a life without debt

Seven Steps To A Debt Free Life

In Debt, Paying Off Debt by Phil McGilvrayLeave a Comment

At Grandma’s Jars, I often ask new clients to imagine what life would be like if they were debt free. For a few fleeting moments their whole demeanour would light up as they enthusiastically considered the possibilities and all the things they would like to do with their lives without the burden of debt.

But then the spark would disappear squashed by the reality of their situation. The idea of paying off debt, while a nice idea, seems too big a dream to hope for.

As a budget coach at Grandma’s Jars, I have come to realise that one of the biggest impediments to people paying off their debt is a lack of genuine belief that it is possible for them.

With each generation that has passed since the Great Depression of the 1930’s we have become increasingly desensitised to the dangers and burden of debt. This doesn’t mean we like debt, it just means we have become more accepting of it. We no longer think twice about taking out loans to buy a car, furniture or electrical goods. In fact we have become so accepting of these ongoing debt burdens that we can’t imagine life without it.

Sure we would love to live a debt free life but deep down we doubt it’s even possible, at least not for us. Ironically, it is this belief rather than the practical mechanics of paying off debt that has become the biggest obstacle to living a debt free life.

Paying off debt is rarely as hard as our mind has built it up to be. With time, perseverance and the right debt management plan, even the toughest debts can be methodically eliminated.

Life without debt is perfectly possible for just about anyone but you need to throw aside the doubts, build a plan and get started. As a budget coach, there are the 7 steps I take every single client through when building a debt management or should I say debt elimination plan:

Step 1: Set Up and Live to a Budget

Setting up and living to a budget will do two things. First, it will ensure you are living within your means and therefore not incurring any more debt. Second, it will help you identify how much money you truly have available to pay off debt. Check out our previous blog post, 5 Simple Tips for Sticking to a Budget, to help you along.

Step 2: Build a Rainy Day Fund

Before you throw any money at your debts, build a rainy day fund of $2,000 to $3,000. This will ensure that you have a non-debt back up when those inevitable unexpected expenses and emergencies come knocking on the door. If you don’t have a rainy day fund, your only option will be to pull out the credit card again which would be very demoralising when you have worked so hard to pay it down.

Step 3: Understand Your Debts

Make a list all your debts, smallest balance owing to largest balance owing. Then identify the minimum repayment required on each, as well as the current payment you are actually making on each.

Step 4: Change Payments to Minimum 

Change all the payments on each loan to the absolute minimum. This means reduce the payments to the smallest amount you can pay without incurring any more interest. This includes your home loan. If you have high interest debt like personal loans, credit cards and store loans, you are better off temporarily taking your home loan back to interest only and freeing up the additional funds to pay it off your high interest debt.

Step 5: Focus Paying Down One Debt

Focus all your surplus money at just one debt, the smallest debt. Focussing on just one debt will achieve two very important things. First, you will very quickly see progress and that progress will build your confidence. You will start to believe that your ability to clear debt is actually possible. The second thing you will achieve is fewer debts. One of the hardest things about debt management is having multiple payments to juggle. If we focus on clearing one debt at a time we can quickly reduce the number of debts and thus the number of payments, making life a whole lot easier.

Step 6: Pay Off The Next Debt

Once your first debt is paid off, focus all your surplus funds at the next smallest debt. With each progressive debt that you clear, your surplus will get larger, your confidence will grow and your progress will accelerate. Just imagine how big your surplus will be the day your debts are cleared!

Step 7: Celebrate Victories

Stop to celebrate your victories! As each debt is paid off, stop and celebrate what you have achieved. Start with something small – dessert out or a trip to the movies. As each progressively bigger debt is cleared so should the celebration for paying it off. What you are achieving is significant! And remember you can still Have Fun While Sticking to a Budget.

Time to Start!

You can see this process is not difficult, it just requires time and perseverance but above all it requires that you start. Too often our doubts and lack of self-belief hold us back. The task looks too big, too difficult but the reality is it’s never as hard as it looks. Yes, it will take time but the prize isn’t just any prize, the prize is life without debt, isn’t that worth working for?

Leave a Comment