Thriving on Less – A Guide to Getting Out of Debt

By Leo Babauta in Management on January 8th, 2009 / One Comment

Debt is the worst poverty.” – Thomas Fuller

It was only a few years ago when I was overloaded with debt – so much so that I couldn’t make all my payments and I had numerous debts sent to several collection agencies. I had creditors calling me for late payments, and I was juggling them, constantly stressed about how I was going to make my car payment and make rent. It’s hard to imagine those days now – the unbearable burden of that debt – because as of this year, I am debt free!

It’s an amazingly liberating feeling to be free of debt. Your money is your own, and you have breathing room in your budget for saving, investing, and buying what you need.

But going from overwhelming debt to being debt free wasn’t an instant event. It was a journey, and it meant a firm resolve, some sacrifices, and some new habits.

How I Finally Got Out of Debt
It wasn’t 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.

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. But basically: 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.

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.

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).

6. The debt repayment plan
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, 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.

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.

Stay tuned for chapter 9 – Tools for a Frugal Life or download the ebook for free here.

About the author:
Leo Babauta is the author of The Power of Less and the creator and blogger at Zen Habits, a Top 100 blog with 80,000 subscribers – one of the top productivity and simplicity blogs on the Internet.

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One Response to “Thriving on Less – A Guide to Getting Out of Debt”

  1. Bryan - Frugal Logic Says:

    Great post. Leo is everywhere, he sure can pump out the posts and yet it’s all quality stuff.

    I think it makes a person more frugal if they have hit hard times before. While I was never poor, in my younger days I did have jobs that didn’t pay a great deal. This taught me to be frugal with my money and as my income has increased, luckily my frugalness has remained.

    Another factor may be upbringing, my parents are pretty careful with their money and I think that has rubbed off on me a bit.

    It will be interesting to see how Leo’s 6 kids turn out. Will they inherit his frugal attitude towards money?

    The other scenario I have seen is the opposite affect, when younger the person went without, and now they feel they are catching up on what they missed out in their childhood.

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