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How To Become Debt-Free ... and What It's Like

There are many paths to becoming debt-free, but they all lead to financial independence.

Justin Cupler

Contributing Writer at Tally

February 16, 2021

Figuring out how to become debt-free comes with many opinions, and some contradict the literal meaning of debt-free. For example, some personal finance professionals will say becoming debt-free means paying off all your high-interest credit cards and loans, but a mortgage is OK because it has low interest and is attached to an asset that's generally worth more than the debt.

This is an acceptable approach for some. But to truly live debt-free means you don’t owe money to anyone. No student loans, no credit card debt, no car loans — nothing at all. Not only does living debt-free eliminate stressful financial obligations, but it's also the start of the path to financial independence.  

It’s understandable to wonder if becoming debt-free is even feasible in today’s debt-heavy world. Absolutely it is, and you don’t have to cut up all your credit cards or lock them away. 

Below, we'll highlight how to become debt-free, how to accelerate your progress to becoming debt-free and what it looks like to maintain that debt-free lifestyle. 

How to become debt-free

Before you can begin a debt-free lifestyle, you must first eliminate all your debt — every last penny of it. You can pull this off using one of a variety of debt payoff methods, but it all starts with setting a budget.

Set a budget

How to become debt-free: A woman uses a calculator and sets a budget

Setting a budget is critical to meeting nearly any financial goal, but it's especially important in debt repayment. You’ll use this budget to determine how much extra money you have to apply toward your debts or if you need to trim your expenses or add income to achieve your debt-free goals. 

To complete this process, you must determine your monthly output and take-home pay, then determine if you have a cash surplus or deficit.

Determining your monthly output

Lay out all your monthly bills and expenses, including the minimum payments on your debts, and add them up. If you have bills that aren't monthly, like a quarterly car insurance bill or an annual homeowners association fee, divide those bill amounts by the number of months in the billing cycle to determine their monthly cost.

For example, if you have a $1,000-per-year car insurance bill, simply divide $1,000 by 12 months to get the monthly budgeted amount of $83.33.  

If you have bills that fluctuate per month, look at the last 6-12 months to determine an average. It's also OK to estimate and adjust as you move forward. 

The total you come up with is your total monthly output.

Determining your monthly take-home income 

If you're a salaried employee, determining your monthly take-home income — your after-tax pay — is simple. Just multiply your check amount by the number of checks you get each month. 

As an hourly or commissioned employee, this can be harder. Look back over the past 6-12 months to determine your monthly average take-home pay and use that number. If you have too short of a work history to look back that far, it's OK to estimate and adjust later.

If you're a freelancer or contractor, you can also look back 6-12 months or estimate and adjust later. 

Determining your surplus or deficit

The final step in budgeting is determining if you have a surplus or deficit. You can do so by subtracting your total monthly output from your monthly take-home pay. If you end up with a positive number, that is a cash-flow surplus, which is extra money you can use to pay off debts. 

If you end up with a negative number, you have a deficit due to overspending. If you have a deficit, you can close the gap by trimming expenses, taking on a side hustle — like freelance writing or driving for Uber — or getting a part-time second job. 

Pay off debt

There are countless debt repayment processes, but two tried-and-true methods are the debt avalanche and debt snowball. 

Debt avalanche 

Many personal finance experts prefer the debt avalanche method because it prioritizes interest rates and balances to help you save on interest charges. 

Lay out all your debts from the highest interest rate to the lowest. If two debts have the same interest rate, make the highest balance the priority. 

Put all your extra cash toward the debt with the highest balance, and pay the minimum payments on all your other debts. Once you pay off the highest-interest debt, repeat the process, focusing all your extra money on the debt with the next highest interest rate. Again, continue making the minimum payments on all your other debts. Repeat this process until you're debt-free. 

The debt avalanche is a great option if you’re intrinsically motivated and want to save the most money possible while getting out of debt. 

Debt snowball

The debt snowball is another popular debt repayment method. It's similar to the debt avalanche, but you focus on the lowest balance.

Lay out all your debts in order from lowest balance to highest balance. Pay all your extra cash toward the debt with the lowest balance while maintaining the minimum monthly payments on your other debts. 

Once you pay off the smallest debt, repeat the process. Focus your extra cash on the next smallest debt while making the minimum payments on all your other debts. Repeat this process until you’re out of debt. 

The debt snowball is a good option if you need a little motivation to keep moving in the right direction. The early wins of paying off your low-balance debts can help you maintain your motivation. 

Accelerate your debt repayment

How to become debt-free: A couple uses a calculator and laptop to review their finances

You can accelerate your debt repayment and save money along the way with a few tips. 

Debt consolidation

Debt consolidation rolls multiple high-interest debts, typically credit card debt, into a single personal loan with a lower interest rate. 

The single monthly payment will help you manage your debt payments, and the lower interest rate can help you save money on interest charges. 

Line of credit

A line of credit is similar to a debt consolidation loan, as it allows you to borrow cash at a lower interest rate to pay off high-interest debts. Unlike a debt consolidation loan, which is a single-use loan, a line of credit, like Tally offers, is a revolving debt you can use multiple times to pay off several debts. 

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The lower interest rate will allow you to repay the debt faster while saving money. 

Balance transfer

Credit card companies often offer special balance transfer rates, like 0% APR for 18 months. You can transfer your high-interest credit card debts onto these balance transfer cards and pay no interest while paying them off

Plus, with no interest being added to the balance each month, you can repay your debt quicker. 

Keep in mind that these cards aren't free. They usually come with a 3% to 5% balance transfer fee, so if you transfer $1,000 onto one, you may incur a $30 to $50 transfer fee. 

Maintaining a debt-free lifestyle

Maintaining a debt-free lifestyle means having no debt, which also includes future debts. This is why maintaining a debt-free lifestyle begins with living beneath your means and using credit cards responsibly. From there, you’ll be able to keep the debt-free cycle going by increasing your savings, preparing for retirement and budgeting for large purchases.

Live beneath your means

Maintaining this debt-free budget means living beneath your means. This may mean you buy a used vehicle or a smaller home than you can afford while others around you rack up debt to buy fancy cars and big houses. Try to ignore the social norm of keeping pace with your neighbors, friends and family members. Remember, financial freedom equals real wealth.

Remaining debt-free goes beyond just the big-ticket items too. It may mean bypassing that $3 cup of coffee from the coffee shop and brewing a 25-cent cup of coffee at home instead. Or skipping that $10 fast-food lunch and instead bringing leftovers from home. 

You may be able to afford these little things, but these small purchases add up over the months and years, and they can have a significant impact on your ability to save. 

Living beneath your means also involves resisting the urge to dramatically increase your expenses when you receive a raise or promotion. It's OK to spend some of that extra cash on you and your family, but a significant portion should help pad your retirement savings. 

Use credit cards responsibly

Though you're aiming for a debt-free lifestyle, you can still use credit cards to reap reward points. In fact, with careful use, credit card rewards can even become profitable. 

The key is to pay off the entire credit card balance by the due date every month. Doing so will ensure you pay off the debt within the interest grace period, meaning you'll still get all your credit card rewards, but the credit card company won't apply any interest charges. 

Responsible credit card use will also help you maintain a good credit score just in case you ever find yourself in a financial situation where a loan is the only solution. 

Build an emergency fund

An emergency fund is there to cover you when the unforeseen crops up, like an unexpected auto or home repair, a medical emergency or even a loss of income. 

Using the budget you've created, channel your extra money into a savings account until you have enough to cover 3-6 months of living expenses. This emergency fund will help you weather a financial storm without resorting to a credit card. 

Save at least 15% toward retirement

A family puts money into a piggy bank

While retirement savings may not be the first thing that comes to mind when thinking about maintaining a debt-free lifestyle, it’s actually rather important. 

If you reach your retirement years without ample savings to maintain your lifestyle, you may have the urge to reach for your credit card, potentially restarting the endless debt cycle. Saving at least 15% of your income in investments and retirement accounts will give most people plenty of funds to enjoy their post-working life.   

As you get promotions and raises, treat yourself by applying 50% of the pay increase to some extra wants in your budget, then apply the other 50% toward your retirement savings. 

For example, if you get a promotion that includes a $1,000 raise in take-home pay, you can increase your monthly vacation savings or your spending money by $500 and channel the remaining $500 per month into your retirement savings. This will progressively increase the amount you're saving each month, bringing you closer to financial independence while rewarding you for your hard work. 

Budget for large purchases

Throughout your debt-free life, you'll still likely have the same big purchases as before, like a home or car. It's possible to make these big purchases without incurring any debt, but it takes careful budgeting and saving. 

Set your budget for your big purchase using your monthly cash flow. If you're saving more than 15% toward retirement, you can redirect the difference between your savings and the base 15% toward the large purchase. 

For example, if you have a $5,000-per-month take-home salary and are saving $1,000 per month toward retirement, you're putting 20% of your income toward retirement and can redirect 5% — $250 per month — toward your big purchase. 

If you're planning to buy a vehicle in 3-5 years, by saving $250 per month, you could purchase a $9,000 to $15,000 vehicle and have no car payment. 

If a new home is on the horizon, your plan will be much longer term, and you may need to make other changes to your budget — like trimming unnecessary expenses or increasing your earnings — to meet your goals.

Becoming debt-free: The gateway to financial freedom

A woman raises her arms in the air while looking at a sunset

Financial freedom is the ultimate measure of wealth, as you can do what you want to do instead of what you have to do to live. And you can achieve this by becoming debt-free and then maintaining that debt-free lifestyle. The latter includes an array of financial keystones, including: 

  • Living beneath your means

  • Building an emergency fund

  • Saving at least 15% toward retirement

  • Using credit cards responsibly

By following these key personal finance guidelines, you too can reach a debt-free lifestyle and the level of financial independence that comes with it.