Becoming debt free and beginning your debt free journey can be overwhelming at first, but also exciting. We followed Dave Ramsey and his baby steps during our debt free journey, but the baby steps didn't include a lot of the backend work we had to do when it came to budgeting and tracking our spending and income.
• Our Budget Template (free): http://www.mikeandbrit.com/budget
• Our Debt Payoff Organizer (as seen in this video): https://www.mikeandbrit.com/debt-organizer
• Grab a free stock with Robinhood: https://join.robinhood.com/michaem27270
•Gear We Use for Our YouTube Videos: https://www.amazon.com/shop/mikethemathman?listId=2F90KJ814LCXF
Thumbnail inspired by @Graham Stephan
0:00 - Intro
1:10 - How Much Debt Do You Have?
3:11 - Figuring out Your Expenses and Income
7:23 - Developing a Budget
9:44 - Saving a Beginner Emergency Fund
11:29 - Paying Down Your Debts
13:30 - Becoming Debt Free Faster
This video explains how to become debt free as fast as possible, by first getting ahold of your finances, monthly income and expenses, creating a budget, saving a small emergency fund, and putting as much of your extra cash toward debt as possible.
Figure out EXACTLY how much you owe and who you owe it to. On a sheet of paper or excel document, make a list of all the debts you have. Car notes, student loans, credit cards, medical bills, family loans, etc. We’d recommend listing these from smallest debt to largest debt. If you have debts on investments that are putting money in your pocket every month, such as rental properties or similar, DO NOT include those. We’re just talking about consumer debts that take away your income.
Determine your income and monthly expenses.
You may already know exactly how much you get paid. If you don’t, pay attention to your paychecks this month and take note of that. You can also look through your previous 2 or 3 months of paychecks and take an average of what you get paid every month. If you’re self-employed and your income fluctuates, do the same thing. Monitor and write down your income for this month. Go back through your bookkeeping software and look at your income for the previous 12 months. What is the minimum you can rely on every month?
This may take an hour or two, but the best way to do this is to look at the last month or two of bank/credit card statements to see what you’re spending money on. Break spending into categories: rent/mortgage, groceries, utilities, going out to eat, gasoline, clothing, insurance (life, auto, property, etc.), phones, internet, etc. Add up everything into those categories and total everything out for the month. Also track your spending for this month. Everything you spend money on this month, write down under those categories. This should include all the debts you listed in Step 1. The objective here is to get an accurate idea of the money leaving your pocket every month.
Make a budget based on your income and spending. The purpose of a budget is to help you be intentional with your spending, so every dollar you spend has an assignment. It should be something that puts you back in charge of your money, rather than your money being in charge of you. Becoming debt free will be next to impossible if you don’t do this step. It's normal to be bad at this at the beginning. It took us about 4 months to get into a groove. Great resources:
http://www.mint.com (free for budgeting)
Our budget template
Save a small emergency fund. We would recommend one to two month's worth of expenses. Every dollar you have left over from your income, after paying your expenses, put in your emergency fund. Pay minimums on all debts until this is done.
Start paying things off. Just like saving an emergency fund, put every extra dollar you earn toward paying off debt. There are different ways of doing this:
1) The debt snowball. Pay things off from smallest balance to largest balance, and snowballing the monthly payment into the next largest debt as things are paid off.
2) Largest to smallest interest rate. This is the most mathematically correct way, but becoming debt free is much more about psychology and behavior than math.
3) Largest payment to smallest. If you have disproportionately large payments on a smaller debts, it may make sense to pay these off first, as it will free up cash flow more quickly to put toward other debts.
Speed up the process of becoming debt free. Sell things, get more work. (we're out of room)
Legal Disclaimer: Michael Miller is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.