Frugality Magazine - Frugal Living Tips for Financial Freedom

How to Become Debt Free in a Year

Contents

Becoming debt free in a year is quite a simple process because it’s just simple math. Here’s what you need to pay off your debt in the next 12 months…

Gather Your Debts – If you’re aiming for a big goal like becoming debt free in a year then the first step is figuring out what your destination looks like. So gather any and all outstanding debts together, then add them up so you know how much you need to pay off.

Calculate Your Number of Pay Periods – How many times will you get paid in the next year? For many of us that will either be 12 (once a month) or 26 (bi-weekly). This will help us figure out what money we will reasonably have available to spend on debt repayments.  

Divide Your Debt By Your Pay Periods – Divide your debt by the number of pay periods over the next year to figure out what you repay every pay day. As an example, if you had $7,000 debt and got paid every two weeks then you’d need to repay at least 7,000/26 = $269 of debt every time you got paid.

Reduce Your Spending – You now have an idea of what money you need to find your debt repayments. The question is how you’ll manage it. Possibly the most effective solution is to start budgeting hard, eliminating or downsizing as much of your spending as possible.

Pay Off Your Debt Automatically – There’s never a good time to start becoming debt free, and if you’re not very careful your motivation may start to flag over time. To avoid this (and to help those of us with bad memories) consider putting your debt repayments on autopilot.

Speak to your bank or your credit providers to arrange an automatic payment every time you get paid from work. Then all you need to do is watch those outstanding debts falling every month.

Track Your Results – Lastly, while I support automating debt repayments, I also suggest that you carefully track your progress. Create a simple spreadsheet (I like Google Sheets which is free) so you can record all the debt payments being made, and your outstanding debt.

Not only is it very motivating to see this debt falling, but it also gives you visibility if any changes are necessary. For example, if an automated payment fails then you’ll know about it rapidly, or if you think you can pay off a little more each month then you can change your repayment agreement. Personally, I used this concept to try and pay just a little bit more each month, watching my debt reduce more and more each month.

Of course, like losing weight, while the basic concept is quite simple actually getting to the point of applying these steps can be more difficult. So let’s not just leave things there; instead let’s dig a little deeper now to provide some more actionable tips for really making your dream a reality.

What About Interest?

If there is a weakness to this simplified system it is that it doesn’t take into account interest payments. There are a number of reasons for this. Firstly, unless you’ve got debt with ridiculously high interest rates (payday loans anyone?) then the amount of interest accrued over a year should be minimal.

If you follow my plan to gently increase your repayments over time then this will also help to offset some of the interest added. Alternatively you could look at swapping your existing debt to a lower-interest option (such as an interest-free credit card) so you in essence have no interest being added.

Lastly, calculating interest on debt isn’t easy. In some cases the interest is added at the beginning, so your outstanding debt figure actually includes the interest agreed to. In other cases it may be added at different times (monthly or annually for example) so predicting the total amount repayment can be tricky. And I don’t want to you going round in circles, sat there with a calculator, pen and paper.

No, I like to try and keep things as simple as possible.

So don’t worry about interest just yet. The key is simply to get started today.

What If I Have Multiple Debts?

If you only have a single debt to repay then you’re in a very strong position. Many others – including myself when I was becoming debt free – have multiple sources of debt. So how do you get all these paid off together?

There are a number of options here. What is nice is that there is no “right” or “wrong” answer. You need to consider which of the following would make you feel most comfortable, then make this the system you use…

An Even Spread

Got four different debts? The first option is simply to split the money you have available for debt repayments equally between all those debts.

Of course, they’re unlikely to all be the same size so this does mean you’ll likely start cancelling some of these debts completely while others are still outstanding. This isn’t a problem, however, and you can simply start pouring a greater proportion into your remaining debts.

A Proportional Spread

A second option is to split the debt repayment you have available proportionally. Bigger debts get a larger chunk of the overall pot. For example let’s say that you have two debts – one of $5,000 and one of $10,000. If you’re planning to pay $750 per month in debt repayments, then with this concept you’d pay $250 off the $5,000 debt and $500 off the $10,000 debt.

The benefit here is that if you calculate the proportions right then all your debts should get paid off all in the same month. And that is the most amazing feeling in the world.

The downside is that you don’t pay off anything in the meantime, so you have fewer “small wins” to keep you going on your journey. Only you can decide whether this is a good or a bad thing.

Start With the Smallest

Dave Ramsey recommends that you pay just the bare minimum of all your debts. You then make a massive overpayment each month on the smallest debt. This allows you to quickly wipe out one debt, before you move onto the next smallest. As he says, it’s about psychology rather than math, as it helps to give you easy wins and keep you motivated.

The Interest Focus

Possibly the most popular debt repayment concept of all is the “debt snowball”. Like the previous option you pay only the minimum on all your debts, but the remaining cash you have is all invested in repaying your debt that has the highest interest rate.

The thinking here is that clearing high interest debt before low interest debt can reduce the total you spend on interest, and will therefore make becoming debt free quicker and less expensive.

Everyone has their own opinions as to which of these strategies is most effective, and you’ll rarely find personal finance bloggers agreeing with one another. I would therefore suggest that you don’t spend too long researching the differences here; just put some thought into which option appeals most to you.

The exact system isn’t crucial; what is crucial is simply that you get started as soon as possible.

How to Speed Up the Debt Repayment Process

If you’re researching how to become debt free in a year then its far important that you use every trick in the book to achieve your dream. Before we end this article, therefore, I’d like to discuss some simple ways to speed up the debt repayment process if you’re worried that a single year won’t be long enough to hit your goal.

Lower (or Eliminate) Interest on Your Debt

High interest debt like payday loans and credit cards can be tough to pay off. Sometimes it can feel like you’re taking two steps forward and one step backward, as interest is added regularly. One handy tip can therefore be to look at lowering the interest you’re paying – or to eliminate it entirely.

There are two proven solutions that you may wish to consider. Firstly, contact the companies to whom you owe money. Explain that you’re getting frustrated with your interest rates, and let them know that you’re considering moving your debt elsewhere. Then ask what they can do to lower your rates. You’ll be surprised with what many banks and lending institutions are willing to do to keep you as a customer.

Secondly, consider taking out an interest-free credit card, and move your debt onto it. So long as you get the card cleared before the end of the interest-free period then you’ll pay no interest on the debt. Some people even do this regularly, taking advantage of zero interest offers and flipping their debt from one card to another over a period of years while they pay it off.

Make Use of Lump Sums

The core of paying off debt this year is making consistent, modest payments. But lump sums can fast track your results in a big way. Just got a bonus at work? Sold your car or received birthday money? Received a dividend from an investment? Don’t splash out, but instead spend it on debt repayment.

Even better, if your lump sum represents a good percentage of your debt then ring up your creditor to discuss things with them.

One debt-related issue I had in the past was not fully understanding the fine print in a phone contract. As it turned out, my lack of understanding opened me up to a bill of around $500 that I couldn’t afford to pay. I sold some unwanted possessions to raise funds, but things took longer than expected.

All the same I decided to take a chance. I rang up the phone company and asked them what figure they’d settle for if I could pay the debt in its entirety that day. They offered me a huge discount and I settled. Debt done – and for far less than expected.

So don’t be afraid to ring up the people you owe money to in order to see if they’ll accept a silly offer – you might be surprised at the outcome (just like I was at the time!).

Go on a Spending Freeze

Just for a moment consider how much money you have earned in total over the years. Then compare this with your net worth – your home equity, your investment accounts and pension funds. If you’re anything like most people there’ll be a massive difference between the two. Money just slips through our fingers all day, every day. Many people literally don’t even know where it all goes. No wonder becoming debt free is so challenging.

Paying more attention to your spending habits, and doing everything you can to reduce your expenses will take you a long way on the journey to a debt free life. As the name suggests a “spending freeze” simply means not spending anything that isn’t absolutely necessary for your survival.

Let’s look at a few examples….

Do pay:

  • Mortgage or rent
  • Utility bills
  • Taxes

Don’t pay:

  • Dinners out
  • New clothes
  • Grocery shopping (use up all that stuff in your cupboards!)

A spending freeze can feel tremendously uncomfortable initially, but all too soon this feeling changes to one of liberation. Who knew you had so many delicious meals in your kitchen? Who realized how little you’d really miss your streaming TV service or picking up that expensive magazine?

Even better, just imagine all that extra cash you’ve saved, helping to speed up your journey to debt freedom.

Land a Second Job

I’ll be honest; this isn’t a particularly exciting option. Who wants to spend their evenings and/or weekends plugging away in a local supermarket or suchlike? Well, I would argue that nobody wants to do such jobs – but it’s a means to an end. It’s a shortcut to a debt free life.

If you could bring in an additional $500 a month from a second job then think how much more quickly you’d get out of the red. And remember, folks, this only needs to happen for a single year.

After that you’ve got the rest of your life back on easy street. Furthermore, think how much more pleasurable your weekends will be when you’re free of money worries and have cash to enjoy yourself with.

Start a Side Hustle

One final tip is to consider starting some kind of small home-based business. Cut other people’s lawns. Or clean their homes. Or, like me, start a blog.

Starting a side hustle is riskier, and it can take longer to really start paying off, but many people find it a lot more fun than working on a check-out.

Just be sure not to invest too much into your side hustle, reducing the money you have for debt repayments.

If you want to see how to start a blog on a small budget then I’ve got a detailed guide here.

How to become debt free in a year - it's easier than you think! Follow the steps I took to pay off debt and become debtfree as quickly as possible.

Richard

Sun-worshipper and obsessive frugality blogger. For loads more money-saving advice come and join us on Facebook.

Add comment