How to Become Debt Free in 7 Simple Steps!

For some, being debt free may seem like an impossible dream! If you’ve found yourself in debt, you are not alone. Debt is everywhere. You’re expected to buy a car and pay it off in monthly installments over a few years. You buy a house on a mortgage. You may end up with student loans or medical bills. And of course, there are the dreaded credit card traps.

If you are like 80% of Europeans, you probably have some degree of debt. But, this means that you are wasting money. While you might see debt as a way to get what you want before you have the cash to fund it, you are also paying a premium once you factor in the interest that it builds up. If you’re wondering how to become debt free, you are in the right spot. While you may think that you have to be stuck in debt forever, the truth is, you can become debt free, but it will take some planning.

Start a Small Emergency Fund

If your goal is to pay off debt, you need to remove all reliance on credit and loans in the first place. This means that you need cash on hand to pay off emergencies in case something happens. Is your tire flat? Did a rock go flying through your window? Did your dog get sick? A healthy emergency fund should be able to cover those small incidentals that happen to everyone at one point or another. For your first step on your journey, the best thing that you can do is start a small emergency fund. Save up €1000 and have it sitting in an account where you won’t spend it unless you absolutely need it. Use this instead of relying on credit cards for unexpected expenses. Check this guide from Bank of Ireland on how you can create a rainy day fund

Snowball Your Debt

Once you have a small savings fund you can snowball your debt. Snowballing involves identifying all of your debts and actively paying them off in a specific pattern. Let’s say you have the following debts:

€300 credit card

€650 credit card

€4500 car loan

€8000 student loan

If you were to snowball your debts, you would pay the minimum payment on all but the lowest bill. This means that you would pay the monthly due amount for everything but the €300 credit card at first. You would throw all extra money toward the €300 credit card to get it paid off as quickly as possible. Then, when that card is zeroed out, you can take that monthly payment and add it to the payment you make at the next lowest payment. This means you would then tackle the €650 credit card with the minimum payment, the payment for the €300 card, and then all extra money. You repeat this process until you pay off all of the debt, constantly snowballing the debt payments until all of the expenses are covered. Don’t worry about the mortgage at this point– that comes later.

Build a 6-Month Emergency Savings

Once you’ve cleared out the debts, you need to be ready to keep yourself out of debt. This means that you’ll need to build up emergency savings funds so if something happens, whether it is job loss, a disaster, or anything else. Generally, it is a good idea to have at least six months of expenses saved up. This should get you through most unexpected emergencies without needing to rely on credit cards, take out loans, or otherwise get yourself in debt. Without the debt, you can put those minimum monthly payments you were spending before right into savings.

Invest 15% of Your Income

When you are prepared to weather most emergencies, you can then start investing your income. Investing your income will help you to get that extra income flow that will help to keep you out of debt as well. By making sure that you have income flow, you help to better your financial situation. Generally speaking, investing 15% of your income helps you to start making money will help you to protect your future security as well. You likely want to retire in the future, and if you want to, you will need the money saved up somewhere, which is where investments come in. Investments allow your money to grow. I Invest in dividend growth stocks but their is many different types of investing styles to suit your needs.

Save for College for Your Children

You also want to future-proof yourself from getting into debt as well. One debt that many people find themselves getting into is student debt for their children. If you plan on having children in the future, or you have any children now, you will need to save up for college. Most parents are expected to contribute to their children’s educational expenses before their children qualify for any federal financial aid, meaning that your child may require you to take out debt for them to enroll if you don’t have the money saved up, By saving up in advance, you will have the money when you need it and skip the debt.

Pay Off the Mortgage Early

Mortgages are one of the most expensive debts most people get into. They typically last 30 years, and you will usually see this as your biggest monthly expense. However, a significant amount of your mortgage that you pay is accrued interest. By even adding in a single extra mortgage payment every year, you can reduce your mortgage down eight years in the interest you will save. Pay off extra wherever you can and as you do so, you will save massive amounts of money.

Build Wealth

Finally, you continue to build wealth so you can maintain a debt free lifestyle. Without being stuck playing the debt game, you will be able to save up massive amounts of money. You can put all of that money that would have gone to debt payments right into your bank account. Max out your retirement funds. Save up 15% to 20% of your income. Then, enjoy the wealth that you amass. You’ll have the funding for your life without building debt. Life’s short. Enjoy it while living debt free!

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