Financial independence and freedom from debt may sound like impossible pipe dreams but turning them into reality is possible with some legwork and a good plan of attack. If you find yourself living paycheck to paycheck whittling debt that doesn’t seem like it will ever go away, keep reading. These tips will give you the means to eliminate debt and keep yourself debt-free moving forward.
Change your mindset.
Society has conditioned people to look at money in a less-than-positive light. It gets blamed as the root of all evil, the source of society’s ills, the catalyst that summons every manner of blight and suffering into the world. Can’t we all just go back to trading stuff for seashells?
Consequently, this mindset shapes many people’s attitudes about money and directly influences their relationship with it in a negative way. Many see a monk-like life of piety and poverty as a virtue, and even more feel guilt and shame and making money and wanting more of it. Thus, making money is seen as a necessary evil.
But while there is something to be said about the inequality so prevalent today, the truth of the matter is: money is not the enemy. It is a tool; a means to an end. It can be used and misused in the same way that your kitchen knife can be used to either make great meals or to harm.
In order to free yourself from the shackles of your debt, first, you need to free your mind from the shackles of this “money-is-evil” mentality. Remember that a healthy relationship with money is key to digging you out of your current predicament.
Analyze your current situation.
This is probably an anxiety-inducing step for a lot of you reading this, but you need to take stock of your current situation in order to be in a better position to formulate a pay-off plan, and eventually, a savings plan.
List down all your current debts such as your outstanding credit card balance, student loans, car loans, and outstanding debts to friends and family members. Then, get your thinking cap out and add up the numbers.
Next, make a list of your savings and recurring income such as your salary and side gigs. Also add up any stocks, 401k plans, and other types of retirement plans you may have.
Done? Great. You’ve just taken a massive step in the right direction and your future self will thank you.
Create a budget and stick to it.
Once you know how much you make and how much you need to pay back, it’s time to focus on creating a spending plan that’s right for your income.
Start with the total amount of recurring income you make a month and work back from there. Subtract all the fixed expenses such as rent, taxes, child support, etc. For variable expenses such as utilities and food, list a maximum amount for the category in question and stick to it.
If you end up with a negative number after subtracting all expenses from income, go over your budget and see if you can trim any fat from there.
Consider getting apps such as Mint or YouNeedABudget to help set up a monthly budget and track your expenses. These apps are great for checking which categories you tend to overspend in. Plus, seeing these figures on-screen helps to give an overall awareness of how much you have in your accounts versus how much you are spending, and helps curb unnecessary purchases.
Pay your goals first.
On a related tangent, be aware of your savings goals and make sure to allocate funds to these goals first before allocating a budget to any other category. For example, if your goal is to repay your debt, first allocate a reasonable amount in your budget for debts prior to allocating the rest of your budget. This also means getting a side gig if for some reason the amount left over isn’t enough to cover the bills.
Why pay your goals first?
Paying your goals first means that you are guaranteeing funds towards the fulfillment of your goal, whether its fully paying back debts or going on that nice vacation in Rome by next summer. This provides a nice ego boost to help drive consistency and build lasting, valuable habits.
Doing the opposite and relying on what’s left over after expenses are allocated usually means that you are not putting enough cash towards your goal. This makes it much harder to follow through with your goals.
Break larger goals into smaller ones.
People often have an emotional wake-up call that spurs them into action regarding their financial situation. It can be something passive and reactive such as a recent illness, death of a loved one, bankruptcy, etc. Other times, it can be more proactive – a desire to travel perhaps, or a desire for early retirement.
Whatever that is, you’ll set yourself up for a better chance of success if you break that goal down into smaller more manageable bits and give yourself a realistic deadline for achieving them.
For example, “I am going to pay my debt” is vague and nebulous. “I am paying my debt by next year” sounds much better but isn’t quite there yet. “I am paying $20,000 by 2020” sets a concrete amount that needs to be paid, and a reasonable deadline to work towards. Creating concrete, reasonable goals makes provides a clearer template for you to follow and sets you up for success.
Financial freedom may sound like a concept from old textbooks, but it’s definitely possible for anyone to achieve. No matter what financial difficulties you have today, there are various ways to get over them. Take ownership of your finances and more importantly, your life. It’s about living within your means, making sure your money goes to necessities, and being a bit frugal. Establish additional streams of income, pay down that debt, and control your finances. Before you know it, you’ll be free.