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

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

Justin Cupler

Contributing Writer at Tally

June 29, 2022

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 starting on the path to financial independence.  

It’s understandable to wonder if becoming debt-free is even feasible in today’s debt-heavy world. It absolutely 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 become debt-free, 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

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’ll determine your monthly output and take-home pay. Then, you’ll figure out 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 each month, look at the last six to 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 six to 12 months to determine your monthly average take-home pay and use that number. If your work history is too short for you to look back that far or if you’re a freelancer or contractor, it's OK to 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 this by subtracting your total monthly output from your monthly take-home pay. If you end up with a positive number, that’s 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. You can likely 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 ways to lower the amount of debt you owe are the debt avalanche and debt snowball methods. 

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. 

List 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 interest rate, 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 — including what you were paying on the high-interest debt — on the bill 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 payoff strategy if you’re intrinsically motivated and want to save the most money possible while getting out of debt. 

Debt snowball

The debt snowball method is another popular debt repayment plan but you focus on the smallest balance.

List all your debts in order from lowest balance to highest balance. Put 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 — including what you were paying on the smallest bill — 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 method is a debt management 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

You can accelerate your debt repayment and save money along the way with these 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 monthly payment to a single lender can help you manage your debt payments. Plus, the lower interest rate can help you save significantly 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. 

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 a balance transfer card and pay no interest while paying them off

Plus, with no interest 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; 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 now or in the future. 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; maybe you’ll 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 at home instead. Or it may mean skipping that $10 fast-food lunch and bringing leftovers from home. 

You may be able to afford these little things, but 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 increase your expenses when you receive a raise or promotion. It's OK to spend some of that extra cash on yourself and your family, but a significant portion should help pad your retirement savings. 

In some cases, you may need to take on a part-time job or side hustle to temporarily put your income above your expenses. Once you get your expenses below the income from your main job, you can leave the part-time job or use it to help pad your 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. This 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 covers 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 extra money into a savings account until you have enough to cover three to six months of living expenses. This emergency fund will help you weather a financial storm without resorting to a credit card. 

Save at least 15% for retirement

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

If you reach retirement age 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, 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 still 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 a big purchase using your monthly cash flow. If you're saving more than 15% for 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 for retirement, that means you're putting 20% of your income toward retirement. You can redirect 5% — $250 per month — toward your big purchase instead. 

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

If a new home is on the horizon, your plan will be much longer 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

Financial freedom is the ultimate measure of wealth; you can do what you want to do instead of what you have to do to live. And you can start on the path to this freedom 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% for 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.

If credit card bills are part of your struggles with debt, the Tally credit card management app may help. The Tally app helps manage your credit card payments, making it easier to remember those monthly bills. Plus, Tally offers a lower-interest personal line of credit you can use to efficiently pay off higher-interest credit cards. 

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.