How I Became Debt-Free at 25
I recently accomplished a goal that has been several years in the making. Nearly two and a half years to be exact.
I became debt-free at 25!
For me, this means no more credit card balances, student loans, or a car note. I was able to achieve true freedom from monthly payments stemming from decisions I made years ago. And best of all, it didn’t require any side hustles or a six-figure salary to do it.
Let’s start with why.
For as long as I’ve been alive, my relationship with money hasn’t been the best.
I grew up seeing the people around me living paycheck to paycheck. It was perfectly normal to borrow money from a family member for emergencies or take out loans for things that were needed. Debt was the norm and despite how much money my family and friends made, there was always still more month than there was money.
I soon recognized this happening in my own life. Despite receiving full-tuition scholarships, I still managed to take out over $20k in student loans and open several credit cards to help pay for additional educational and living expenses over the course of six years.
As a grad student, I lived off of an $1800 monthly stipend (before taxes and deductions) and wasn’t allowed to have other jobs. Granted this wasn’t a ton of money, but combined with the money from loans and the credit cards I had, I found myself feeling frustrated and overwhelmed with money. Not just at how I was currently managing it, but how I would eventually deal with the mounting debt I was slowly racking up.
It wasn’t until my last semester of grad school, that I decided to take an undergraduate personal finance class for “fun”. Since I’d soon be graduating, starting my first real job, and buying my first car (yay, more debt!), I figured it wouldn’t hurt to learn a thing or two about money.
This class ultimately ended up being the catalyst to me diving deep into the world of personal finance. We discussed money in a way I hadn’t been exposed to before and covered a wide variety of topics such as taxes, insurance, credit use, home buying, investing, and more. All the stuff that I wish I had learned years prior! Seriously, why aren’t classes like these mandatory!?
After completing the class, I resolved to pay off my debt ASAP once I started my full-time job and to make smarter decisions with money moving forward. I knew that I didn’t want to spend most of my 20s owing money to banks and lenders.
This initial decision to get out of debt and the journey that followed wasn’t necessarily easy or linear — I backtracked so many times and still make mistakes with money! — but I can truly say that it’s given me a sense of both control and freedom with money, and ultimately my life.
Aside from the obvious reasons and benefits for wanting to become debt-free, it’s still important to have a why.
Why do you want to be debt-free? What will you be able to do differently with your money and in your life by becoming debt-free?
My “why” is simple. I want to be as free as possible. Free of financial obligations from past decisions. Free to choose a job in any location based on how much I would enjoy it, not how much it pays. Free to give cheerfully to others and spend money on things that make me happy.
With debt, I just didn’t feel free. Without it, I have the freedom to start creating a lifestyle centered around the things I truly value and intentionally choose to spend my money on vs. what I have to spend money on. Having a “why” is what consistently motivated me to wipe out my debt and do so within a short time period.
Now let’s get into how I actually paid off my debt! To move out of the negatives and closer to 0, these are the steps I took:
1. Create an Emergency Fund
At the start of my debt-free journey, I opened a high-yield online savings account and saved $1,000 in it. This became my “emergency fund” and was enough to cover most unexpected expenses like a car repair or unexpected travel for family emergencies (both of which happened along my journey).
Having an emergency fund is an absolute necessity before trying to go all in on paying off debt. Seriously. Please do not throw boat loads of money at debt until you have an emergency fund. Also, do not spend the money in your emergency fund on things that aren’t true emergencies.
Now how much to set aside in an emergency fund depends on your personal situation, but most experts would recommend anywhere from at least $1,000 up to six months of necessary expenses. Should the worst happen, like losing a job for example, having a larger emergency fund that covers several months of expenses can prove incredibly beneficial while getting back on your feet. Plus it will prevent you from taking on even more debt to keep afloat.
As the old saying goes, Man makes plans and God laughs. No matter how well we plan, emergencies can and will happen without a doubt! Your future self will thank you for having money set aside for a rainy day.
2. Use the Debt-Snowball Method
Once my emergency fund was set up, I zoomed out to see how much debt I really had. Since I wasn’t tracking it, I had no clue what the total amounts were or the interest that had accrued.
Total debt: $44,807.87
- Furniture Store Credit Card: $2,728.91
- Bank Credit Card #1: $1,465.50
- Bank Credit Card #2: $2,765.73
- Car Loan: $16,241.12
- Student Loans: $21,606.61
There are plenty of different ways to tackle debt, but I chose to tackle mine from smallest to largest balance, independent of interest rates. This is called the snowball method.
Following the snowball method simply means putting as much as you possibly can towards your smallest debt while making minimum payments on your other debt. Then once you pay off your smallest debt, you repeat the cycle. Each time you repeat the cycle, you pay off the next smallest debt with the amount you were paying on the previous smallest debt PLUS the minimum debt payment of the new one. This is key!
The snowball method has more psychological benefits than mathematical. But what makes it so effective is that the excitement of quickly paying off smaller debts can build momentum and greater focus towards paying off larger balances -hence the snowball effect!
An exception I made to the snowball method is that I paid off my student loans before my car loan. Despite the car loan having a lower balance, since the car was a depreciating asset and the loan amounts were relatively close, I felt that paying off my student loans first was the better choice.
3. Budget and Track Spending
Creating and sticking to a budget was arguably the hardest part of my debt-free journey. As an impulsive spender, it’s taken me a while to get this right and is something I still actively work on. But don’t sleep, because budgeting is truly where the ~magic~ happens!
There are plenty of free budgeting templates available online to get you started and free apps that you can download like Mint, Personal Capital, or Nerd Wallet. These apps will make it even easier to stick to a budget by automatically categorizing purchases and tracking spending for you.
To get started I list out my monthly income (after taxes and pre-tax deductions) at the beginning of each month. This is known as take-home pay since it’s what you actually receive in your bank account on pay day.
Then I create a budget to decide how I would ideally like to spend my income. I start with the necessary expenses, things I have to buy or pay for no matter what, like rent and electricity. Since I have a good idea of how much these items will cost me, I can almost accurately list how much I should spend on them. For example, my internet bill is $65 every month, so that’s exactly what I budget for internet.
After I’ve budgeted for all of my bills, minimum debt payments, groceries, and gas, I then take a look at my discretionary expenses. These are the things we don’t necessarily have to spend money on, but we choose to for one reason or another. This looks different for everyone, but for me, expenses in this category include things like shopping (clothes, books, candles etc.), personal care (nails, hair, brows etc.), eating out etc.
Then comes the most important and often forgotten part in all of this. At the end of each month, I review what I actually spent in each category, alongside what I budgeted for. This helps me understand how I actually spent my money, what categories I overspent on, and how I can get back on track the following month.
4. Optimize and Reduce Expenses
The magic of budgeting and tracking spending (especially discretionary expenses) is that whatever I didn’t spend created margin and more cushion within my budget. This freed up cash that could then be allocated towards more important things — like paying off debt!
It also made me realize how much my lifestyle and small habits were costing me. Who knew that buying $5 smoothies throughout the week could cost me $60 a month!? To make it practical, trimming my “eating out” budget by just $60 was $60 more that I could automatically put towards debt upfront. Sweet!
By budgeting and tracking spending, you become better able to optimize and reduce expenses. This enables you to make more conscious choices about how you spend money and improve at findings ways to save more and spend wiser. This is what enabled me to cut out unnecessary spending and significantly speed up the amount of time it took to pay off debt.
A phrase I often quote is I only buy what I need and I only buy what I want when I need it. Not sure where I heard it from, but this really helps keep my discretionary spending in check by encouraging me to pause and evaluate which of my “wants” do I really need.
For example, up until September 2020 I had an iPhone 7. Although it worked perfectly, I had long since wanted an iPhone 11 but decided to wait until I absolutely needed a new phone (my 7 died a slow death and became inoperable) to buy one. A less extreme example is only buying new hair products when I run out of my current ones (natural girls, this one’s for you).
Other ways I optimized and reduced expenses included frequently looking for ways to save and take advantage of discounts when and where I could. For example, I negotiated a lower rate on my auto insurance, moved to a cheaper apartment complex, joined free loyalty and rewards programs (the Target app is one of my favorites!) and started shopping more frequently at discount grocery stores like ALDI.
I also automated all of my bills and debt payments. This gave me one less thing to remember and forced me to stick more carefully to my optimized budget. For example, I didn’t have to think about if I wanted to pay extra towards my car note, because $650 was taken out of my account automatically to go towards it each month — even though the minimum payment was only $280.
Lastly, I threw whatever additional money I could get my hands on at my debt. Whatever was left in my checking account at the end of each month went towards debt. And any bonuses, refunds, rebates, or monetary gifts I received throughout the year also immediately went towards debt. I treated any extra income as if I had never received it in the first place.
Final Thoughts
There is nothing original or revolutionary about any of these steps. Once the wheels are in motion, all that’s required is staying the course. Of course there were plenty of times along my journey when I overspent and made poor financial decisions that delayed my goal of becoming debt free by 25. In these moments I gave myself permission to go off the rails — after all, I’m young and still want to live a little! — knowing full well that my why would eventually get me back on track.
As Dave Ramsey would say, live like no one else, so later you can live like no one else. The small sacrifices and intentional choices I made in the short-term with my money each month were paving the way for me to live a more financially freeing life in the long-term.
Now that I am debt-free, I can’t wait to see where my financial journey will take me as I continue to learn more about money and create new goals for saving, investing, and funding an early retirement. I’m excited to write about it and have others be part of the journey!
This post was originally published on the Finesse with Vinessa blog.
