The day you get out of debt is an amazing one. When my husband and I graduated college, we had $46,500 of debt from student loans, credit cards, a car payment, and other miscellaneous smaller items. We were able to pay this off completely in 2 years (even when both of us were unemployed for 1 month).
In order to get out of debt, you must have it as your #1 goal. Create a plan to prioritize paying off debt, instead of treating it as just another never ending bill.
My student loans accrued interest at a rate of $1.25/day at 4% interest. Imagine if it was a credit card with interest rates of 15%. Every day your debt sits is just money being thrown away.
Think of it as a marathon, not a sprint: running is awful, it takes months of effort to train, and some weeks you have more motivation than others. It’s the same thinking to get out of debt: it takes hard work!! There will be some months where you can only put in $20 more than the minimum, but that’s still moving forward!
So how did I do it?
How To Get Out Of Debt (Without A Budget)
If you are starting from ground zero, there are three main points to follow to get out of debt:
1. Save $1,000 for emergencies
The age old debate: get out of debt first or save first?
Personally, I think you should save first – but just enough for emergencies.
Saving $1,000 before starting the debt payments is a good buffer for minor emergencies – car breaks down, unforeseen vet bill, etc. Of course, this isn’t nearly enough to help in a major situation, but you know your own circumstances. For us, $1,000 was more than enough of a safety net. Even when we were unemployed for an entire month we still didn’t touch it.
This buffer is merely to provide peace of mind to help you account for those times when life is unpredictable.
If you end up using some of your emergency savings, just make sure to take a break from paying off debt to save back up to $1,000.
Don’t have any extra money after bills are paid for? Here are 50+ creative ways to save money.
2. Write out all your debt
Be honest with how much debt you truly have by writing everything down on a piece of paper.
For instance, ours consisted of:
- Student loans: 27,000
- Car: 10,000
- Wedding ring (on a credit card): 1,000
- Laptop (on another credit card): 500
- Other miscellaneous credit card expenses: 8,000
- Total: 46,500
Ouch. Even though it was a big number, at least there was no mystery to what I owed.
3. Pay off the least amount first
Known as the debt snowball by Dave Ramsey, it simply means paying off debt from the smallest amount to largest (regardless of interest rate). This gives us the feeling that we’re making progress on our debt, which provides the encouragement to keep going. Paying off a $1,000 credit card bill feels much better than putting $1,000 into a $200,000 mortgage.
For us, this meant we paid off the laptop first, then the ring. By the time we started paying off the monster student loan debt, I didn’t have the other debt payments distracting me. I was able to put more into the student loans every month instead of dispersing my payments across the board.
But what about interest rates? Wouldn’t you want to pay off the highest interest rate first?
I agree that interest rates are very important. Of course you want to pay off the debt with the highest interest rate first and on paper, that makes the most sense. However, the debt snowball is popular because it accounts for human tendency, willpower, and psychology. I’d be much more likely to give up the dream to get out of debt if I kept chugging away at a $20,000 loan for months. Instead, paying off smaller loans gives me motivation to keep going by celebrating the small victories.
Unfortunately, the reason why becoming debt free is so hard is because many people live paycheck to paycheck and don’t have any extra cash after bills and expenses. How can you get out of debt when you don’t have any money?
During our two years of paying down student loans, I tried my best to live by two spending rules:
1. Don’t spend money
There’s no way around it: when you’re trying to create a debt free life, you will be uncomfortable during the process. You will be wanting for things that aren’t necessities. After a long day at work, I wanted nothing more than to get drinks and eat take out. I wanted new furniture and clothes. I wanted to travel.
In order to minimize expenses, I put myself on a spending freeze. Anything that wasn’t a necessity, I tried not to spend money on. Of course, no one is perfect, but this mindset allowed me to see how often I’d want to buy something just because.
What is a necessity? That is different for everyone, but for the most part, it consists of:
- Bills (phone, utilities)
- Car maintenance (gas, oil changes, tire rotations)
- Insurance (health, car)
What is not a necessity?
- Monthly subscriptions (Netflix, magazines, etc)
- Dining out (meals, coffee, desserts)
- Home decor, furniture
Even though it may seem extreme, the goal is to pay off debt quickly. The spending freeze is only meant to be temporary. This mindset meant I had to evaluate all my purchases to make sure what I was buying was truly something I needed.
Of course in everyday life, it’s improbable to do a complete spending freeze. Coworkers want to get drinks after work, your family is visiting – life happens. For those situations, create a budget buffer of around $50-100/month. That way, you’re still keeping track of the expenses and know exactly how much you’re spending. The buffer also helped to preserve some sanity and fun in order to actually be on a spending freeze for months (or even years) at a time.
A spending freeze is difficult because it’s so much more natural to spend money than to save it. During this time is when I learned about minimalism, which completely changed the course of how I view objects and purchases. Minimalism made the spending freeze easier because I learned to put less value on everyday things.
2. Put anything extra into debt
You must be aware of what your current bills and expenses are, including knowing what’s fixed and what’s variable each month. If you don’t, you will be at a vast disadvantage since you won’t have any idea how much money you’re spending on things that aren’t necessities.
Fixed expenses would be things that stay the same, like rent or a mortgage. Variable expenses would include things like groceries or utilities.
Before we started paying off debt, I didn’t keep track of our variable expenses. We were probably spending about $400/month on just dining out. This in addition to about $400/month on groceries.
In order to get out of debt, I reigned in on our spending for these variable expenses. After these expenses, basically anything that was leftover was put into debt.
By incorporating these two rules, I became much more aware of our spending and where our money was actually going.
So how did I get by without a budget?
Since I had the spending freeze, I wasn’t spending money on anything besides necessities anyway. I also didn’t want to be tempted by having money left at the end of the month and spending it (for instance, having money left in my “entertainment” budget).
Now, this doesn’t mean you shouldn’t track your expenses. You should always be aware of what you’re spending on! I just didn’t want to create a budget for my fixed expenses – these stayed the same every month anyway so I know how much I’m spending on it. As for variable expenses, my plan was simple:
- To spend as little as possible on them
- To only keep track of my biggest variable expenses
Here is an example:
Getting gas is a variable expense. But even if I went over my budget for gas for the month, I’m still going to fill up the tank because I need the car. So instead, I thought, how can I reduce the amount of gas I am using? This meant that we walked more (we lived in an urban area), we took public transit when possible, and we carpooled.
What are your biggest variable expenses?
As I was purposely spending as little as possible on variable expenses, I knew I didn’t have to keep track of the smaller things (car maintenance, utilities, etc). However, there were two variable expenses I had to keep track of because if left unchecked, it could go downhill fast. They were 1. groceries and 2. dining out/entertainment.
My husband and I had (and still have :\) a tendency to overspend largely on groceries and dining out because we love food. Therefore, these were the two things that I definitely had to keep track of. I did this by using a simple app on my phone that I just reset every month.
By not creating a budget for all possible variable expenses, I felt much more in control of my finances. I didn’t feel overwhelmed by spreadsheets I couldn’t keep track of, and I had peace of mind knowing I was cutting basically all the corners I could to get out of debt as quickly as possible.
It’s for this reason that we didn’t do the cash envelope system that many people like to do. It added too much complexity in having to keep track of physical bills, and having to make extra trips to stop by the bank. Also, credit cards are an amazing tool in building credit score and saving money, if managed well.
Paying off student loans has given us so much more financial freedom. We never worry about finances, we travel more, and my husband is able to pursue grad school without having to take out any loans: we will be paying tuition completely in cash. The journey to get out of debt is difficult, but one that’s so worth it.