As much as I hate to admit it, before we began our financial journey, we also lived like millionaires. We were swimming in debt, committing financial suicide. I came across a blogger called Mr. Money Mustache. I realized after binge reading his posts in a day, that the only thing standing between me and financial freedom, was me. Suddenly, our debt felt like this massive weight that was crushing our financial goals. I had to eliminate our debt before I could reach other financial goals. I had an $18,000 student loan from graduate school. We had bought a brand new shiny Honda Odyssey. We were suffering from lifestyle inflation. As our income increased, so did our lifestyle. I had about $16,000 left on my student loan at a 7% interest rate, and we had $16,000 left on our auto loan at a 3% interest rate. That day, we decided to treat our debt like an emergency. It was draining our finances, and if we didn’t act soon, we would be left with nothing. Here’s how we paid off $32,000 of debt in a year.
1) Create a budget
The most important thing you can do to save money, is to create a budget. Identify your fixed and discretionary expenses. Determine if you can make any changes to your fixed expenses. Most of your adjustments will likely come from your discretionary expenses. Like a business, you want a profit not a deficit. Make sure you have more money coming in, than what’s going out. Budgeting takes time. It’s a trial and error process, so tweak your budget until you get it right.
2) Track your expenses
The only way to know if you are following your budget, is to track your income and expenses. Be careful not to lose track of those small purchases. Spent $2 on a soda? Add it to your expenses. Try to add it as soon as possible, because I’ve found that when I don’t, it’s easier to forget. Remember, those small purchases really add up, so keep it as accurate as possible. We use the everydollar app, and it has made tracking our expenses so much easier. Do what works best for you.
3.) Set Goals
Decide what your goals are, and then develop a plan to meet those goals. Set a pay-off date. Put it on your fridge, mark it on your calendar, and set it in your phone. You don’t have to have your debt paid off in a year like we did, but maybe your goal is to have it paid off in 2 years or 3 years. Do the math, make a plan, and stick to it. If you miss your goals one month, don’t be discouraged. Your motivation will grow as you begin to see your efforts pay off.
4.) Identify wasteful spending
Once you begin tracking your expenses, it will be easier to identify wasteful spending. We were paying around $150 for our cell phone plan. We swapped providers, and was able to save over $100 per month with 3 phones. Don’t be afraid to shop around, or negotiate with your providers. We also cut cable. We pay a total of $19.98 for Netflix and Hulu, and invested in a google chromecast. Look at your budget, and you can quickly identify where you can save money. Take the time to make those changes. Make coffee at home, take your lunch to work, and invite friends over for drinks instead of going out. Do whatever you can to completely eliminate wasteful spending.
5) Learn to do your own work
Thanks to YouTube, I learned how to cut my whole family’s hair, including my own. This has saved us about $780 per year. When our dishwasher flooded our kitchen, we had to replace our flooring. I wasn’t confident in my ability to replace my own flooring, but I was able to remove our baseboards and old flooring, which saved me $2,000. We have cut services such as pest control, lawn service, and pet grooming, and we do it all ourselves now. Learn to do your own work, and throw that extra money towards your debt.
6) Save on food
Do not go out to eat. This can double or triple your food budget. Cook at home and plan ahead. Plan for those busy nights. Plan for lunch at work. Pack your kids’ food. Do not sway from your grocery list, especially when you are buying in bulk. Stick to your list. You would be surprised at how quickly a few items can add up to $100. Buy in bulk. We signed up for a Costco membership, and was able to cut our grocery bill in half. We try to stick to whole foods, and limit buying drinks. Water is free, and it’s best for our body.
7) Look for free local activities
We chose free recreational activities over costly ones. If you have expensive hobbies, try to swap them out for cheaper ones, even if only temporarily. We spent most of our summer hiking and biking. In the winter, we chose watching movies at home over going out. My husband made a sledding path in our back yard with Christmas lights. The kids had a blast spending our winter days sledding in our backyard. We also took advantage of free local activities. Sign up for a newsletter or subscribe to a page in your local area. Most areas have lots of free activities. I was able to register our family for a free 5k color run. You don’t have to spend money to have a great time, and make memories.
8) Got a windfall of money?
As tempting as it is to buy the latest Iphone, stay focused on your goals. Take that extra money and throw it towards your debt. We were lucky enough to receive a tax refund. We threw the entire amount towards our debt, and was able to pay it off even faster.
Most people tend to focus on large expenses instead of smaller ones. They don’t think a $3 coffee everyday will make much of a difference in their budget, but those small expenses quickly add up to huge savings. I would argue that we have saved a large portion of our money by cutting smaller expenses. Create a budget, develop a plan, and eliminate wasteful spending. You will be amazed at the savings those little expenses add up to. Have more successful tips to pay off debt? Share them.