One of the most common financial goals is to become debt free. While this might seem like a far-off dream, it’s more achievable than ever before. With tons of free educational tools, resources, and help, a few steps go a long way. It’s possible to become debt free in 5 years (or less), but you need the right strategy.
As you likely know, it’s not reasonable to expect your debt to disappear overnight. That is, unless you expect to win the lottery or inherit a lot of money unexpectedly. Becoming debt free is always easier said than done, especially if you have a lot of debt.
Luckily, you’re not in this alone. The right steps help you say goodbye to your debt once and for all. More importantly, they prepare you to make stronger financial decisions in the future. In this guide, we’ll outline the first 5 steps to become debt free in 5 years.
1. Stop the Debt Spiral
First, you can’t climb your way out of a hole if you’re still digging deeper. It’s easy to get trapped in a debt spiral, especially if you’ve used predatory loans (like the dreaded payday lending cycle). The only way to stop your own spiral of debt is to commit today to stopping once and for all. No longer rely on credit cards, and stop borrowing money that you can’t pay back in full right away.
If you want to become debt free, you need to cut your connections with debt once and for all. The more comfortable you become with living within your own means, the easier it becomes to complete the steps below. Until you master this first step, you’ll never become debt free.
2. Build an Emergency Fund
Next, you need an emergency fund. No matter who you are or your lifestyle, emergencies can strike at any time. If there’s one thing we can all learn from the COVID19 pandemic, it’s that emergencies happen when we least expect them. This means an emergency fund is a must to keep you from relying on credit cards when you need to make ends meet.
Whether you lose your job unexpectedly or your car breaks down, you should be able to afford most emergencies on your own. While it might seem counterproductive to save an emergency fund when you’re trying to become debt free in 5 years, it’s part of the winning formula. Put away a mini emergency fund of at least $500 somewhere safe.
3. Make a Budget You Can Afford
From there, you’re ready to create a budget. There are a lot of misconceptions around budgeting. They’re not just for people struggling financially—they’re for everyone. It’s not enough to send money to your bills blindly each month. You have to keep a close eye on your incoming and outgoing payments.
To begin, track your spending and income for a month. You can use a budgeting app to help with this. Once you understand how you’re spending your money, create a budget that works for your current expenses. You might discover some areas you can cut back. This frees extra money you can put towards debt repayment.
4. Choose a Debt Strategy
When you’re comfortable with your budget, it’s time to get serious about becoming debt free in 5 years. The best way to do this fast is to determine which debt strategy is right for you. You don’t want to throw all of your extra money from your budget towards all of your debts at once. This isn’t effective. Instead, consider either the debt snowball or the debt avalanche method:
- Debt snowball: With this strategy, you pay the smallest debt first. Then, you roll these payments over to your next smallest debt until they’re all paid fully.
- Debt avalanche: For debt avalanche, you pay your highest interest first. This method makes more financial sense, helping you save interest over time.
There is no “right” or “wrong” strategy. The best strategy for you is whatever keeps you motivated to continue on your financial wellness journey.
5. Track Your Progress
Lastly, don’t forget to track your progress. If you want to become debt free in 5 years, you can’t simply set a budget and leave it alone. You’ll need to check in regularly to make sure it’s still working for you. It’s a good idea to also check on your credit rating in the process, as well as your debt accounts.
As your balance goes down, your motivation goes up. There’s something empowering about being in charge of your money. Though it might take years (or longer), don’t lose hope. You’re on the right path.
Become Debt Free on Your Own Terms
Ultimately, you don’t have to manage your debt alone. While these steps above are easy enough for anyone to follow, it’s always helpful to have a professional on your side. The team at Debt Busters are here to help.
Contact our team today on 1300 368 322 to schedule a consultation. Together, we’ll create a customised debt relief plan to win you your financial freedom on your own terms.
