Photo by danesparza The 10 Key Actions That Finally Got Me Out of Debt; or, Why Living Frugally is Only Part of the Solution
This month, I paid off the loans for both my vehicles! I am debt free!
After focusing on getting out of debt for so long (a few years now), becoming debt free is a wonderful and amazing feeling.
It wasn’t easy — my wife and children and I all made sacrifices. It took perseverance. It took some creativity.
And unlike the common misconception about getting out of debt, it took more than frugality.
Background
Let’s take a little trip back in time and see how I got into debt to start with. For a large part of my early adulthood, I was very careful to have a small credit limit and to pay off any purchases on my credit card immediately. I had an auto loan that I paid off religiously, and later a mortgage that I also paid very conscientiously.
After a divorce, I came out debt free. We had paid off our car loan and credit card, and the mortgage was no longer my responsibility.
Then I entered a period that I like to call “frugal irresponsibility”. I made some bad choices, getting a car loan, a credit card with a higher limit, putting things on the credit card that I couldn’t afford, spending without a budget … not the smartest decisions.
The next period was one where I was crippled with debt, as well as trying to survive on a single income with no medical insurance. This was only recently (within the last few years). I wasn’t making enough to support my family, so we fell deeper into debt.
The most recent period has been my turnaround. I canceled the credit card, and began to live more frugally. I increased my income and saved an emergency fund. This is the part where I learned how to get out of debt. And this is what I’d like to share with you today, in hopes that it will help others struggling.
You won’t be able to replicate what I’ve done exactly … everyone has to deal with their situation in their own way … but my hope is that you’ll be able to glean something from my experiences. At the very least, a little inspiration. And that’s not such a small thing.
How I Finally Got Out of Debt
This hasn’t been the easiest of journeys for me, but I think because of the struggle that getting out of debt entails, the final destination is that much sweeter.
Here are the most important things that got me out of debt:
1. Canceled the credit card. This item always draws a lot of debate, but I’ll say it anyway, because it’s been crucial in getting myself debt free: credit cards are extremely tempting, and with the high interest, they can be downright dangerous. It is possible to use them wisely and even profit from using them … however, most people don’t use them that way, and for people like me, it’s better to just cancel the card. I still had a big debt to pay on the card, but at least I wasn’t using it anymore. Rule #1: If you’re trying to get out of a hole, stop digging.
2. Eliminated non-essential expenses. This might seem extreme to many people, but remember: I have six kids and for awhile I wasn’t making enough income to support my family. I needed to cut back. So I eliminated everything I didn’t need: cable TV, most of my eating out, going to the movies (except on rare occasions), alcohol, eventually cigarettes (once I quit smoking in November 2005), buying new clothes (except when really needed), etc. I slowly re-learned what it was like to live frugally. This was also key, as it’s part of the “stop digging the hole” rule. See also: How to Stop Living Paycheck to Paycheck.
3. The spending plan. I don’t like to use the word “budget” because it strikes fear in the hearts of many readers, and blank stares in the eyes of others. Instead, I like the term “spending plan”, because it conjures images of creating a plan to achieve a goal, taking action, and doing something about your problems. Nevertheless, both concepts are essential the same: figure out how much you make, and consciously decide how you want to spend it this month. My plan actually budgets out each paycheck, because a monthly budget wasn’t useful to me: if I only do a budget for a month, how do I know what to pay when my first paycheck comes out? I like to be more specific.
Anyway, the spending plan is essential. You have to decide where your money is going to go before you actually spend it. It was when I was spending without a plan that I got into trouble. And remember: a plan should be flexible, and have wiggle room, because life changes. See also: 10 Ways to Simplify Your Budget.
4. Cash and online bill payments. One of the reasons I had a hard time controlling my finances in the past is that I was spending left and right with no easy way to track my finances or stay within budget. I was using a credit card, debit card, checks, constant ATM withdrawals, etc. I’m not good at writing down every penny. So I devised an easier way: pay all my bills online (including debts and savings), and then withdraw all the money I need for spending categories like eating out, groceries and gas. I use the envelope system, so that I always know how much I have left in each category. Simple and fail-safe. More here.
5. The emergency fund. I think this was one of the most important things I did. I know, it’s very common advice, but it’s for a good reason: without an emergency fund, your finances are at the whim of any urgent situation that comes up. Unexpected medical bill? Home repair? Car repairs? Need to travel to see your sick relative? These things will have to be paid for somehow, and if you don’t have an emergency fund, you’ll either go into debt to pay for them, or you’ll sacrifice your debt repayment for this month to pay for it.
Without an emergency fund, it’s almost impossible to get out of debt. For myself, my debt reduction didn’t really start until I had saved at least a small emergency fund (shoot for $1,000 to start with, but at least a few hundred in the beginning). Read more.
6. The debt repayment plan. I like having plans. They’re how I get things done. I created a plan to get out of debt, using the debt snowball method. I tackled the small bills first, allowing myself to create a sense of accomplishment right away, and to free up some money to pay for the bigger bills. Although tackling the highest-interest debts first is smarter financially, the difference is small and the psychological boost of the debt snowball is huge.
7. Debt is my first bill. In the beginning, actually, saving for the emergency fund was my first bill. As soon as I got paid, I would go online, transfer money into my savings account, and only after that was done would I pay other bills and withdraw my spending cash. Once I had a $1,000 in savings, I began making debt repayment my most important bill, and I would pay those first. Savings second. All other bills third. By paying debts and savings first, you eliminate the common problem that people have when they make savings and debt the last thing they pay: if something else comes up, there’s not enough money left over for savings or debt.
8. Rewards. I am a strong believer in rewarding yourself and celebrating any accomplishment. When a debt was paid off, my wife and I would go out to dinner to celebrate. And we might do something nice for the kids. Sure, we were spending extra money, but that sense of accomplishment is important. It’s a long journey, and you need to be able to look back every now and then to see how far you’ve come. It’s very motivating, and it gets you to the finish line.
9. Increased income. Besides spending less and living more frugally, I also increased my income to make my financial situation more stable and to accelerate debt repayment. To do this, I got a full-time job (I was only doing freelancing before), and continued to do as much freelancing as possible. Then I started Zen Habits, and that became a steady and growing income stream. I also improved my freelancing gigs, and began to look for other ways to make money.
10. More increased income. With the increased income mentioned in the item above, I was in a much better situation financially. That gave me the courage to look for more. I sought donations, to help me achieve my dream of becoming a full-time blogger, and people were incredibly generous (and still are). I began to seek new opportunities, and have some projects coming up down the line. I sold my Zen To Done ebook, and that was a surprising success … it actually allowed me to get debt-free two months before I had anticipated. My wife went back to work, and that helped tremendously. And now my book agent is shopping around my print book proposal, and that could be another way for me to make more income. Always look for new ways to pursue your dreams and your passion … and to increase your income.
Why Living Frugally is Only Part of the Solution
I would not be debt-free today if I didn’t learn to live frugally. If you don’t stem the flow of blood, you’ll never heal the wound.
But frugal living is only one component. You have to learn to get your finances under control, and to plan your spending, and to create an emergency fund. You have to learn how to motivate yourself to finish the long journey.
And one of the most important steps, as mentioned above, was increasing my income in multiple ways, in a series of steps designed to get my finances in better shape and to pay off debt faster.
Living frugal should be the first thing you do, in my opinion. It is vitally important. But it’s only a part of the equation — spending less only gets you part of the way. Earning more gets you the rest of the way.
How can you increase your income? You won’t do it the same way I have. Sure, anyone can create a blog, write an ebook, freelance, write a print book. And I’ve talked about ways to do those things in various places before. But it doesn’t always work out for everyone.
The key is to find something you’re passionate about, and pursue that with all of your heart. That might mean educating yourself, and learning new skills. That might mean finding mentors, and starting at the bottom. But when you’re passionate about something, you’re more motivated to learn and to succeed. Really pour yourself into it, and you’ll find a way.
It’s also important to seek new opportunities, and don’t let good ones get away. If the opportunity doesn’t work out, well, drop it … but at least you gave it a shot. And who knows? One or more of those opportunities might turn into pure gold. They sure have for me, and I’m loving my life more than ever before.
What’s Next: My Credit-free Plan
So I’m debt-free … where do I go from here? My plan now is to continue to try to increase my income with new projects, to continue to follow my heart and my passion, and to see what comes up.
But I plan to still live frugally and to save and invest as much as possible. In truth, I haven’t done much investing yet (besides my 401k) … that’s my next financial project, once my emergency fund is where I want it to be.
There will be a little more spending, to be sure … I’ll be able to travel now (maybe a trip every year). I haven’t traveled in 6 or 7 years.
But one thing’s for sure: I’m not getting into debt again. I’m not taking out any credit cards, and I’m not going to take out any loans. This might be a little controversial, but I’m pretty adamant about this: I’m already saving for my next car, so I can buy it on cash. And I’m going to buy my home on cash too, someday. Until then, I can rent.
Debt is a dangerous game. Some people can succeed at it. The rest of us can’t. For me, getting out of debt has been like shedding a load of boulders from my back. Living without debt is wonderfully light, and I’m not giving that up. Sure, I’ll have to wait a little longer to get the things I want on cash … but that’s worth the wait. It really is.
I’m free!
Update: Read this amazing account of a similar journey to debt freedom by J.D. Roth of Get Rich Slow — J.D., by the way, has been one of my key inspirations on my own journey.
What are your most important debt-elimination actions? Have you recently gotten out of debt? Do you agree that staying away from credit is a good thing? Share your thoughts in the comments, or continue the discussion in the Zen Habits forums.
If you liked this article, please bookmark it on del.icio.us or vote for it on Digg. I’d appreciate it. :)
See also:
- 6 Great Free Alternatives to Quicken and MS Money
- 10 Habits to Develop for Financial Success
- How I Ended My Affair with the Credit Card
- Monitor Your Impulse Spending Urges
- How I Save Money
- What is truly necessary? A guide to living frugal
- Reward Yourself Without Spending a lot
- One Month Challenge: Tracking Our Expenses
- How to Stop Living Paycheck to Paycheck
- Baby Makes Eight: Raising Six Kids, Part 1 - Finances
- Posted on 3 December 2007 in Finance & Family, Goals |
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Comments (101)
Balfour Says:
December 3rd, 2007, 21:32 pm
Wow, congratulations Leo!
Collis Says:
December 3rd, 2007, 21:39 pm
Well done Leo, there’s nothing like shedding a big burden to kick off a happy holiday season! Congratulations
K Stone Says:
December 3rd, 2007, 21:44 pm
Congrats Leo! What an awesome success story! You may have covered this other articles, but I’m curious why you’re averse to having a mortgage where you could be building equity in a home instead of having it just go to rent? I’m not sure what taxes are like in Guam -same as US? - if so then you’d also get a tax deduction from mortgage interest. I ask respectfully. Teach me Leo! :)
Brett Says:
December 3rd, 2007, 21:58 pm
Congrats, Leo! Man, that’s awesome! I can’t wait to be your position. Hopefully in a few years. I think I’m doing alright in the frugal department. I need to find ways to increase my income.
Jonathan Fields Says:
December 3rd, 2007, 21:58 pm
Awesome, Leo! Debt is one of those things that requires constant conversation. On a personal level, I strive to accumulate as little as possible.
But, on a business level, I’ve started a number of companies and the fact that part of the funding was debt allowed me to keep control over the company long-term.
To me, I differentiate between debt that is taken on for the express purpose of building a dream and a stream of revenue, versus debt that is taken on largely to fund discretionary purchases.
Thanks for giving me the chance to explore this again!
Victoria E Says:
December 3rd, 2007, 22:00 pm
I keep thinking about canceling one or two of my three credit cards, but I’ve heard that the long you have them and keep them in good standing, the better your credit looks :/
shane Says:
December 3rd, 2007, 22:00 pm
Leo thats fantastic!!!!
I remember the day I considered us debt free (mortgage aside). I had made a committment to myself to buy my wife a wedding present cash, and refused to go into debt over it. Took about 2 years of diligence, living on a budget, and as you said, increasing my income.
I’m proud of you and welcome to the club!
Leo Says:
December 3rd, 2007, 22:01 pm
Thanks guys!
@K Stone: This has been covered more fully by more knowledgeable writers, but to put it simply: when you take out a mortgage loan, you’re most likely paying 3 times the worth of the house in interest. Plus there’s taxes, insurance, maintenance costs, etc. If you rent, you can save money, invest it and actually have the money make money for you. While you can get equity from a home, you can get equity from investing your money in an index fund too, and actually you can get a lot more equity from investing in the index fund than the house, in many cases.
Now, whether to buy or rent is a tough question, and it really depends on your individual situation. But for me, I’d rather take my money and invest it, not have to pay the huge interest on a mortgage, and buy on cash when I have the money.
The key point for me is not being indebted to a bank. Without the burden of debt, I’ll keep myself light and free.
Free Fall Creative Says:
December 3rd, 2007, 22:02 pm
Awesome article. I’ll definitely be reading this over 2-3 more times.
I have a question for you though if you have a second.
You mention how you grabbed a full time job while also doing freelance. I am in the same boat right now of only doing freelance but I’ve been thinking about looking for a full time web design job locally with a firm around here, but honestly, my pride of “doing it all on my own” is stopping me. I left my parents house a few years back saying that what I was doing would be my living, and now, I’m hitting some rough spots.
Did you find it easy to get back into full time work and/or did it hurt your pride in any way?
Thanks,
Mike
Leo Says:
December 3rd, 2007, 22:04 pm
Oh, I forgot to address taxes: with the number of dependents I have, I don’t pay taxes, so any benefits of getting a tax break from mortgage payments doesn’t apply to me. And Guam has the same taxes as the U.S. — our tax code mirrors the federal code.
But let me stress this: my decision to avoid debt works for me, but it might not be the best for everyone else. I’m not criticizing anyone else’s lifestyle choices. :)
Leo Says:
December 3rd, 2007, 22:13 pm
@Free Fall Creative: I hear exactly what you’re saying … and I’ll be honest, there was definitely a lot of hurt pride when I had to swallow my ego and get a full-time job. However, I had lived at least 6 months hoping I wouldn’t have to do that, and in the end I had to face reality. Things were getting really bad for me, and the move turned out to be one of my best ever.
I’m going to quit my full-time job soon, 2 years after going back, so it was just a temporary thing for me, but it really helped.
Whatever you do, though, don’t give up your dreams! Stay focused on continuing your freelance work.
10KPortfolio Says:
December 3rd, 2007, 22:15 pm
Nice post. Even though I would not “cancel” my credit cards I do understand if there is any temptation it is better to cancel. Another option is to shred the cards so they are still active.
Leo Says:
December 3rd, 2007, 22:16 pm
Sorry for the multiple comments, but regarding the buy your home vs. renting, here’s a good article:
Get Rich Slowly: Buying vs. Owning a Home
@Victoria E.: Yes, it’s true: having a card with a long history and in good standing looks good on your credit report. If that’s something that’s important to you, I would pay off the card, but not use it if you don’t have the cash to pay it immediately.
But as I mentioned, I don’t intend to borrow money ever again (if possible). If that’s the case, then your credit score is irrelevant. Why should I care about my credit if I don’t want a loan or card? :)
John Brougher Says:
December 3rd, 2007, 22:33 pm
Congratulations Leo! You deserve a big high-five.
I have to tell you, though, that I’d avoid waiting to get a house or property until you’re ready to pay for it in full–cars are one thing, but stuff that tends to appreciate in value like real estate is very different. Basically, rent is just lost money, whereas a house (even though you’re paying a mortgage) is an investment. After you’re done with the mortgage, you can then keep the house and rent it out as income, or sell it for (hopefully) an overall profit. I’m no accountant, but this is just the advice I’ve heard countless times.
John Brougher Says:
December 3rd, 2007, 22:34 pm
Oh, and from what little I know, I think renting out your eventual property makes the most sense. Instead of a big payout from selling, using it as a rental property makes just one more source of passive income. If you have six kids to send to college (not to mention pampering yourself and your wife, of course!), passive income does help.
Again, sadly, I’m not a financial expert–just passing along the word.
K Stone Says:
December 3rd, 2007, 22:46 pm
Thanks for the info on home buying vs renting, and the benefits.
I’m so glad for you that you’re living out the life you want! You obviously worked hard to get there. Congrats again!
Leo Says:
December 3rd, 2007, 22:49 pm
@John Brougher: Actually, as I mentioned in the article I linked to above, a few comments above this one, renting is not throwing your money away any more than paying off a mortgage is.
When you buy a house, you are “throwing away” 80% of your mortgage payment on interest, not to mention the amounts you pay in insurance, maintenance, taxes and all that.
When you rent, you can invest that money in the stock market … which is a much, much better investment than a home.
Now, this all depends on your situation, but buying is *not* always better than renting, financially.
As for passive income, there are better ways of doing that, and I’m pursuing them now. :)
Thanks for the comments, John!
Free Fall Creative Says:
December 3rd, 2007, 22:50 pm
Thanks Leo for your honest reply. I’ve been struggling with it for a few months now as well. Every time I do think about picking up the yellow pages, I end up with a few bigger jobs that come and I think to myself “great, I don’t have to” but I really think I do.
Plus, the stress that my girlfriend has from the money situation really messes with my head because I don’t want her to. We’ve been together for 8 years and it’s pretty much like we’re married, we just haven’t took that step yet so I make sure she’s ok before I make sure I’m ok.
Anyways, enough rambling.
Thanks again Leo, and keep up the great work!
Mike
dave Says:
December 3rd, 2007, 23:03 pm
Leo-
thanks for all your great work, i really admire your writing and ZenHabits.
Tina Su - Think Simple Now Says:
December 3rd, 2007, 23:20 pm
That’s so awesome to hear Leo. Congrats!!
I love your suggestion to increase income streams in addition to being frugal. This indeed rings truth: “The key is to find something you’re passionate about, and pursue that with all of your heart.”
My most debt-elimination actions is to not get into debt if I could help it. Never put anything on my credit card if I cannot pay for it within 30 days. I also use Microsoft Money to track my spendings at the end of the month. The pie chart at the end of the money showing where my money goes really highlight my spending patterns to the foreground. I used to spend a ton of money on clothing, which I didn’t realize until I saw the total at the end of the money from MS Money. I’m much more conscious of that now and only buy clothing when I need rather than out of impulse.
Thanks for the inspiration. Digging it! :)
Tina
Tina Su - Think Simple Now Says:
December 3rd, 2007, 23:21 pm
Oh, I wanted to ask.
If you use software to track your spendings. Which do you use?
Leo Says:
December 3rd, 2007, 23:25 pm
@Tina: Thanks for the nice comment! I use Microsoft Money, just because it came with my computer. I use a simple Google spreadsheeet for my spending plan and to track my savings and other financial goals.
Laowai Tattler Says:
December 3rd, 2007, 23:25 pm
Hey Congratulations on reaching your goal.
The best thing that ever happened to me was getting a bad credit rating when I was in my early twenties by not paying off a student loan on time.
I couldn’t get a credit card after that for years. It meant I learned to do without credit and in turn the crushing debt and interest payments that go with buying things I couldn’t afford.
Now that I am many decades older, I see the lives all the credit card holding fools have. They live paycheck to paycheck, always complaining about how to make ends meet as they continue to consume ever more by using their plastic cards to make one purchase after another.
Meanwhile, I’ve got money in the bank and live within my means and can do things I want that they can’t.
Living frugally eliminates so many of life’s hassles related to money that there is more time to actually enjoy living.
John of Indiana Says:
December 3rd, 2007, 23:36 pm
Great article, Leo. I wish I had read that posting from Get Rich Slowly 12 years ago before I got yoked with that house that eventually ruined me in a Ch. 7.
For me, the 2 nicest things about renting are that when the water heater blows up, I call the landlord and when I get home from work it’s fixed, and if I need/want to pull up stakes and relocate, I’m not stuck trying to move a top-heavy pig in a declining market.
Alison Says:
December 3rd, 2007, 23:37 pm
My husband and I maintain no debt other than a college loan, a car (one is paid off) and a mortgage. We use credit cards to get miles & cash back, but pay the balance in full each month. We have the luxury of having and adequate income to do this without feeling burdened. We also save for retirement, emergency, etc. and yet we are using the snowball method to eliminate all debt, and we plan to buy any future vehicles with cash. I do view real estate as an investment and in our area you have to have a LOT of dough, to buy without a mortgage.
I think that for some people you are right on the money encouraging them to rent until you can buy your home outright. I used to work for a non profit that was involved in affordable housing. I was a new home ownership counselor. The idea behind our organization was that owning one’s own home “complete’s the American dream.” And yet, I so saw many people who thought home ownership to be the answer to their prayers and their problems. After working their for 2 years, I really don’t think homeownership is for everybody. If you can only save a few thousand for a down payment you shouldn’t be buying a home. The old stand buy was a 20% down payment, which I think should indeed be the minimum. My 2 cents…
Putta Says:
December 3rd, 2007, 23:42 pm
I live in a big city. So, instead of paying for cars, I’ve opted for a mortgage. I think about it as an investment.
I have a full-time job, very steady and stable but the pay is not great. So, I must be careful with my money.
I set aside my savings into two pockets: one for my cash emergency, which accounts for my monthly paycheck (I don’t touch this cash in case of real emergency, such as, a coup d’etat) and the other is set aside for my investment plan.
The investment plan is very simple as I am no accountant. One-sixth of my monthly paycheck goes to a retirement fund (long-term mutual plan) and a myriad of life insurance polcies (with additional health insurance coverage)… I don’t live in the US and, many decades ago, suffered from bank and trust closures. So, I’ve learned to diversify my investment to minimize my risks…
Putta Says:
December 3rd, 2007, 23:44 pm
Oh, I forgot to tell you this is an awesome post!!! Thanks again!!!
Andrea Hess Says:
December 3rd, 2007, 23:48 pm
Congrats on being debt-free. I used to have quite a lot of credit card debt from graduate school. Once I was done with school, paying it off was a huge priority. By the time my husband and I got pregnant, we were debt-free. Now we have both of our cars paid off, and the only debt that remains is our mortgage, but that’ll be gone in about eight years, too.
It’s wonderful to actually “own” the money we receive from our work.
Congrats again,
Andrea
thomas george Says:
December 3rd, 2007, 23:55 pm
I am from India.Thank you Leo for Zen Habits.I have been reading your blog for some time now and more importantly I have had success in implementing your suggestions and tips.I wake up early,go to bed early,am vegetarian,workout more,dress better-all this by focussing on one thing at a time-my first goal was to remember to wear a belt when I go out :).By starting small I was able to go on to bigger things.Thanks once again.
I have been reading about finance and investing for sometime because India is changing and changing fast.Earlier fixed income was good enough.Not anymore with money supply growing at 20 percent.
In the course of my reading ,I came across the writing of two men -Marc Faber and Jim Rogers and they have really influenced me.If they are correct (which I think they are)
we are at the beginning of a massive commodity bull market which will affect industry and stocks adversely.This also suggests investment in commodities and gold as a hedge against inflation induced by sense less Fed money printing.The Fed will cut rates this December 11-the bond markets reflect 90+ percent certainty and they are generally right.The Fed money printing affects me because the Indian central bank will buy US dollars and print Indian rupees to prevent the rupee from strengthening vis a vis the dollar pushing a lot of paper money into the system and viola we have Inflation,
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=a.f3V4JEOc1o
Jim Rogers has a commodity fund (but min investment is 100000 US dollars- I doubt if I would ever see such money in my whole life :) ).I think an ETF based on the fund has been launched by Barclays.
The only reason for this post is to first of all thank you for your excellent work and secondly (with reference to the article) offer an alternative view on investments.
Note-I am a medical professional and not a financial advisor(so I am not getting paid to promote any funds :)) and I do take my own medicine- apart from an emergency fund,the bulk of my meager savings are in a gold ETF.Unfortunately we don’t have access to commodity ETF in India,
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3Ffprxw004o&refer=home
http://www.bloomberg.com/apps/news?pid=20601103&sid=aXH9wCx1oydw&refer=us
U might want to search for Jim Rogers and Marc Faber in google news -i have google alerts on news about them and read their books.
The daily reckoning australia is another good contrarian investment site I read daily.
Happy investing !
Time for me to go to work !
Stephanie Says:
December 4th, 2007, 0:00 am
Congratulations on being debt free!
Reading this reminded me that maybe I don’t need so much money in my emergency fund, and can funnel more money towards debt reduction (darn student loans!)
Kerrie Says:
December 4th, 2007, 0:03 am
Congrats Leo! I’m on my way there - slowly - just have a loan to family left to pay (and then the mortgage of course!)
Ben Clapton Says:
December 4th, 2007, 0:26 am
I’ve never had a credit card, but I couldn’t do without my Visa card. My bank offers a visa card as a debit card - so I can use it for purchases on the internet, but am always using my own money. This is important for me, because quite often I can get things cheaper over the internet, than I would from stores.
Great post Leo, I’m going to take a nice read of these tips - not so much to get out of debt (as I’m not in debt at the moment) - but to stay out of debt.
Jason Says:
December 4th, 2007, 0:43 am
I think the snowball effect was the most powerful tool for me. If my credit card had 15% interest, paying it off was like making an investment at 15%. Money saved is money earned.
The biggest relief was getting the cars paid off. We used some money that we were saving on the side for taxes. Paying off the car early saved us from a $350 monthly payment, and that made it extra easy to save up the needed tax money again. Saving more money only got easier as our debt payments disappeared.
Kenneth Says:
December 4th, 2007, 1:11 am
This is absolute inspiring, I’m 19 and not in any debt but I’m working hard to help my parents get out of debt.
It’s time for them to relax!
Miss Gisele B. Says:
December 4th, 2007, 1:27 am
Great discussion Leo,
Getting my business off the ground required me to use credit.
That said, in the past few months, I’m been able to land a few contracts that will help tremendously in the coming months.
I already have a repayment/saving plan in place and I estimate that by July, I should be sailing free of debt.
That said, I do follow a lot of your advice because that was the price I was willing to pay to launch my business. I’ve seriously and SEVERELY cut back on many non-essential spending patterns.
I’ve also cut back on seminars because the registration + travel costs where not essential expenses for me this year.
It’s difficult at time because when you look around everyone is spending and you just cannot … but I know why I made the decision and I also know that in the near future it will pay off big time.
I don’t have 6 children to take care of and I admire that you are able to juggle so many financial responsibilities along with building a business, having a positive outlook on money and finding the time to inspire so many of us.
Thanks for the important reminder. This is an excellent time of the year to talk about finances.
Gisele
Eugene (Editor, Varsity Blah) Says:
December 4th, 2007, 1:59 am
Congratulations! It just goes to show that getting out of debt is possible.
However, I think there needs to be a distinction between good debt and bad dad (just like Robert Kiyosaki often talks about). The bad debt (e.g. credit card) should be avoided whereas the good debt (e.g. home loans) can actually work in your favor, especially with the market in its current state.
Another useful piece of advice would be to simply track your spending. It’s basically what Oprah talked about in her Debt Diet. Carry a notebook with you and record all your expenses for a week. Simply realizing where the money goes will definitely open your eyes to some areas where you can cut back. It really works…
Aaron Stroud Says:
December 4th, 2007, 2:02 am
Leo, congratulations on getting out of debt. Aside from the decision to quit smoking, this might be the best decision of your life.
Although Leo really jumps in and responds to every post! I still think I’m going to chime in on a couple of these.
@Victoria E, Leo is completely right. Keep the credit cards open if you can resist running up a balance and you need a high credit score for a mortgage at some point. I kept a couple of cards open for this purpose. The cc companies haven’t closed my accounts even though I haven’t made any purchases in years.
@John Brougher, sometimes renting your house feels like a full time job! Renting houses can be a good strategy if you (1) end up with good renters, and (2) can do a lot of the repairs yourself.
@John of Indiana, exactly. I wish more people understood what you learned the hard way. Homes wouldn’t have sold nearly as quickly these past few years and my property taxes wouldn’t have skyrocketed!
@Alison, I agree with you on the down payment. Life is full risk. Why add another to the risky by buying a house almost entirely with borrowed money?
Tamlyn Says:
December 4th, 2007, 2:53 am
congratulations on being debt free, Leo!
When my husband an I sold our former home, it sold with for half more than we had paid for it. With that money we were debt free in an instant, and had some money left for a new car etc.
For us it is better to own a home, because of the following reasons:
a. in my country we get tax returns for the interest on mortgages, this is a nice extra income each month
b. what we pay in mortgages minus the tax reduction would not be enough to rent us an apartment in this town, let alone a whole house with three bedrooms like our home. Rents are so high in my country, most of the time renters are people who have low incomes, they get government support for the rent payments.
The best rule for me to stay out of debt is, that I ask myself with every purchase: do I really need this?
funny thing is that it also helps lose weight, when asking this standing in front of the candy department in the supermarket :)
OlliS Says:
December 4th, 2007, 3:18 am
Some nice points there but I have to disagree with a few of them:
“1) eliminate credit cards”
This one makes life a lot harder; I think one should just adjust the credit card limit to an appropriate amount of money. And take only ONE card. Nowdays at least I couldn´t do anything without a credit card: most of the pruchase I do is online. Only groceries and essential stuff I pay cash with.
“2) eliminate non essential expenses”
Well, a great idea, but how far would/should one go is another question. I don´t think people should compromise too much of the quality of their lives. You shouldn´t eat the same inexpensive food all the time and cut all the amusement; it gets you mentally probably more in a deppresed state.
Otherwise some nice points there, nothing new though.
And to make a notice, it isn´t just that easy for people to increase more and more their income…
Lodewijkvdb Says:
December 4th, 2007, 4:47 am
Congrats Leo!
Amazing how you can get in debt so fast and what impact it has. I’ve also been very averse to getting debt (except mortgages, but taxes for those are good in the Netherlands). And this story sure makes me firm in my belief of staying debt free.
It’s also been a pleasure to see you rise to blogging success. It’s very inspirational…
Karla Says:
December 4th, 2007, 5:34 am
Congratulations! I’ve been following your blog and actually taking some of your advice. My goal is to be debt-free by June next year, and I started that by closing credit cards that I haven’t used for some time but still paying off at a lesser interest rate. I must admit I was scared of not having plastic for those emergencies, but I love the feeling of paying cash for everything and not worrying that my debts are increasing.
You’re an inspiration. I’ll let you know next year if I do achieve that goal (and I am intent on doing so).
caro Says:
December 4th, 2007, 6:02 am
Awesome! I aspire to do that some day, but right now my only income comes from student loans. I keep saying that when I finally do get a (hopefully 6 figure!) job, I’m going to live in hovel and as frugally as I can get away with, paying the maximum amount on my student loans. People say I’m crazy and that everyone is in debt - that it’s normal. Don’t worry about it. And I say, in the 1920s the phrase was “Eat, drink, and be merry, for tomorrow we die”. Then in 1930s, many did… of starvation.
I don’t want to worry about money, so I’m worrying about being happy instead. I experiment by eliminating things in my life and seeing if I can live without them and still be happy, then only adding things that I really miss and really need. That way, I splurged on things like nice work pants, dark curtains, more pillows, and a tv. I think ‘essential’ is different for everyone.
I know, students are a case study in frugal living, but I hope to develop these skills for my future life in the “real world”.
Dave Says:
December 4th, 2007, 6:12 am
Great post Leo. I’m new to Zen Habits but already impressed.
@Free Fall Creative. I was in the same boat about 18 months ago. I had started a web design business and, while working as a freelancer was great, it wasn’t paying the bills. I mounted up a lot of debt (that I’m still trying to get out of) before taking the plunge and finding a full-time job.
But there’s good news; you can function fairly effectively as a part-time freelancer when you’ve got a steady paycheck. And it’s amazing what a positive cash flow does for your relationships (trust me, my wife was on the verge of leaving me at one stage).
Take the full time job. Pay the bills. Freelance. And be happy. Good luck.
Mike Kingscott Says:
December 4th, 2007, 6:27 am
First, congratulations on becoming debt free! I’m still working on it, and to that end, I have a question after reading the article: Did you “pay yourself first”, as espoused in The Richest Man in Babylon? After reading the start book again this morning, I realised that in the haste to pay off my debt (i.e. using all my money), I would have NO savings whatsoever. I know that the interest rate on the money I save is not as high as the interest rate on my debt (but not by much, maybe 2%), but not saving anything at all is troubling. I guess you could class your emergency fund as saving, but that’s obviously for emergencies, not long-term saving. Any advice?
Anne Says:
December 4th, 2007, 7:02 am
Congratulations, Leo on a job well-done. We still have our mortgage to pay off, but other than that we are debt free. It took us 4 years to pay off our debts. Doesn’t the world look different, now that you don’t owe anyone any money.
After several years, our spending plan pretty much takes care of itself. We know exactly how much “wiggle” room we are comfortable with and what to expect to spend in every category except gas. My husband was able to quit his full-time job and work for himself and I was able to start working on the farm full-time. As we say, “We’re liivin’ the dream”
Thanks for a great article. And for the skeptics out there - this really does work.
Kath Says:
December 4th, 2007, 7:24 am
You have simplified budgeting and have made getting frugal and out of debt much more achievable through your excellent and informative article. Many thanks!
Tim Says:
December 4th, 2007, 8:02 am
A noble goal for all and you can be proud.
I too would add a couple of exceptions to the no credit card rule instead of a no debt rule. When buying online you never want to use a debit card. It does come right out of your account and if there is fraud or identity theft it is almost impossible to get the money back in a timely manner.
Second for identification purposes a credit card can be invaluable. With good credit you can get a very low rate and additional perks. Just pay it off each month. If you can’t control your spending, put the card in a cup of water and put it in your freezer. When you want to use it you have to thaw it out first. That will kill most impulse buys.
As far as owning property is concerned, there are different views and I can see both sides. We have lived in a world where people have seen the stock market increase in value with a few corrections. The fact is that the market could go south and you could lose everything. This is why diversity in your holdings is critical. With home ownership you can have property that will sustain you.
The key to paying off a mortgage is to make additional principle payments when possible. That substantially reduces the interest that you pay.
For those interested there is a nice site called Debt Proof Living (Google should get you there) that has some good techniques for those of us working toward a debt free life.
Leo — Keep up the good work.
Dan and Jennifer Says:
December 4th, 2007, 8:30 am
What really helped me was to start referring to my ‘debt reduction plan’ as my ‘wealth creation plan’ - it just helped me put a positive twist on something that didn’t seem so positive at the time… I also write paid in full on every bill as it comes in - again, just more mental woo-woo, but it really works!
Joseph Abbott Says:
December 4th, 2007, 9:39 am
Leo, I love your work. But there is one question that has been truly rankling me and is somewhat personal, so please feel free not to answer - how do you reconcile your frugality with having 6 kids? Is it fair to your kids - can you support all 6 kids as you could have supported 2 or 3 for example? What is the point of your being so frugal when you have decided to have 6 kids?
sophia Says:
December 4th, 2007, 9:56 am
Congratulations on being debt free! I have followed Dave Ramsey’s plan (very similar to yours) and have found much financial peace through getting out of debt, living frugally, having a good emergency fund, and having financial goals.
It’s a transforming experience.
Cale Says:
December 4th, 2007, 10:31 am
I used to be a big fan of your site, but this article has brought my readership to an end. So long.
Debbie M Says:
December 4th, 2007, 11:14 am
One strategy you haven’t said specifically is that it’s good to have the mindset that you don’t need debt. That you can pay more than the minimum. That car loans and mortgages can be paid off early, that kind of thing.
Another strategy is to make your savings hard to get to. A friend of mine puts hers in another bank that’s across town. Similarly, you can lock up your credit card in a safety deposit box or something.
Another strategy is to separate out what other people expect from what you want. And then, out of all the stuff you don’t care about but which you think other people expect, figure out which of those expectations you want to satisfy. For example, you may not care about clothing, but it’s against the law to be naked in public, so you might decide to get clothing. And you might not care about a big wedding, but your Mom does, so you might decide ask her what’s most important to her and do that part of it. And you might not care about how stylish your car is, but your co-workers do, so you might decide that their expectations on this issue don’t matter enough to do anything about them.
@Leo, unfortunately people other than lenders check your credit report. Things I’ve heard of include prospective employers, people who rent out apartments, and people who sell car insurance. In all these cases, explaining why your credit looks like it does will convince anyone reasonable that you are not a risk, and if the first person you deal with is unreasonable, there are plenty of others to try.
@caro, good plan, but don’t be too flippant about the 30s. Almost every way I can think of to have prepared wouldn’t have worked. Good job? People got laid off. Money in the bank? Banks went out of business. Money invested? Stock market crashed. House paid off? Homes were repossessed when people couldn’t pay their property taxes. Garden out back? There were several consecutive years of drought. Scary times.
@Joseph Abbot, I think the point of frugality is to spend less in areas you don’t care about so that the money you have can be applied toward things you do care about (like getting to have a huge family).
Alan Says:
December 4th, 2007, 12:16 pm
Great post Leo! Some of the best wisdom and advice I ever received when I was younger was in Pollan and Levine’s books titled “Die Broke” and “Live Rich.” It was an explanation of what the difference between a “credit card” (for example Visa) and a “charge card” (for example the American Express Green Card) was. Even though these books are 10 years old, the wisdom in them is timeless.
I would suggest that even if you get rid of all credit cards, keep a charge card. I know I pay a fee for carrying my AMEX card, but it is great for purchasing airline tickets. and hotel rooms.
Cheers,
Alan
stephanie Says:
December 4th, 2007, 12:22 pm
I am 23, a college graduate, and employed at a job that could turn into a career if I so desire. And I have no intention of ever owning my own home. I like the freedom of renting - if I want to move across the country (or across the world), I do not want to worry about selling a house or continue to make mortgage payments on a house I do not live in. Some would argue that this is because of my age, however, I think it is much more to do with my personality and values (which I do not think are based on my age).
On an unrelated note, I have one credit card through my bank with a low credit limit, and I pay the balance in full each month. I use either this credit card or my debit card for every purchase I make. My paychecks are direct deposited. I rarely deal in cash (if I am traveling I sometimes carry a little in case of emergency). Anytime I log in to my bank’s website, I can easily see exactly where my money goes (and how much I have, and in which accounts). I never have to hassle with writing down expenditures or keeping track of receipts. This wouldn’t work for everyone, but it works very well for me!
Also, I get paid twice/month, and I make a payment to my credit card each time I get paid (again, easily done through my bank’s website). This way instead of making one larger payment each month, I am making two smaller payments, so it doesn’t seem like as much of a burden. I never carry much debt on my credit card, so its not much of a burden anyway, but paying them in this way may help those who have larger monthly credit card payments.
Kris Says:
December 4th, 2007, 12:35 pm
Congratulations, Leo! Thank you for outlining your steps in the post, too. It’s fantastic to see how you got there.
Jim Says:
December 4th, 2007, 13:00 pm
If you do not want to cancel your credit cards, do what my wife and I did. We froze them. I wrote about it in blog Getting Ahead in Life. http://gettingaheadinlife.blogspot.com/2007/11/freezing-your-credit-aka-cold-hard.html
Caron Says:
December 4th, 2007, 13:03 pm
Congrats Leo! :)
I found this article helpful. Thanks!
KS Says:
December 4th, 2007, 13:36 pm
I am currently reading Dave Ramsey’s “Total Money Makeover”. I would recommend this to ANYONE, regardless of tax bracket. They are actually using his material in over 1000 high schools! It sounds very much like your article: no fancy, get-rich quick schemes, just a little sacrifice and restructuring and some good old-fashioned common sense.
becca Says:
December 4th, 2007, 14:32 pm
great site! i’m an oldster… 57, and divorce after 30 years has spun my financial life. on the one hand, i have a house and no mortgage; that’s wonderful. but i have a tiny income still, and my credit card debt has gotten out of hand. i’m inspired actually by the frugal living idea (i was somewhat blown away by divorce [understatement]; some of the debt has been “comfort spending”. here’s my question: i have about 15k in savings (i know kids, that sounds great. when you’re looking at 60, and have no pension, and your SS is teeny, it’s what we call peanuts), and about 14k in debt, including what’s left on car. 10k of that is high interest cc debt. i keep thinking i should pull the savings and pay the cc, but at my age and in my circumstances it would take a very very long time to replace that cash. to be left with nothing for emergencies really scares me, especially as i might end up just spiraling up on credit cards again. i have no idea how i’ll survive in old age and that is scary. meanwhile, what’s your advice? also… should i sell the house and rent? it would cost a fortune to get it into shape to rent… but i’d have a fair amount of cash if i sold it as is. (it’s very comfortable actually. i like my house. costs a fortune to heat, though, even after doing all the stuff to minimize that.)
Danny Says:
December 4th, 2007, 14:40 pm
Congrats Leo! I am working my way that direction. Its going to be tough, but it will be totally worth it!
Allison Says:
December 4th, 2007, 16:35 pm
Big congratulations to you on becoming debt free.
I’m 37 and debt free except for my mortgage. I think I got out of debt four years ago, but all I know is I never looked back. It’s been the most freeing experience in the world, and it goes a long way toward helping me evaluate what I really need. The answer is not much. I live a modest but perfectly comfortable lifestyle. Even more comfortable now because I don’t toss and turn worrying about money anymore. I buy most stuff second hand, get only basic cable, check books and DVDs from the library, ride my bike on errands. I have plenty left over for good groceries, dinners out and an occasional weekend trip. Those things are more important to me than expensive clothes or a new car. This has been one of the best changes I’ve ever made in my life. For me, it’s all about freedom.
By the way, I was inspired to go debt free by Dave Ramsey’s radio show, as well as a book called Work Less, Play More.
Deborah Says:
December 4th, 2007, 18:29 pm
Great article … this is what I must do … my income has been suffering so I got into debt just trying to meet my living expenses. I will be referring to this again as I am only at first base-recognizing the problem and attempting to make a plan. I am not sure how I am going to pay everything, but I cannot go on this way. Thanks for the inspiration and encouragement.
Jim Says:
December 4th, 2007, 19:21 pm
@Becca, Hold onto the house for now. With the market down it is not a good time to sell. As far as paying off your debt, how much interest are you getting on the saved funds? Is it more than what you a paying on interest on the CC debt? Also what are the chances you may need the cash for an emergency? If you pay off the CC debt would you need to use the CC again for the emergency (which would put you back in debt)? I thnk you may be better off keeping the CC debt and making the payments. Unless you can’t make the monthly payements, then pay off enough to make it manageable. Check out my site about freezing your credit cards so you won’t rack up more debt. And think about your plan for your finances. It is what I am doing too. Check out my post: http://gettingaheadinlife.blogspot.com/2007/11/whats-plan.html
becca Says:
December 4th, 2007, 19:54 pm
thanks for your response! those were my thoughts, too. i can make the payments. for now. and i throw every windfall in: mileage paybacks from work, gifts (i ask for cash), everything. 2 kids in college makes it hard. dad is broke. but he helps as much as he can. sigh. so they are sinking in the student loan racket.
it’s really hard not to use those cards. i hate xmas shopping and have done it online every year and already have again this year. but i am weaning off, and i use debit card instead more and more. it’s real money that way. credit cards feel like *free stuff* to people even my age. the whole country is stuck and distressed. humans are crazy. i’m off to check out your site. is anyone REALLY making a living, or decent money online??
becca Says:
December 4th, 2007, 19:56 pm
oh! laughing. just went to your site. maybe you are. : )
Travis Says:
December 4th, 2007, 20:15 pm
Hey Leo,
Another one right out of the park! Awesome advice, very down to earth, which I greatly appreciate. My wife, and I, have made the decision to live solely on my income for the time being to allow her some years as a full time artist. I believe in her art, and its the right thing to do, but also frightening. Your article came to me at just the right time. She will be bringing in some money for teaching gigs and modeling work, and hopefully art sales in the not too distant future. ;-)
Time for both of us to buckle down, get our priorities right, execute on a simple plan, and live frugally. You can bet your backside I will keep surfing your site for the excellent tips & tricks.
Thanks, again!
Bryan Says:
December 4th, 2007, 20:46 pm
This may have already been said, but your primary home is rarely an investment. Investments should be looked at as a way to make a substantial return on the initial investment. Most people will not end up making a decent ROI (return on investment) when they sell their home. If you include all the interest you will be paying during the life of your mortgage with the property taxes and upkeep costs vs. the amount of time you are living/buying the property, most will not achieve more than a %10 return. That being said, renting still seems to be a more profitable venture for the average person trying