before you spend it.
Step 3: List your debts smallest to largest, and start aggressively paying off the smallest debt, and working your way up to the largest debt. People that make decisions based on the numbers will think this is the wrong way to pay off debts. You can do it based on the highest interest rates, but the other way of doing it is more about momentum and personal achievement. If you start out paying off your $20,000 debt first, it’s harder to feel like you are making progress and you may be discouraged to continue paying off your debts quickly. Dave Ramsey teaches the method of smallest debt to largest debt, because when you clean up the smallest debts first, you feel a sense of accomplishments and you gain more momentum to put more money towards larger debts.
Step 4: Create alternative sources of income. I’ll give more specific examples for doing this when I write about principle #6. The point is that there are endless possibilities of ways to make extra income right out of the comfort of your own home. Boosting your income is a great way to speed up the process of paying off your debt. Read the post that I referenced for some quick ideas.
Step 5: Save a Big Emergency Fund. Once you are out of debt, you need to make sure that you STAY out of debt. Read the post I referenced about putting together a large emergency fund that will cover your expenses up to 3 to 6 months. If you lose weight, you can’t go back to your old ways of eating fast food and never working out. The only way you’ll keep off the weight is to keep eating healthy and continuing to exercise. Staying out of debt has the same principles. Once you change your behavior to get out of debt, you must keep doing those things to stay out of debt.
The key here is that I want you to be debt free as quickly as possible. I’m talking about getting out of debt in two years or less, not five or ten years. The faster, the better. You don’t even need to worry about what your interest rates on your consumer debt when you’re knocking off debts left and right. Get excited about doing it, and start today. Follow these steps, and you’ll be well on your way to getting and staying out of debt.