The 10 Key Actions That Finally Got Me Out of Debt; or, Why Living Frugally is Only Part of the Solution

By Leo Babauta

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.

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.