How on earth could we become debt-free?

My husband and I have read all the books about becoming financially free, played the Cashflow boardgame, invested in property, invested in the stockmarket, built up passive income, set up our own business and been entrepreneurial, and it’s been great, don’t get me wrong…. but we’re a long way from financial freedom.

One thing we forgot when building up our multiple streams of income was to also pay down our debts. Anyone who knows Robert Kiyosaki’s game, Cashflow, understands that the way to get out of the rat race is to build up your passive income so that it matches your outgoings, and a big part of that is reducing your liabilities. That’s where we have failed, and I can’t believe I’ve reached the age of 51 and it’s only just dawned on me how important that is, particularly when you’re self-employed and don’t have a fixed income.

We’re lucky that we have a relatively small mortgage – thanks to our move to Spain back in 2006, but we still have rather a lot of consumer debt that has built up over the last decade. When I sat down to look at our finances in August, I calculated our total debt (not including mortgage) to be €32,329.00 which comprised:

€4536 credit card debt (interest free short-term but then 27.18%)

€15005 bank loan for business (4.29%)

€3688 personal bank loan (4%)

€6400 loan from family (interest free)

€2700 loan from family (interest free)

The total amount scared me, but I wanted to commit to paying it off as soon as possible.

I did a lot of research and reading. I read “Meet the Frugalwoods” by Elizabeth Willard Thames, “Pay off Your Debt for Good” by Jen Smith, “Debt-free Forever” By Gail Vaz-Oxlade, “The No Spend Challenge Guide” by Jen Smith, “The No Spend Year” by Michelle McGagh, “The Year of Less” by Cait Flanders, and “The Year without a Purchase” by Scott Dannemiller. As a result of the information and advice gleaned from those resources, I did the following:

• Looked through six months of online bank statements to work out how much we were spending on average per month in different categories.
• Looked at our income, which is variable, over 6 months, and averaged that out per month.
• Listed our debts from highest interest rate to lowest.
• Worked out the minimum we needed to pay per month to pay off the lowest interest ones in 36 months.
• Picked the highest interest one to overpay. Once that is paid off we will put the amount we were using to pay that one off per month towards the second highest interest one. It’s called snowballing or avalanching. I used Gail Vaz-Oxlade’s Debt Repayment Worksheet for that – https://www.hoyes.com/money-master-class/
• Created a budget and filled virtual envelopes with money in the GoodBudget app for Groceries, fuel, entertainment/eating out, and miscellaneous. My husband can use the app too and has access to the same budget. When we spend in those categories, we record the transaction via the app.
• Created a spreadsheet for August to track ALL spending in detail – direct debits for bills etc.
• Created a spreadsheet for income for August.
• Created a weekly meal planner so that when we go food shopping, we only buy what we really need.

Phew!

I also decided to have a No Spend Challenge for the month. We could spend money:

• On the categories we had envelopes for, and within the budget.
• If something broke and couldn’t be repaired AND was necessary.

Even though we have an entertainment/eating out budget, it’s not huge and so we decided to cut down. Rural Spain is very cheap for eating out, but we don’t need to do it so frequently.

I knew it was going to be tough as I’m a bookaholic and am used to reading books on my kindle and buying the next in the series, but I knew financial freedom was more important, and I have loads of books.

Financial freedom to me is having enough passive income coming in to pay my costs, and by getting rid of these debts we’ll be nearly there. After these debts are paid, we’ll get on to paying down our mortgage, which is €40,000.

We already have €1,000 in an emergency fund, so, at the moment, we’re not adding to that. We’ll re-evaluate in a few months. It would be good to build up savings. For now, we need to focus on frugality and paying down the debts.