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Money Habits of People Who are Debt Free

Whether your goal is to become debt free, run a marathon, or simply declutter your home and live a more minimalist lifestyle, we often turn to those who have had success and do what they do. It’s called studying best practice.

If you want to learn how to run a marathon, you would talk to other runners and follow a training plan. If you want to enjoy a more minimalist lifestyle, you would read up on minimalism and talk to other minimalists. If you want to become debt free, you adopt the money habits of people who are debt free.

Organize and Pay Attention to Your Bills

Rather than just piling up the bills and walking away from them, people who are debt free open their bills as soon as they come in. They check to make sure that the statement is accurate and organize them in a way to ensure that the bill is paid on time.

Live Within Your Means

People who are debt free do not spend beyond what they earn. It seems obvious, I know. But in these days where credit is easy to come by, and most aren’t spending intentionally, it’s easy to spend more money than what comes in every month.

People who are debt free follow the principle that if you don’t have the cash, you can’t afford it. So part of living within your means also requires you to strengthen your savings muscle and set aside money each month for larger purchases like vacations, home improvements, or a new-to-them vehicle.

Don’t Try to Keep Up With the Joneses

People who are debt free have learned to practice the art of contentment and are grateful and happy with what they have. They don’t worry that their neighbors just purchased a shiny new vehicle or just upgraded to a 75-inch flat screen television.

They also avoid the trap of emotional spending and buying items to make them feel better. They know that these unplanned purchases only have a temporary effect on one’s feelings, and if anything may lead to feelings of stress later on in the month.

Demonstrate Self-Control

In order to live within your means, it’s important to be intentional with your money and develop a spending plan. Debt-free people create a budget before the month begins which gives each dollar coming in a job, helping to eliminate money that disappears or gets wasted.

Part of living on a budget also means avoiding impulse purchases. These impulse purchases can quickly destroy a budget. Instead try avoiding the stores that you know cause you the most temptation when it comes to buying impulsively. You know that trip to Target that you made to purchase one item and ended up walking out with $100 worth. Trust me, been there, done that!

Be Proactive

It’s no surprise that being proactive is the first habit discussed in “The 7 Habits of Highly Effective People” by Stephen R. Covey. People who gain control of their finances and live debt free have learned to be proactive. This means that they have looked at ways to cut their budgets and their spending to free up extra income to pay off their debt and then start saving. They will also look for ways to earn an extra income if it’s necessary to reach their financial goals.

Your Turn!

  • What’s one money habit that you would like to improve?

How We Paid Off $59,000 in 24 Months

There’s no easy, fast way to pay off your debt. It takes a lot of hard work, sacrifice, and focus. The good news is that it is possible, no matter how overwhelming it may seem, and the end goal is worth it.

March 17, 2014: I was sitting at my dining room table surrounded by bills, sick and tired of making a decent income, but having nothing to show for it. The stress of juggling payments and the fear that there was going to be more month than money had gotten the best of me, and in that moment I knew we had to make a change.

You may look at the title and think to yourself, “Well if you paid off $59,000 in 24 months that must mean that, on average, you were putting just over $2,400 towards your debt each month.” Putting that amount (37% of our take home pay) wouldn’t have been possible if we hadn’t been willing to change our behavior as well.

Getting Real With Your Spending Behavior:

I added up the debt and had no idea where that money had been spent or what it had been spent on. We didn’t have any fancy clothing, we don’t have a home filled with the latest and greatest technology, our furniture was mostly purchased second-hand, and our car was certainly not the fanciest (not unless you consider a well-loved Honda Odyssey fancy).

So in order to see where the money had  gone and where the leaks were in our spending, I decided to do a six-month spending analysis. I grabbed six months worth of credit card statements and bank transactions and got to work. I quickly realized that we were the “death by $20” types, meaning we would spend $20 here or $20 there. Although that amount doesn’t seem like much at the time, it quickly added up.

Take Responsibility:

overspendingWhen married, in debt, and stressed, it was easy to blame the other person and their spending behavior for getting us into the mess that we were in. Completing the spending analysis put both my husband and I in the position where we had to take responsibility for our part in the problem.

We could see exactly what we had spent over the last 6 months. The truth hurt but it was in front of us and the numbers didn’t lie. Once we saw the holes in our spending, and took responsibility, we were now able to come up with a plan to get out of the mess that we each had a part in creating.

Develop a Budget Where Every Dollar has a Name:

The biggest part for us in our journey of becoming debt free was to get on a monthly budget where every dollar was given a name. We started at the top with our income and worked our way down through our expenses until we got to the end. Any money left over each month was then thrown at the debt.

We preferred the debt snowball when determining which debt we wanted to attack first. In the debt snowball, you list your debts from the smallest balance to the largest balance and then start paying them off in that order. We loved the traction we felt as those smallest debts got paid off quickly.

Cut, Slash, and Free Up Your Income:

In order to be able to put an even larger amount on our debt, we looked for ways that we could cut our spending. We slashed our average monthly grocery budget by $200 a month by meal planning, shopping with a list, and making as much as we could from scratch. We cut our clothing budget by shopping at the thrift stores and the clearance racks. We only bought what we needed and skipped the things that we wanted.

Stick With The Budget

budget moneyOK…This was a hard one at first. We really needed to get into a routine and pattern that worked for us when it came time to checking in with the budget. When first getting started, I had a budgeting app that was on my phone that I checked in with at least once a day (sometimes, several times a day…I’m a bit of a numbers geek).

Writing a budget is one thing, but checking in with the budget is the important part. We had written budgets before, but as the debt rose, it became clear that a budget isn’t a set it and forget it tool. Your money will not magically behave just because you put some numbers down on paper.

Get the Biggest Shovel Possible:

Aside from getting on a budget and sticking with the budget, finding extra work and making extra money was hugely important in us becoming debt free as quickly as we did. When you want to get out of debt so bad you can taste it, sacrificing some free time to work extra hours or a get a second job in the short term is a great way to put your debt pay-off into overdrive.

Stay Focused on the End Goal:

During our debt free journey, it was tempting to take a break, and enjoy some of the extra money that we now had by working extra jobs. We knew though that if we stopped, getting back on track was going to be even harder, so we had to stay focused on the end goal.

We reminded ourselves of our “Why?” Why we wanted to get out of debt. What a debt free life would look like and feel like. We tracked our progress and made every purchase intentionally by asking ourselves, “Do we want this item more than we want to be debt free?” When you know where you’re going and why, getting there becomes much easier.

Your Turn!

  • What does financial freedom look like to you?

6 Things We Gave Up to Get Out Of Debt

In order to get our consumer debt paid off, my husband and I had to be willing to give up some things. We had to consider what aspects of our spending behavior we needed to change so that we could hit our goal as quickly as possible.

Here are the six things that we decided to give up in order to help us pay off our debt:

“Browsing” at our favorite stores:

The more time I spent browsing, the more I realized that there were items out there that I didn’t even know I “needed” and ended up buying. When I did our spending analysis at the beginning of our debt journey, what I found were my weaknesses for Target and the drugstore. That’s where I tended to get into the most amount of trouble when it came to spending impulsively.

I quickly realized that if we were going to get out of debt, browsing in those stores wasn’t something that I could be doing any more as too much money was getting wasted on items I didn’t need.

Shopping without a list:

Whenever I shopped without a list, my focus was easily diverted to all of the other things that I might “need”. In order to cut back on the amount we were spending, we learned that we needed to not only shop with a list, but stick to the list.

Shopping with a list included more than just groceries. When we need clothing, or anything else for that matter, I’ll do an inventory of what we have and then come up with a list of what we need so that when we go into the store we are not as easily distracted and wasting money on items that we don’t need right now.

New clothes:

Instead of shopping at the regular retail outlets, we now shop for new-to-us clothes at the thrift store. In doing so we have saved a lot of money, cutting our clothing budget in half. In order to save even more money, my favorite day to shop at the local thrift store is on their 50% off day.

Convenience food:

One of the biggest ways we saved on our grocery budget was to give up many of those convenience foods that are pre-made or pre-packaged. Many of these processed or pre-made foods tend to be overpriced and you can do it yourself for a lot cheaper. We make our own bread, pancake mix, hot cocoa mix, side dishes, and pizza. Not only is it just and easy to make these things, it’s also comforting to know exactly what’s in it.

Free time:

In order to get our debt paid off, we were also willing to give up some of our free time to generate an extra income, giving us more money to throw into our debt snowball. Both my husband and I have our respective “side hustles” that allow us to use our talents or interests to earn even more money.

Living life without a budget:

budget money

Living on a budget focused our spending and allowed us to gain control of our money. Having a plan for our money allowed us to see how much we needed to live and get by and then how much money was left that we could throw at our debt. Once we got on a written monthly budget, we truly felt as if we had gotten a raise because we were now telling our money where to go instead of wondering at the end of the month, where it went.

Your Turn!

  • What are you willing to give up to get out of debt?

 

Budgeting Mistakes to Avoid

Whether you’re new to budgeting or have been budgeting for a while, there always seems to be expenses that get forgotten or overlooked. I know I’m guilty of overlooking all of the five most commonly forgotten expenses at one point or another. Unfortunately I don’t realize it until the expense comes up and I feel the pinch on our monthly cash flow.

In order to avoid the pinch, it’s a good idea to check your budget and make sure that you haven’t overlooked the most common budget expenses that get forgotten. You don’t want these sneaky budget busters ruining your month.

Special Occasion Gifts:

When looking at next month’s budget you do not want to forget any special occasions (think Halloween) or gifts that you might need to budget for. Open up your social calendar and see if you have any birthdays coming up or anniversaries that are being celebrated. Don’t make the same mistake I seem to do in October, and forget to budget a dinner out for our anniversary, and then have to make cuts elsewhere in the budget to accommodate for the “unexpected” expense.

Car Maintenance:

This is one of those categories that my husband and I overlooked early on in the budgeting process, but one that is important, especially when it’s time for any regular car maintenance. Even if you just set aside a small amount every month in an envelope or sinking fund and let it build, when you have to do an oil change or you have to replace your tires, you’ll have the money ready to go.

House Maintenance:

You also want to make sure that you’re setting aside a little bit of money each month for home maintenance. Even though you may not need this money each month, home maintenance is ongoing. There are always items around your home that will need to eventually be replaced or upgraded. Setting aside some money each month ensures that any foreseeable home repairs don’t require you to dip into your emergency savings or go into debt to cover the costs.

Quarterly or Annual Bills:

You also don’t want to forget those bills that don’t come in every month. For us, our electric bill comes in every other month and we pay our water bill quarterly. You want to familiarize yourself with the bill schedule so that you know which months you need to budget for them. Other quarterly or annual expenses might also include your insurance, licence plate renewal, or any yearly membership renewal fees.

Setting Aside Money for Taxes:

For those that are self employed or generating a side income where income tax is not deducted, you want to make sure that you’re setting aside a certain percentage of that money to keep the IRS happy come tax time. In order to know how much to set aside, you’ll need to determine your marginal tax bracket rate. By setting this money aside and being prepared, you’ll avoid the scramble with the tax bill comes in.

Your Turn!

  • What are some expenses that have busted your budget in the past?

Four Reasons Why We Stayed In Debt

Our debt story began when I was 19 years old and I got my first student loan and credit card. Fast forward 18 years, a marriage and two kids later, we had to come to terms with the four main reasons why we stayed in debt for all of that time.

 

At 37 years of age, I found myself staring at close to $59,000 worth of debt (a long way from that initial $500 student Visa card I had signed up for). Confronting the reasons why we had stayed in debt so long and changing our mindset about debt, finally gave us the motivation we needed to get it paid off.

We thought we had plenty of time:

My goal was always to be debt free by the time I retired. I understood at a young age that heading into your retirement years with debt wasn’t a wise financial decision. The problem was that in my 20’s and early 30’s, I still thought I had plenty of time to get my debt paid off.

I wasn’t in any rush, because I didn’t feel any sense of urgency. Not until I hit my mid-30’s. Once I hit that age, I realized that if we kept going the way we were, spending without a plan, and not putting a thing towards savings, my husband and I were going to be in deep financial trouble.

The other kicker came when I looked at what was being spent on debt-repayment. At the time our debt repayments totaled just over $1000 each month. Looking at the total amount paid, rather than just the individual minimum payments, forced me to see how much money we were throwing away and paying the bank each month, when if we had been smarter with our spending, could have been paying ourselves in the form of retirement investing.

We used our line of credit and credit cards as income:

Because we weren’t on a budget and had no idea where the money was going each month, we found ourselves relying debt to help us get through the month. If the bank balance was getting low, and I still needed to get some food or clothes for the kids, out would come the credit card.

After years of doing this, it really became a vicious cycle of using debt to either pay for the things that we needed, as well as the stuff we wanted. We also got into the trap where I would find that I was paying debt with debt (using Visa to pay MasterCard) if the money was tight at the end of the month and the bills were due.

In order to break out of this vicious cycle, we got on a monthly budget so that we could control our spending, account for our spending, and break the ties with the credit cards and the line of credit once and for all.

“At least we’re not as bad as…”

All of our friends had debt, so I found myself getting into the trap of thinking that debt was normal. Everyone seemed to have debt, so I wrote off the fact that we had debt as “No big deal; We’re just like everyone else”.

I also found myself playing the comparison game. One of my favorite shows on TV at the time was “‘Till Debt do us Part” hosted by Gail Vaz Oxlade. On this show, she would feature families who had gotten themselves into debt and were looking to get out of it.

Instead of being inspired to get out of debt ourselves, I found that I would compare our financial situation to the families featured on the show, and thought, “Well at least we have less debt than them”, as a way to justify and feel better about where we were financially.

Keeping up with the Jones’s:

american dreamThe last reason we stayed in debt as long as we did was our desire to keep up with the Jones’s. I would look at the lifestyles of those making a similar income to my husband and I and felt that we should be able to afford the same types of things.

Where we went wrong was that we didn’t plan or save for major purchases or vacations, we just went ahead and charged them. The down payment for the mini-van, new furniture, and our family vacation to Disney World were all courtesy of MasterCard.

What we have since learned is that we can have all of the things that the Jones’s have, we just need to plan ahead and save up for them first by budgeting and setting aside money into our sinking funds.

Your Turn!

  • What are some money mistakes that you’ve made that kept you in debt?
  • What mindsets did you have to change to pay off any debt you had?
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