5 Steps to Get Out of Debt and Stay Out of Debt

After over 20 years advising clients on tax planning and wealth management, I realized most financial goals like saving for retirement or buying a home are sidetracked by one roadblock—debt. Whether from burdensome student loans, credit card balances, medical bills or business losses, debt chains finances to the past rather than allowing investments in the future.

When debt payments consume 20-30% or more of take-home pay, dreams of traveling, giving generously or even switching careers feel impossible. Your income trajectory simply covers debt service costs rather than going towards what matters most.

The good news is there is a structured path to become and stay debt-free regardless of your current financial strain. Through guiding clients methodically through these 5 steps, I empower them to erase all debt within 3-5 years while altering money habits for good:

Step 1: Shift Your Mindset Towards Debt

While debt feels like a math problem to solve, the most potent initial step is psychological. Human behavior change happens fastest when our identity and beliefs shift first before tactics.

I coach clients to reframe limiting stories providing “good reasons” to keep debts around. For example:

“This debt allows me to have things I can’t afford otherwise like a nice house or car.”

“My student loans gave me access to a great education and career.”

“Putting some expenses on credit cards allows me to pay over time.”

The above stories implying debt supports our lifestyle sound rational but keep you financially chained. In contrast, I guide clients towards empowering identity statements like:

“I am transitioning to a debt-free lifestyle aligned with my values.”

“I deserve financial freedom to spend on what matters most.”

“I am willing to make temporary sacrifices to liberate my future.”.

This inner work establishes the mental footing to then tackle the numbers.

Step 2: Assess Your Total Debt Burden

Next, gather details on every outstanding loan or debt balance you currently owe - credit cards, auto loans, student loans, medical debt, personal loans, business loans etc.

For each debt, capture critical factors including:

• Original amount borrowed

• Interest rate

• Monthly payment

• Total balance remaining

• End term date

Input all debts into a consolidated tracker to analyze:

• Total debt across all loans

• Share of monthly income going to debt payments

• The heaviest interest rates paid

This step confronting your entire debt picture often shows more leaks in spending than realized. But transparency clarifies how to divert future income towards repayment.

Step 3: Reduce Expenses Temporarily

With all debts organized by highest interest rate, the next phase is freeing up as much cash as possible for rapid repayment. This requires strictly minimizing expenses that don’t align with priorities.

I coach clients to trim expenses using the 50/30/20 budget rule:

• Needs: 50% on essential living costs (housing, food, transport)

• Debt Payments: 30% towards loans

• Wants: 20% on lifestyle, hobbies, leisure

Getting serious about downsizing housing, dropping unused subscriptions, limiting eating out/shopping, or temporarily halting retirement savings generates surplus income. Even an extra few hundred dollars monthly focused on debt repayment makes substantial progress.

Additionally, seek ways to increase your earnings with overtime, part-time work, monetizing skills or selling unused items. When focused intensely for 3-5 years, living below your means accelerates becoming debt free.

Step 4: Pay Down Debts Aggressively

This step entails swiftly eliminating debts smallest to largest using freed up income, while paying minimums on all larger debts. I have clients follow the popular “debt snowball” method to build momentum:

• Rank debts smallest balance to largest

• Pay minimums on all debts except the smallest

• Put any surplus income towards repaying the smallest debt

• Repeat this process as you eliminate each small debt

Psychologically, eliminating the smallest debts quickly gives a motivating “win” to keep attacking progressively larger balances with full force. Mathematically, this also eliminates debts with higher interest rates rapidly to avoid growing interest costs over time.

Depending on your income and debts, this focused repayment period usually lasts 3-5 years until becoming debt free. Celebrate each milestone along the journey!

Step 5: Build Savings & Sustain Financial Health

The final step begins once all outstanding debt balances reach zero - ideally by age 30. Now the full surplus income previously going towards loans can get redirected to:

• Building an emergency fund covering 6 months living costs

• Funding retirement accounts to max contributions

• Saving towards goals like education, real estate etc

• Increasing lifestyle design investments

The key to sustain a debt-free financial position long-term is upholding habits like:

• Maintaining an affordable cost of living

• Budgeting expenses aligned to priorities

• Funding needs before wants

• Limiting reliance on credit to what you can fully pay off monthly

The finish line isn’t repaying debts once, but deliberately designing a balanced financial plan you can stick to forever debt-free. With the right strategic mindset combined with tactical steps, you can join others I’ve guided to permanently break free of debt. The freedom and life possibilities awaiting on the other side make the short-term sacrifices more than worthwhile!

Interested in Learning More - Feel free to book an appointment on Calendly here.