How Can Someone Deeply in Debt Become Debt-Free?

My former husband and I were deeply in debt during our marriage. We had three condos with mortgages, two car payments, and significant credit card debt. At that time, our lifestyle was more important than our financial future.

Becoming a licensed financial coach taught me to live within my means, pay off my bad debt, and save for the future. Now, I focus on having only good debt that supports my goals.

Building up my savings and not having credit card balances provides peace of mind. Carefully deciding how I invest and spend my income increases opportunities to engage in experiences that matter. Making memories while preparing for the future provides the financial and emotional stability I desire.

No matter what your debt load looks like, you can pay off your bad debt, which reduces your wealth, pay down your good debt, which helps build wealth, and save for the future. Changing your mindset and tailoring a spending plan to fit your financial situation are essential steps in the process. 

What Does Living Debt-Free Mean?

Living debt-free means you have no mortgage, car loans, student loans, rolling credit card balances, or other unpaid debt weighing you down. You are free to save, invest, and spend as you desire.

Being debt-free means not having to make monthly payments and deal with high interest rates. You have a safety net for emergencies and investments to live on during retirement. These factors create a sense of security, empowerment, and freedom to live the lifestyle you desire.

What Are the Benefits of Living Debt-Free?

Living debt-free means not being tied to monthly payments and accumulating interest. You’re free to use your income for savings, investments, and experiences that bring you happiness.

Reducing financial stress provides security. You don’t have to borrow to meet your needs. Experiencing the freedom to make choices free of debt constraints strengthens long-term independence.

However, maintaining and wisely managing some form of debt can be helpful. For instance, a mortgage enables you to purchase a home and increase your assets. The key is to avoid high-interest debt, such as credit cards. The goal is to create financial balance by using money as a tool to enhance your life rather than control it.

What Is Good Debt and Bad Debt?

Understanding the differences between good and bad debt enables you to make informed decisions that support your goals and improve your financial well-being.

Good debt:

• Has a low interest rate. A low, manageable interest rate enables you to pay off the debt over time.

• Serves a purpose. The debt enables you to attain a meaningful goal, such as advancing your career.

• Invests in your future. You can finance opportunities to increase your wealth or improve your quality of life. For instance, you might secure a mortgage to purchase a home.

• Provides long-term value. The asset or opportunity can appreciate or contribute to your earning potential.

Bad debt:

• Comes with high interest rates. Paying off credit cards, payday loans, and some personal loans can be challenging due to the accumulating interest.

• Is impulsive or unnecessary. A lack of planning often leads to regret and financial strain.

• Finances non-essentials. Paying for items or experiences that don’t retain their value or generate returns, such as dining out and luxury goods, takes away money for essentials, like groceries and utilities.

• Decreases your financial security. A cycle of borrowing involves interest and fees accumulating faster than you can pay them off, creating instability.

How Can Someone Deeply in Debt Become Debt-Free?

The following guidelines can help you tailor a plan to become debt-free:

1.   Evaluate your debt

Get a free copy of your credit report from the three main credit bureaus through AnnualCreditReport.com. Review your outstanding accounts to understand your debt load.

Create a list of your mortgage, car loans, student loans, credit cards, and other outstanding balances, such as loans from family and friends that don’t show on your credit report. Then, write down the interest rate and minimum monthly payment for each debt.

Use an amortization calculator for your mortgage and a credit card payoff calculator to determine how long it will take to pay off each debt and the total amount you will pay with interest if you make the minimum payments. Evaluating your debt helps prioritize your payoff plan. 

2.   Choose a payoff strategy

Select a payoff strategy that fits your financial situation and motivates you to continue making progress. Common methods include the debt snowball and the debt avalanche:

• Debt snowball: Pay off your smallest debt first while making minimum payments on the rest. As you pay off each small debt, you gain momentum and capacity to tackle larger balances. Quick wins motivate you to continue.

• Debt avalanche: Pay off your debt with the highest interest rate first. Reducing the amount paid in interest saves money over time.

3.   Modify your spending plan

Track your income and expenses to understand where your money goes monthly:

• Consider breaking down your spending into categories such as housing, groceries, transportation, entertainment, and discretionary spending.

• Look for areas to cut your spending, such as cooking meals at home, canceling some subscriptions, and delaying non-essential purchases.  

• Prioritize paying off debt when modifying your spending plan. Include a specific monthly amount to increase the payment on your highest-priority debt. Making temporary sacrifices can provide long-term financial freedom. 

4.   Develop positive money habits

Consistently make monthly debt payments according to your repayment strategy:

• Build an emergency fund of at least $500 to $1,000 to cover unexpected expenses and avoid taking on more debt.

• Celebrate small wins, such as paying off a debt or reaching a goal.

• Continue tracking your spending and setting saving and investing goals.

As always, you are welcome to reach out with questions.

*This information is for educational purposes only.