#010 | How To Become Debt-Free
Tactical approaches to tackle credit card balances, student loans, and more
Hey everyone,
I recently had a friend reach out and tell me that they were in ~$15k of debt, split between $12k of credit cards and $3k of student loans.
“Interest is whooping my ass”, he told me.
The beautiful thing about a newsletter is that it allows you to scale your message.
My advice to him could potentially help others struggling with debt too, so that’s what I will share with you today.
And I know a thing or two about paying off debt - I had ~$61k of unpaid student loans last year. After 3 years of aggressively saving ~30% of my income, I was finally able to pay it off this past October.
Debt is a financial challenge that many people will deal with at some point in their lives. A recent Clever Real Estate survey says that 3 in 5 Americans are in credit card debt, and 23% of Americans say they go deeper into debt every month.
Given that debt is so common, it’s nothing to be ashamed of.
What’s important is taking proactive steps to address it and improve your financial situation.
By taking control of your finances and making positive changes, you can start building a brighter financial future.
So let’s get into how you can become debt-free:
1. Have a positive mindset. Believe that a debt-free life is possible!
Don’t take this lightly - everything in life starts with your mindset.
It will make or break you.
Before you can achieve a goal, you have to believe it is possible.
“Some people think they can; some think they can’t. They are probably both right”
—Henry Ford
2. Generate revenue and increase your income
The more income you generate, the more money you’ll be able to plow back into your loans.
The more money you apply to your loans, the less interest you will pay, and the quicker the balance will get paid off.
There are a handful of ways that you can start generating more revenue:
Job-hop for a raise
I job-hopped 3 times in the first 3 years of my career - my pay progressed as follows:
Year 1: $60k base with no bonus
Year 2: $72.5k base, 1% bonus
Year 2.5 (Internal promotion): $85k, 1% bonus
Year 3: $15k signing bonus, $110k base, annual bonus up to 25% of base salary
This repesents a 154% increase in my total compensation over 3 years.
I suggest promotional moves instead of lateral moves, but there are pros and cons to each approach.
Start a side hustle
Side hustles are great because you can do them on your own time.
If I needed to make money today, I would consider the following ideas:
Delivery through Doordash, Uber Eats, Instacart, GoPuff, etc
Drive with Uber or Lyft
Pet sit on Rover
Handyman jobs on TaskRabbit
Use my current skills to find work on UpWork or Fiverr
Start a part-time Job
A part-time job can provide extra income specifically earmarked for debt repayment and other financial goals.
It also offers opportunities to learn new skills and gain experience in different industries.
Balancing a part-time job with existing commitments like work, family, or education may be challenging though.
Business owners: collect on your accounts receivable!
Many business owners have customer accounts that are past due or haven’t been collected yet.
To speed up your cash conversion cycle, you can offer a discount to incentivize customers to make early payments.
Additionally, you can sell your accounts receivable to a factoring agency. You can typically sell them at 70-90% of their face value, but you no longer assume responsibility for collecting payments from customers.
3. Stop using your credit cards
Continued use of your credit card deepens debt, making it harder for you to achieve your goal of paying it off.
A higher credit card balance may also result in additional interest and fees being charged, which allows less of your money to go towards debt repayment.
To encourage responsible spending habits, use a debit card or cash.
Sure, credit cards can be a way to optimize your spending since you receive rebates in the form of rewards points or cash back… but the cost of interest far outweighs the rewards that you get.
Think about it - would you rather receive 3% back, or pay 20% interest?
It’s also important to realize that your reward points don’t compound, however, the interest payable to your lender compounds against you daily.
4. Implement a budget that you will be able to follow
If the largest and most successful companies in the world follow a budget, you should too.
By learning how to budget, it will no longer be a matter of if you will achieve your financial goals… it becomes a matter of when you will achieve them.
To maximize the amount of income that you can apply towards your debts, you will need to “act your wage” and keep your living costs low.
I personally like the 70-20-10 budget. It has many variants, but if I were in debt, I would allocate my income in the following order:
20% towards debt repayment
10% towards savings and my emergency fund
70% for all other spending
A more comprehensive budgeting guide can be found in my past newsletter.
5. Approaches to paying off debt
Now that you have identified how to increase your income and get your spending to a manageable level, it’s time to tackle your debt head-on.
There are 2 primary strategies to pay off debt:
Debt Avalanche
The debt avalanche method prioritizes debts with the highest interest rate first, while still making minimum payments on all other loans.
By tackling high-interest debts first, you minimize your overall interest costs and accelerate the debt payoff process.
Debt Snowball
The debt snowball method focuses on paying off debts from the smallest to the largest balance, regardless of interest rates.
Similar to the debt avalanche, you will still make minimum payments on all of your other loans.
While it may not result in the lowest overall interest costs, the debt snowball method is the optimal approach from a psychological perspective.
This approach allows you to achieve quick wins by tackling smaller debts first, which provides positive momentum to continue your debt repayment journey.
Conclusion
If you are in debt, your first priority should be to get out of it.
The peace of mind that comes with being debt-free is unmatched.
Additionally, when your income isn’t eaten up by debt payments, all of your income flows straight to your net worth!
So what are you waiting on? Get out there and make it happen!
That’s all for today - thank you for taking the time to read!
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