Yes, you can become debt free even if you owe $20,000 or more. It’s practically guaranteed if you follow this advice.
Step 1: Learn where your money’s going
If you’re falling further and further into debt every month, there’s one simple reason. You’re spending more than you earn. But why is this the case? You can’t know until you track your spending for a month. There are numerous smart phone apps that can help you do just this. We like Mint, Expenser and PocketMoney Lite but any expense tracking app will do. Just make sure you track every penny you spend.
Step 2: Look for “leakages” or places where you can make easy cuts
Now that you can see where you’re spending money, you need to organize it into categories. Apps like Mint will do this for you. Or you could choose BudgetSimple or JumSoft Money. Next, review each category carefully to see where you could make cuts. Your objective is to reduce your spending to the point where it’s less than your income. The first time through you may think, “Oh, no. I can’t cut my spending that much.” But you can. If you truly want to get out of debt, you have to reduce your spending even if it means making some sacrifices. You might think you can’t live without that health club membership but trust us. You could. Just walking 30 minutes a day will give you all the exercise you need. You don’t need to eat out three times a week and as much fun as it might be to download all those new films, that’s just not a necessity of life.
Step 3: Keep cutting
After you get your spending in line with your income, now comes the really hard part. You need to go through all your categories again looking for places where you could make even more cuts. Your objective now is to spend at least $200 a month less than you earn to pay down your debts. Where can you make more cuts? Take a hard look at how much you’re spending on food, clothing and entertainment/recreation. These are categories where almost everyone can make cuts. For example, we read recently of one woman who was able to get $100 in groceries for less than $20 just by using coupons.
Step 4: Spreadsheet your debts
Make a list of all your debts. The best way to do this is with a spreadsheet program. If you don’t have Microsoft Excel, you could use Google Docs or OpenOffice.org, both of which are free. You will need four columns as follows: One for the name of the debt, a second for the balance owed, a third for the interest you’re being charged and a fourth for the day of the month that payment’s due. Next, sort the debts in order from the one with the lowest balance down to the one with the biggest.
Step 5: Start snowballing
Use the $200 you’ve shaved off your spending in Step 4 to start paying off the debt with the smallest balance. Don’t forget to keep making the minimum monthly payments on your other debts. When you’ve paid off that first debt, you start snowballing by using the money that’s now available to begin paying down the debt with the second lowest balance and so on.
Step 6: Find ways to earn extra income
You need to now start working on the other side of the coin, which is finding ways to earn more. The simplest and most direct way is to get a second job or take on extra shifts where you work. The objective here is to earn an extra $200 a week. If you have the time, you should be able to get a part time job paying at least $10 an hour. Work 20 hours a week and that’s $200 or roughly $800 a month. When you get that first $200, you will use it to help pay down that debt with the lowest balance.
Once you’ve paid it off, you will have even more money to start paying down the debt with the second lowest balance and so on. Here’s an example of how this could help you become debt free.
| Debt | Balance Owed | Minimum Monthly Payment | Snowball payment | Time required to clear debt |
| Debt 1 | 2,500 | 24 | 500 | 5 months |
| Once you’ve paid off Debt 2 | 2,800 | 56 | 750 | 4 months (9 months total) |
| Once you’ve paid off Debt 3 | 4,100 | 82 | 1000 | 4 months (13 months total) |
| Once you’ve paid off Debt 4 | 5,000 | 100 | 1500 | 3.5 months (16.5 months total) |
| Debt 5 | 5,600 | 112 | 2000 | 3 months (19.5 months total) |
Debt free in 20 months
If you were able to follow this model, you’d be debt free in about 20 months. Of course, this could take less or more time depending on how much you owe and how much you’re able to cut your spending and/or increase your income. But as you can see, you could become debt free and in less time than you might have imagined.
The Net/Net
The net/net of this is that you can get out of debt by following this 6-step program.
Step 1: Learn where your money’s going
Step 2: Look for “leakages” or places where you can make cuts so your spending less than you earn
Step 3: Cut even more – until you have at least $200 available to pay down your debt
Step 4: Spreadsheet your debts
Step 5: Start snowballing
Step 6: Find ways to earn extra income
