How to Pay Off Your Debt and Live Debt Free in 3 Steps

Take a moment and imagine what your life might be like if you were totally debt free. How would it feel not to have any credit card debt and to own your car and your home free and clear? Would you feel less stress perhaps? Happier? Freer?

Is this an impossible dream? No. In spite of all the advertising that urges you to spend more than you earn, it's possible to become and live completely free of debt on even a modest income.

Part of the problem is our society pushes us toward debt, both secured debt and unsecured debt. Unfortunately, many people get into debt with no clear understanding of what it really means and how much debt actually costs.

The first thing to understand is that secured debt means you have some collateral or something of value that, if you fail to pay, you can give up that will satisfy the debt. Homes and cars are typical examples of secured debt.

Unsecured debt has no collateral, just your promise to pay. Credit cards are classic examples of unsecured debt. If, for example, you use a credit card to charge an airline ticket, you can't give it back if you aren't able to pay what you owe because you've already used it.

In either case you actually are borrowing money from a third party who hands the amount of the purchase over to the seller, then collects what you owe, with interest. Interest can be thought of as rent on the money you borrow. Since we rarely if ever see the actual cash, these transactions often take on a kind of unreality, and it's easy to miss their potential long-term impact. The actual cost of that interest is shocking.

If, for example, the mortgage you sign is for $165,000 payable over 30 year at 6% fixed, in addition to the face amount you'll also pay $191,132.17 additional in interest.

Credit cards are even worse. If you have, for instance, $12,000 in credit card debt and you pay only the minimum payments, it will take you 400 months or 33.3 years to pay that debt off at 18%; your total interest will be $17,615.69. If your rate is down to 11%, it will take 264 months (22 years) and you'll pay $6,816.71 in interest.

As shocking as these numbers are, when you do the research to discover exactly what your debt is costing you, you're actually on your way, if you choose, to becoming debt free. You can do it with the following three steps:

1. Track every expense. Keep track of every single expense, no matter how small, for at least a month. This will put you in a place to understand exactly where you money goes, which, in turn, will help you make good decisions.

2. Start Saving Something. Saving is key. Set up an automatic deduction from your paycheck, even if it's only $5. This is the beginning of your emergency fund. Eventually you'll want to up that to at least 10% of your income, but you've got to start somewhere. Aim first for having about $1,000 in an emergency account. When you get there, notice how that makes you feel.

3. Pay off your smallest debt first. Assuming you know exactly what you owe, many authorities recommend pay the smallest debt off first. Make sure any you pay above the minimum gets credited to principle. As soon as that first debt is paid off, pay off the next one. Continue this until you're debt free.

Don't be surprised if you also have to find a way to reduce your expenses or increase your income or even both. Go slowly and don't make yourself miserable; if you do, you'll probably quit. Far better it take you longer to pay off your debt than to quit working on paying it down.

Bit by bit you'll find yourself gaining control over your finances and reducing your debt with these steps until you're totally debt free. The seemingly impossible dream has come true.