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How to Become Debt Free Now

You’re reading this because somewhere along the lines, you failed.  You may have failed to control your impulses. You spent MORE than all of your money.

Or maybe you were unprepared for the unexpected and ended up with so much debt from medical expenses that you’re struggling to get by. Whatever the case may be, you have debt, and it needs to be eliminated.

Since this blog started 8 months ago, I haven’t written about how to get out of debt. I had imagined that every reader of this blog was well on their way toward Early Retirement, and just read my articles to stay motivated in their quest. But, thousands of people realize every day that they want to leave the Rat Race, and most of them are still in debt, so they need the tools to get out of the red so they can get way into the black.

As you may remember, I used to suck with money. It wasn’t until I was about 25 years old when I started giving a shit about my finances. My wife and I had made some poor financial decisions — who hasn’t? — all before we were officially deemed The Moneyseeds, of course. We ended up with a mountain of debt, big enough to warrant its own ski lodge, and if it sold us season passes we probably would have just added that to the pile as well.

Shortly after we decided to spend our lives together, we realized that our debt was a big, ugly problem and it needed to go. We began to look at our debt, not as a monthly bill, but as financial shackles that were holding us down from making any progress in our new life.

Now, we are debt free* and well on our way to Financial Independence. How did we get there? We followed what would eventually become “Johnny Moneyseed’s Guide to becoming really, really, ridiculously debt free“. We didn’t have a fancy name for it at the time, but the concepts were cemented into our thoughts and actions, and it became clear that things were working when our debt started disappearing at an incredible rate.

Have you ever heard anyone say any of the following ridiculous statements?

“Having more money would fix all of my problems. I would be out of debt so quickly!”

“This new iPhone is great, and thanks to my credit card it only costs me $20/month.”

“I don’t think getting out of debt is even possible. Where do you want to get dinner from tonight?”

These people are in debt denial. It’s a serious case that affects around 50% of North American consumers. Basically, people think it’s OK to carry debt. That it’s OK to buy something now that costs $300+ and only pay the bare minimum every month to pay it off. Then, there are people that know that having debt isn’t OK, but they have it anyway and spend most of their debt repayment money on shit they absolutely don’t need.

50% of U.S. households have credit card balances that are, on average, in the $14k range! Those same people are in front of you in line at Starbucks, they’re browsing for new TVs at Best Buy, and they’re getting box upon box delivered to their house through Amazon. They don’t treat debt like a priority. For you, reckless spending ends today. Follow this guide, and you won’t just get out of debt, but you’ll get out of debt way faster than you had ever imagined.

Step One: List all of your debts, their balances and interest rates.

This should be a pretty obvious first move, but don’t let the simplicity of it get the best of you. Get a piece of paper, a Google Spreadsheet, or open Notepad on your computer. Go to the website of every financial institution to which you owe money. Then, copy down all balances with their respective APRs (interest rate) exactly as they appear. It’s also very beneficial to know what your minimum payments are for every account.

After tracking down all of your debts, you’ll have a decent idea of how much is owed. Let it sink in, but don’t worry, in a few more steps we’re going to start getting rid of it.

Step Two: Set periodic goals.

Becoming a goal-oriented person is one of the most powerful things you can do for yourself, in finances and pretty much every other area of life. Goals allow us to break really hard things into manageable chunks that we can feel good about after we complete them.

When you set a goal to pay off your debt you first assess how much money you can contribute toward debt repayment every month. Then you can do a rough estimate of how long it will take you to get out of debt. (Debt / Monthly repayment = Amount of months until you’re debt free) Just understand it could take longer than this to repay your debt, but this is a good way to understand roughly how much longer you have to bare this burden.

The big goal, the final goal, is to pay off all of your debt. That should be the end point of your timeline. Then, it’s up to you what other goals you’d like to set. You could make every $5,000 mark a goal. Or every $10,000 for those with student loans.

Once your goals are in place, they’ll be almost impossible to ignore. This will push you toward accomplishing your goals way faster than you would have originally anticipated.

Step Three: Start paying off balances from highest to lowest APR.

There are a few trains of thought when it comes to the actual debt repayment portion. The first being: Pay balances low to high. This is dumb, because it doesn’t take interest rates into consideration. The second, and more logical: Pay off the debt with the highest interest rate first, then work your way down.

Make the minimum payment possible for every account, besides the one that you’re trying to eliminate first. This allows you to focus on it, and to lose the least to interest.

I’ve heard of people going to debt consolidation counselors, and also of people who transfer all of their balances to new credit cards that have 0% APR for an introductory period. While in theory these ideas could work for you, they aren’t the best ideas. Just imagine for a second: Why would anybody want to give you an unsecured loan to consolidate your debt? Or a 0% rate?

Step 3.14: Every time you pay off a debt, you have more money to throw at the next one.

This concept is known as “snowballing”. I think “avalanching” sounds cooler, so let’s call it that instead. Now, when you’ve paid off a debt, you’ll have freed up some money that you can now use in conjunction with the minimum payment that was already being made on the next debt down the list. Then when the next debt is paid off you keep the avalanche going.

Here’s where you become whiny.

Step Four: Trade in big ticket items.

Do you have a shiny new-ish car or two in the driveway? You can significantly reduce your total debt by trading in your car for something cheap. If you can get $18,000 for a trade-in, and you can find a $10,000 car on the lot then you just came into $8,000 to help you pay off debt. If you can trade-in two cars and concede to just having one you could double or triple this amount.

You can further apply this to boats, yachts, jet-skis, snowmobiles, Segways, or any other ridiculous self-balancing modes of transportation. Now isn’t the time to have toys. You can have toys when you’re debt free.

Step Five: Sell almost everything.

Now that ALL of your big ticket items have been either sold or traded in for less expensive versions, you can start becoming a professional Stuff seller. American houses and apartments are filled with crap we don’t need. A good way to figure out what you do need: Carry around a notebook and write down every item that you use over the course of a given week. It’s going to be a lot less stuff than you imagine. The rest — the crap that added to the debt problem — has to go. It’s unnecessary and dragging down your recovery efforts. Get rid of the stuff. There’s always time for stuff when you’re debt free.

Step Six: Work, work, work.

This one is going to blow your mind: To pay off debt faster you can work more. Overtime, second jobs, babysitting, etc. Check out this article I wrote about how to make more money.

Pretty obvious, right? More money, more debt repayment.

Step Seven: Reward yourself.

Achieving your goals, no matter how big or small should be celebrated. Don’t take this to mean that you should go out and spend hundreds of a dollars at the Mall for paying off $100 of your debt. Instead, buy yourself a cup of coffee. For a free alternative you could guilt people into congratulating you by posting your achievements on Facebook.

Step Eight: How to use windfall money.

My definition of windfall money is: Any money that you receive that didn’t directly come from your employment. Tax returns, bonuses, inheritances, birthday money, wedding gifts, whatever. If you are in debt then windfall money isn’t fair game. You should apply it directly to your debt. In most cases you’re getting free money to pay your debt. You couldn’t ask for a better gift, so don’t blow it.

Step Nine: This isn’t a step, it’s what you shouldn’t do when you have debt.

I talk to people who are in debt, or behind on their bills all the time who:

  • Continue to go out to eat on a regular basis
  • Go on vacations, elaborate or otherwise
  • Buy new model electronics
  • Purchase coffee drinks at coffee shops
  • Add to the mountain of debt
  • Don’t bring a homemade lunch to work
  • Go to concerts, the movies, or out drinking
  • Browse online retailers or hang out at the Mall
  • Trade in their vehicles for newer, prettier ones with more cup holders
  • ….And the worst kind of person: One who doesn’t read Johnny Moneyseed

Step Ten: Breakdance party.

You’ve made it.

All of your debt is completely paid off, so you officially earn the right to have a breakdance party. Turn on some old school Run DMC, have a friend flick the lights on and off, throw down a cardboard box and start busting out your best Suicide Rubberbands (learn how to do that move from a 12 year old).

If anybody has any other sweet tips for people in debt, please leave them in the comments below!

*Somebody is going to point out that I’m not debt free because I have two mortgages. Those readers can hold their comments and check out the posts I’ve written about not giving a fuck about paying off my mortgage early. Part 1 and Part 2.

  24 comments for “How to Become Debt Free Now

  1. October 1, 2013 at 10:40 pm

    I do pretty much all of this. I really have nothing to sell as I am not a materialistic person, but working all the time is what really helps me make extra payments. I cannot wait to have a party when I am done!

  2. Chris
    October 1, 2013 at 10:59 pm

    Good article and nice to get to the “roots” of how it all started. (You see what I did there , lol, roots – seed, yup I’m a goof) it’s amazing that so many can’t grasp this smile concept. I was always good with my money but always increased my lifestyle as I made more money. I wish I would have clued into the JM and MMM real way to get FI a lot earlier but at least I’m on the right path now. Keep the posts coming.

  3. October 2, 2013 at 9:53 am

    As with any other worthwhile financial endeavor, it’s a long process. In the end I think it largely all comes down to being able to change your regular habits, which can really only happen one small step at a time. But each one leads to the next one, and eventually you’re like an entirely different person.

  4. October 2, 2013 at 11:18 am

    Awesome post, Johnny. We started on the journey you’re describing 9 months ago, and although we’ve got a long way to go, it’s been worth every step, no matter how difficult some of them are. A life without debt really is worth it!

  5. October 2, 2013 at 12:45 pm

    Great post! I lot of really great info in here.
    I am on the journey of paying off over $100K in student loans. I am down to just over $75K. I do have some issues with over spending, which I am trying to curb, but I am mostly trying to increase my income and put all the extra towards my student loan demolition project.

    • Kyle
      October 4, 2013 at 2:11 pm

      We are twins. I started off at $100k and just hit $75k with my loans. When do you foresee paying yours off?

  6. October 2, 2013 at 3:03 pm

    I do pretty much all of that except working overtime right now. I know I really need to get into babysitting, especially since I got free CPR training through my job. I work in a ritzy area so I know there are prime opportunities for money making through childcare.

    Great list!

  7. October 2, 2013 at 6:31 pm

    Rehearsing my break dance party as we speak!

  8. October 2, 2013 at 11:59 pm

    Great tips. I agree on the interest pay off, don’t look at the lowest balance. Debt prevents you from ever working for yourself.

  9. kathny
    October 3, 2013 at 10:32 am

    I agree with everything you said, but I’m of two minds when it comes to paying off the highest interest debt first, rather than the lowest balance. I agree in theory that paying off a higher interest rate debt is definitely the way to go. Intellectually and financially, it makes sense. However, When you think about it, paying the lowest balances FEELS like it will free up the money faster to pay the higher balances. A $400 debt gets paid faster than a $4000 debt, even if the interest rate is higher on the $4000 debt. There is a mental and emotional factor here. When a debt gets paid off, however small, it feels like a weight has been taken off your shoulders and it gives you the motivation to keep going. The more names off of the list, the more money there is to pay down the higher debts and it feels like it moves faster, even if it isn’t actually moving much faster, so while your way makes more sense financially in the long run, I think people would be more successful and more likely to stick with it the other way.

    • Johnny Moneyseed
      October 3, 2013 at 12:19 pm

      I think that is great advice as well. Especially when there is a disparity in your loan balances (ie 1 loan at $400 and another at $10,000). Hell yeah I would pay off the $400 loan first no matter what the interest. But if you have loans that will take a while to pay off, you’re better off attacking the highest interest rate loan at full force.

  10. October 4, 2013 at 11:23 am

    Haha – breakdance party – love it!

    Also, I completely agree with “Step Three: Start paying off balances from highest to lowest APR.”.

    The snowball method REALLY annoys me. When I see people advising people to make sub-optimal financial decisions, I wonder how these people can be such “experts” in the field!

  11. October 9, 2013 at 7:30 am

    I can’t wait until the breakdance party! LOL! Awesome list and thanks for sharing. Eyes on the prize! Eyes on the prize!

  12. Aerynn
    October 27, 2013 at 11:54 pm

    Two years ago I started grad school with $12K in credit card debt and $25K student loans. I’ve gotten my credit card debt down to $8K and put it all on one of my existing cards with a 0% APR special for balance transfers (yeah, yeah, I know). The promo period is two years, but the payment to pay it all off within that promo period now fits in my budget. That leaves me 3 years to tackle the student loans while they’re not accruing interest.

    I work part time as a teaching assistant (and tuition is covered), I don’t have cable or a TV, my car is 12 years old, and I sew for extra money on the side. I also live in the most expensive city in the nation – Santa Barbara, CA. If I can do it, anyone can – but I’ve always got my eyes peeled for sites like this for more great advice. Debt Free by PhD!

  13. November 11, 2013 at 1:22 pm

    Doesn’t paying more than the minimum on your credit cards positively affect your credit score? So please address if it wouldn’t be wise to pay just a little something over the minimum on each debt each month even while “ganging up on” the target debt? And how much is enough? $5 over the minimum, or is $1 over the minimum still “more than the minimum”?


    • Johnny Moneyseed
      November 11, 2013 at 9:34 pm

      Star — The only thing that matters as far as credit card debt is concerned is your debt-to-credit ratio. That means if you have $1,000 worth of credit card debt and have credit cards whose limits total $5,000 you would be at 20% debt-to-credit ($1,000 divided by $5,000).

      The lower your debt-to-credit ratio (otherwise known as utilization rate) the better you’ll be seen in creditors’ eyes. They don’t care how you pay off your debt. Just that your payments are on time.

      I advocated strictly paying minimum balances on all accounts besides the one that you’re trying to payoff first (the one with the highest APR). So, to answer your questions I would say pay $0 over the minimum :) Use that money to attack the biggest debt.

      Another way to decrease your debt-to-credit ratio is by increasing your credit limits. If you can increase your $5,000 limits to $10,000, given the previous example, you would now only be at 10% utilization.

  14. Aly
    November 12, 2013 at 12:31 am

    Thanks for the information! The only 2 debts I have are 2 mortgages. I don’t have any credit card debt or loans and I sold my car almost 2 years ago. I still like to read your posts though! I am a landlord, own my own business and work 2 other jobs so I agree that you have to work, work, work to pay down your debts. The most I’ve owed is a couple thousand dollars for loan, but that’s it thanks to my mother for teaching me not to ever have credit card debt or buy things I don’t need.

  15. Justyna
    November 18, 2013 at 3:29 pm

    In my case, rolling my high-er interest credit card (13%) to a 0% intro (for 15 month) worked to get out of debt. I was lucky enough to have a decent credit score (above 725) when I had the ‘oh crap…debt emergency” lightbulb finally go off. By that point I had managed to get myself into 30K of consumer credit card debt. Luckily I also had a decent salary and when I slashed my spending to 25% of that income I knew I would be able to pay the 30k off before the intro period ended. Yes there was a 3% charge to roll the debt over, but it still saved me >2k in interest overall. I think the key is to not roll over the debt and then start accumulating more debt. That is recipe for disaster. I really agree with your post though, people do not treat debt seriously enough. It really is a state of emergency.

  16. December 3, 2013 at 8:41 pm

    So, what you’re saying is looking at Credit Karma, crying for a good 20 minutes, then hiding under a blanket isn’t working?

    • Mimi
      November 24, 2014 at 3:36 am

      This brought me to tears! I really came here to get advice but thanks for the laugh Sierra!

      And to answer your question, no that doesn’t work. I have tried it for five years, so, safe to say it is SCIENTIFICALLY proven that “looking at Credit Karma, crying for a good 20 minutes, then hiding under a blanket isn’t working” isn’t working.

  17. Lisa
    December 20, 2013 at 1:17 pm

    Can you tell me how you make money writing blogs? I didn’t know you could get paid for doing that! Thanks for your response as well as for all the great advice.

  18. December 30, 2013 at 3:28 pm

    I love step eight. I got a bonus this year and someone asked me what I was going to do with it. Uh … is there any question what I would do with it?! If it’s not paying bills, it’s going to a student loan! Duh.

  19. garry burgess
    February 13, 2014 at 12:58 am

    One thing that I did that was super powerful, and can also be applied to savings, is that I would go in to the financial institution and make small debt payments with available money. It was not so much the amount, as the act of doing it that got me into a habit of making debt payments. The habit was more important than the money. Eventually it became fun.

    Now of course, a person can go online to do the same thing. Somehow it just sort of all adds up to a habit.

  20. Kenneth
    March 7, 2014 at 12:36 pm

    Johnny, this is the best post I’ve seen on a Personal Finance blog regarding paying off your debt. I especially enjoyed Step 9 – what you SHOULDN’T do when you have debt! Vacations, eating lunch out at work, eating out at all on a regular basis, overpaying for cars, cellphones etc. Most people just do NOT get this – they think it is normal, mainstream etc. to have all the stuff. Mr. Money Mustache said it best – you can’t afford to employ people to serve you (like in a restaurant, or your maid service etc.) if you have debt.

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