If you’re currently in debt, financial independence or early retirement might seem impossible. I’m going to share with you the seven steps that will lead you out of debt and help you on your way to financial independence.Here is a step-by-step guide on how to get your debt paid off as fast as possible.
Understand your debt
The first thing you need to do is understand your debt. Take a piece of paper or open up a spreadsheet on your computer and list all your debt, and the associated interest rates and payments.
If you don’t know how to start, you can go here and get a free copy of your credit report. Once you get your credit report, examine it carefully. If you find any mistakes or problems with your credit report, you can take a look at this guide to find out how you can fix them.
Understanding
your debt also implies understanding your budget. You use an app like (link) to create
a budget and understand how you’re
currently spending your money.
Negotiate lower interest rates
Now that you have a greater understanding of your debt as well as your budget, you can start improving your finances.
Call each of your credit card companies and ask them to lower your interest
rate. If they say no, then explain that you’ll be transferring your balance to another
credit card at a different company and close
your account after you complete that transaction. This is the point where they’ll usually offer
you a rate reduction.
The next step is to find out if any of your credit cards offer balance transfers. You can usually transfer the balance of one card to another one, and they will give you a zero percent interest rate.
This rate may only be good for six or twelve months, so you’ll need to pay that balance off or risk ending up with an even higher interest rate. Once you transfer the balance, don’t pay for anything else using these cards.
You must try to switch to operating your life with cash while you do this. Don’t worry that you’re not getting points on your GAP credit card. You don’t need another puffer jacket. Spending your money frivolously is how you got into debt in the first place.
Freeze your credit cards (literally)
I’m sure many of you heard about doing credit freeze. This is where you call the credit agencies and put a freeze on your credit where you can not open up new credit cars. You may need to do this, but it isn’t what what I’m talking about in here.
For those of you with a real credit card problem, I want you to take your credit cards out of your wallet. Touch them, feel them, and take a good hard look at them. Now, go to the kitchen. Do it! Walk into the kitchen, get a Ziplock bag, and put the cards in the bag. Now, fill the bag with water. I’m not kidding, fill it up with water. Next, put it in the freezer and say goodbye.
I know there are emergencies where you might need them. That’s why I didn’t tell you to cut them up. However, putting them in the freezer will make you think twice about using them unless you need to pay for something really important.
I invented this method for one of my clients when I was running a mortgage company. I should probably coin a phrase for it, so the other credit gurus don’t claim they invented it. Let’s call it The Credit Deep Freeze.
Use the snowball method
There are several schools of
thought regarding the order in which you should pay off your debt. Dave Ramsey
claims to have invented the snowball
method. The snowball method states that you should start by paying off your
smallest debt first. The logic behind it
is that you’ll get small victories faster, which will help you gain momentum.
Put as much money as you can into paying off this first debt. Once you pay that one off, start putting money into paying off your next smallest debt. Then keep on doing that until you pay off all of your debt. The one negative side to this approach is that if your biggest balances have the highest interest rates, it will cost you more money to wait to pay them off.
For those of you who are excited about getting out of debt and don’t need the thrill of small victories to keep you going, I suggest starting by paying off the balances with the highest interest rates first. I would even suggest you stop putting money into your 401K and savings account until you pay off all your debt.
Once your debt is eliminated, you’ll have a lot of cash left over to make up for any payments you missed on your retirement or savings accounts.
Sell stuff you don’t need
I hope that looking at all your
debt and realizing the work it’s going to take to pay it off has got you
thinking about how you got here. More
than likely you ended up here because you like stuff.
Here’s what I want you to do. Go and find one thing in your house. This should be something big, like a coffee table, an end table, or wall art. Take a picture of it and put that sucker on the Facebook Marketplace and sell it.
Selling things you don’t need has a number of benefits:
- It takes time and energy so it will make you think twice about buying something that you’ll probably end up selling later.
- It will give you a little extra cash to put towards paying off your debt.
- It will leave a hole in your home. When you eliminate something big from your home, it keeps catching your eye because something is off. It will serve as a reminder of what your life will be like with less stuff and no debt.
Make it harder for you to spend money
If you haven’t noticed, I’m trying to make buying stuff more
difficult for you. One way you can do this is to go on Amazon or wherever you
like to shop and delete all your credit card information. Now, if you want to
buy that hot new purse or download some music,
you’ll have to go to the freezer and hack your credit cards out of a block of ice.
Change your habits
Just like changing your
spending habits, you need to change your life habits. Stop buying $5 coffee
every day and start bringing homemade lunch to work. Use apps like GasBuddy to help you save on gas. Be mindful of
how you spend your money.
Conclusion
I don’t want you to live a life of deprivation, I just want you to change your retirement mentality. Remember, as soon as you get your debt paid off you’ll be able to start putting money into retirement savings. Pick a debt payoff date. Then you can figure out how much you have to pay and when you can be debt free.
Once you do that, you’ll have the opportunity to start investing and get closer to the big prize – owning your life and your time.