How To Become Debt Free In One Year: A Step by Step Guide | Finances Uncomplicated (2024)

Looking to become debt-free as soon as possible? When I became 100% debt free, including my mortgage, everyone wanted to know how they could do the same.

Here are my best tips for becoming debt free in a year or less. The road to debt freedom in a year is going to be a very tough, maybe a little extreme, but totally worth it. If you follow these exact steps, you can achieve financial freedom in one year.

My wife and I paid off all of our debt in seven years. However, when we became extra focused and created a plan we paid off our mortgage in 19 months from the day we put our plan into play. I want to teach you what we did so you can compress this time in twelve months.

Check out my article on how my wife and I were able to pay off our mortgage in 19 months.

You can become debt-free in one year if you stick to the strategy outlined. However, you will have to do some very drastic things to make this happen, like really extreme! Plan on selling everything and moving back in with mom and dad if necessary. The only way to clean up a debt mess fast is to do things no one else is willing to do.

“You must live like no one else, in order to live like no one else”.

~Dave Ramsey

If you are up for the challenge, let’s begin.

Examples of some “whys”:

• I want to be debt-free to stay at home with my child when they need me.
• I no longer want to waste money towards interest.
• If I’m debt-free, I can have more money to spend on things I genuinely enjoy.
• Being debt-free will allow me to buy my dream house.
• I want to put more money towards retirement and to eliminate debt is the best way to stash more cash away.

There is no wrong purpose statement. The reason for getting out of debt is your personal choice. It needs to be a “why” that is really important to you, gets you excited, maybe even a little emotional. This will be your drive to make your desire a reality.

Step 2: Discuss your dreams with your family.

You must discuss your goal of becoming debt-free with your family. If you do not have the support of your significant other, as well as your children, the road to paying off debt will be challenging.

To get “buy-in” from your spouse include him or her on the first step of coming up with your why. Tell them your vision of what becoming debt-free will look like.

If your significant other is not on board with the idea of becoming debt-free, allow them to take a day or two to think it over. It is a big commitment and again can require some sacrifices from everyone in the family.

During the period of contemplation, do not let this drag out too long, a few days max should be enough to come to a conclusion. Once you get the go-ahead, continue to follow the steps outlined below.

If they are still not ready, I recommend you create a budget and a timeline of when you can become debt-free. Share these with your partner, and they may become more motivated to get out of debt if they know it can all be eliminated in a year.

Step 3: List out all the debts you have with a net worth statement.

Completing a net worth statement is the next step in becoming debt free because this statement allows you to see how much debt you actually owe.

For a complete guide on creating a net worth statement as well as a free, NO email required downloadable spreadsheet, I use every month, click here.

If you are unsure how much debt you have to go to Annualcreditreport.com to receive a free credit report. The report will allow you to see all the accounts you have open. Be sure to pull all three credit bureaus. Sometimes not all the bureaus have all your information.

Note: Annualcreditreport.com is a free website mandated by the government. The government requires the credit bureaus to give consumers one free look at their credit report, and this is the site to do it at. The site does ask for all your personal information including your social security number. I have been using the site annually since 2010 and have had no issues.

Need to know how many student loans you have?

Go to the National Student Loan Database to find all your subsidized and unsubsidized federally insured student loans (click here for the National Student Loan Database). This website will give you all the details of the loans as well as who the current servicer is. If you have a private student loan through a bank or other lender, it will not show up in this database.

Step 4: Calculate the payment you’ll need to make one year a reality.

Once you have your net worth statement complete, it is time to see how fast you can actually become debt-free. There are several calculators online that will allow you to come up with your number.

Online Debt Freedom Calculators

1. Power Pay. I personally used this calculator when paying off my debt. It is an older looking calculator, but I like how detailed it is. This calculator will give you the precise date of when you’ll become debt-free. And you can add random one-time lump sum payments you expect to receive in the future.
2. Dinky Town – This is another website I use regularly. This calculator will give you a lot of beautiful graphs, but not a specific date on becoming debt-free only the months it will take you to achieve debt freedom.
3. Financial Mentor – I have used this site in the past before. It is an excellent site with a lot of resources.

Do not be overwhelmed if the date it has you becoming debt-free is years from now. Over the next few steps, we will be working on how to get you obligation free twelve months from now.

What you’ll need to calculate your debt-free date.

• The interest rate on each loan
• The minimum payment on each loan
• Balance of each loan

Debt Snowball or Debt avalanche

There are mostly two thoughts on paying down debt. One is the debt snowball where you pay off your accounts in order of the smallest balance to the highest outstanding balance. The debt snowball helps you win early in your journey. You will be paying off your tinier balances first giving you the motivation to keep going after the larger accounts.

The second method is the debt avalanche. In the debt avalanche you pay off the loan with the highest interest rate first, but it may not have the smallest balance. The thought is if you pay off the most significant interest loan first you will be able to pay off your debts faster.

However, when devising a plan to pay off your debt in a year the interest rates and order of paying off what account becomes irrelevant so use the debt snowball method. Even at really high-interest rates of 29% using the debt avalanche barely moves the needle.

Read: Here is a complete article with how the debt snowball stacks up against the debt avalanche.

Step 5: Discuss what loans you could get rid of today.

Now that you have your plan covering what it will take to become debt-free, you may feel a little discouraged. The number to become debt free in a year is probably really high. That is ok. In this step, we are going to find some ways to get rid of the loans you already have.

Here is a list of conventional loans that you can get rid of or significantly reduce.

• Car loan (Learn How To Lower Your Car Payment Without Refinancing)
• Boat loan
• Home loan
• Camper loan
• Appliance loans
• Furniture loan

Any loans that are secured by an asset like a car, boat, or house can be reduced from your debt snowball or eliminated altogether. For example, if you have a loan on your vehicle. Go and sell the car and pay off the loan.

What if you are underwater?

If you are underwater, meaning, you owe more than the asset securing the loan there are options. If you owe less on the car, boat, or home most lenders will work with you by giving you a loan on the difference.

Yes, it will feel like you’re losing money, but this is what will have to happen to pay off your debt in a year.

If you had a car loan for $15,000, but the car is worth $9,000 you will need to get a loan for $6,000 and sell the vehicle. While this looks like a loss, you have just saved yourself $9,000 in payments.

Things to consider.

If you do sell your car or home you need to think of what you’ll drive or where you will live next? There is no shame in buying a $500 car to drive around for the next year as you pay off debt, this would be a genius move.

If you did sell your home, you need to decide where you’ll live. Moving in with family is a great short term plan as well as a cheap rental while you dig yourself out of debt.

Step 6: Develop a monthly budget.

Now that you have a date you’ll become debt-free as well as a plan it is time to start living on a budget. A budget is a tool for you to tell your money where you need it to go.

Creating a budget will allow you to find other ways to save money as well as help you prioritize your goals. When writing my budget out, while we were paying off our debt, I made sure the debt payment we established was paid first. Nothing else was paid for until the debt payment.

This means if we fell short on our zero-based budget we established at the beginning of the month money would be taken out of other areas of our budget to fill the gaps.

How to create a zero-based budget: Step by Step

Using a zero-based budget means every penny is allocated to some portion of the budget. At the end of creating your zero-based budget, you will have zero dollars at the bottom. This is important when paying off debt because you want all your money working for you to achieve your goal.

Here is an example of how a zero-based budget should look:

Step 1: Be realistic

You need to be aggressive with your budget, but at the same time, you must be realistic. I have seen many people put together a budget to pay off debt, but they make the budget too restrictive. Being too restrictive makes the budget hard to follow, and you are less likely to stick to the plan.

If you need $100 a month for going out to eat, then put that amount in the budget. Yes, you should look for ways to save and cut costs but make sure you can stick to the numbers you place on the budget.

Remember this plan is for you. You can make it however you want.

Step 2: Use a budget tool

I personally use and recommend Everydollar.com. The app is free to use and is a zero-based budget tool. There is a $10.00 per month option, but the point over this next year is to cut costs and pay off all your debt. Use the free version until you’re debt-free.

Step 3: Income

Create a list of all your income for the month. If you are salary, this is easy because it will stay consistent from month to month. Be sure to list every income source including interest on checking and savings accounts that you can use to pay down your debt.

If you live on a commission-based income, make your most reasonable guess as to how much income you’ll earn. I would aim for the lowest you think you will receive. This way if you earn more it is a bonus that can lead directly to your debt reduction plan.

Step 4: Expenses

The easiest way to list out your expenses is to break them down into categories. I have my costs broken down into the following groups.

• Giving
  • Church
  • Gifts (Birthdays, Anniversaries, Weddings)
• Housing
  • Homeowners Association
  • Water
  • Gas
  • Electricity
  • Property taxes
• Transportation
  • Gas
  • Maintenance
• Food
  • Grocery store
  • Out to eat
• Lifestyle
  • Haircuts
  • Phones
  • Clothes
  • Netflix
  • Phone Apps
  • Sofia (my daughter)
  • Misc. (this category should have limited use, but is a catch-all)
• Insurance
  • Health Insurance
  • Dental Insurance
  • Eye Insurance
  • Homeowners Insurance
  • Auto Insurance
  • Life Insurance
• Medical
  • Dental
  • Health

You will want to add the category of debt to yours. Next, get out your previous month’s bank statement and or credit card statement. Start listing the expenses under each category. Of course, your costs will vary from month to month, but this will give you a good start when you do your very first budget.

Expenses Once Per Year

Some costs are once per year. For example taxes and insurance. Also, you may have a considerable payment ten months from now that you know about.

Here is how you need to handle large one-time payments in the future. List the item you need to save for in your budget. Then simply divide the amount you need by the months until you need it.

As each month goes by transfer the fractional amount into a separate savings account, this is called a “sinking” fund. Then when the significant expense arrives simply transfer the funds and pay the bill.

Step 5: Track

Once you have your categories and amounts inputted into Everydollar, it is time to track your spending. Every time you go and buy something you will need to input the numbers into the app.

If you have a spouse it is essential to track the numbers they spend as well, you both are a team. You could give your spouse the password to you the Everydollar app so they can input the numbers themselves.

Or you can do what I did. Every night when my wife and I got home, she gave me a list of what she spent, and I entered it into the budgeting app.

Step 6: Monitor

Now that you are tracking your expenses you’ll need to stick to your plan by ensuring you are not going over in any particular budgeted item. If you set a budget of $50.00 going out to eat, then you need to stick to it this month. Then next month you’ll know to adjust your out to eat plan.

In the beginning, it is an excellent practice to go over the budget each week with your spouse. This allows you both to see where you stand concerning each budgeted item and this will help ensure you stick with the plan. As you progress and grasp the budgeting process, a weekly meeting can turn into a two week or monthly meeting.

Step 7: Adjust

You are a pro at this point you’ve been tracking and monitoring your budget, and now it is time to make some adjustments. The first month of the budget will be the hardest. You will need to make some significant adjustments from your original budget, this is normal and ok.

It took my wife and me three months of budgeting before we had a substantial budget that fit our lives. Once you have the right budget to fit your life, it is easier to stick to it.

Step 7: Come up with additional funds to pay down debt

There are two ways to come up with more money to pay down debt. The options to come up with more money are; making more money or cut cost in your monthly budget. Because your goal is to pay off all your debt in a year, you will need to use both strategies.

The approach my wife and I took was to lean heavily on the cost-cutting plan. We did do random money-making activities, but the best method for longterm extra cash is to save money in your budget.

Read: Here is the story of how my wife and I paid off all our debt including our mortgage.

Make more money

There are surprisingly several ways for you to make more money to pay off your loans within a year. Because you have 52 weeks before your deadline on becoming debt-free you should choose at least two extra money-making activities.

Here is a list of ways to make more money:

• Sell stuff you no longer need or use around your home
• Drive for Uber or Lyft (My brother in law averages $18.00 per hour with Uber)
• Ask for a raise (Check out my article on how to ask for a raise)
• Rent out rooms in your house with Airbnb
• Start a side hustle and be sure to choose the one you can make money fast
  • Dog walking or Dog running (how to start a dog running business)
  • Pet sitting
  • Babysitting
  • Mowing lawns

Choosing two or more money-making activities will help ensure you have your debt paid off in the next twelve months. Remember if you start a side business outside an app with a steady supply of customer make sure the startup costs are minimal and the pay is at least $15.00 per hour.

The reason I focus on mowing lawns, animals, and kids is that customers are easy to find and the start-up costs are minimal. The point of starting the business is to earn money fast. Save the big business ambition for when you’re debt-free.

Cut costs in your budget

The next thing you’ll need to do to eliminate your debt quickly is cut costs on everything you already spend money on. My wife and I used these techniques when we paid off our mortgage in 19 months.

Read: Here is the full story on how we paid off our mortgage.

Here is your guide to cutting costs:

1) Save on heating and cooling

One of the most significant bills in my household budget is our electricity. While we were paying down debt, I made sure the thermostat was lowered to the lowest point we could comfortably live.

Reducing your thermostat by seven to ten degrees for eight hours a day, you can potentially save 10% per year on your heating and cooling bill according to the U.S. Department of Energy.

When I personally lowered my thermostat, I did see some savings averaging $15.00 per month. However, I’m one of those people who love walking around the house in shorts during the winter, so this approach did not last long. Be sure to do what is comfortable for you, but realize every penny you save will get you closer to your goal of debt freedom in one year.

2) Cut your cell phone bill

If you are no longer under contract, now is the time to shop around to see if you can save money on your plan. You could also try to negotiate with your carrier directly to see if they will lower your bill before you make the switch. Read “How to cut your cell phone bill in half” to save money on your phone bill.

Here are some great cell phone providers with cost-saving plans to choose from.

Check out these carriers:

• Republic Wireless – Plans starting at $15.00 per month
• Ting – Plans starting at $15.00 per month
• Google Fi – Plans starting at $20.00 per month

3) Pack a lunch

My wife and I packed a lunch every day for work as we paid off our debt. This saved us thousands over a year. It is time to get cheap. You need to become debt-free, and this approach will save you money every working day.

Below is a chart showing you the annual cost of going out to eat rather than using last night’s leftovers:

• First column is the cost of the meal when you go out to eat.
• Second column is the cost of going out to eat once per week.
• Third column is eating at a restaurant twice per week.
• Fourth column is eating out three times per week.
• Fifth column shows you how much it costs to go to eat five days per week.

While you may think you don’t go out to eat very often it is critical you do not go out to eat even once during this next year as you strive for your goal. Eventually, I became known as the guy who didn’t go out to eat in the office. It started to make me feel like I had a superpower. People would tell my story of not spending money to other people I never met. I thought it was pretty funny.

I remember the day I had all my debt paid off and I decided to go out to eat…it blew my coworkers minds!

4) Get rid of internet

If you have an unlimited data plan on your phone getting rid of your internet is an option. If you can end your internet contract without fees or penalties exceeding what you will have to pay over the next twelve months, this would be a great option to save some money.

See if your phone allows for hotspot capability. My wife and I use this option with our iPhones from Sprint. This will allow you to drop the home internet and instead connect your laptop to your phone.

5) No more cable

If you are currently paying for cable, it is time to cut the cord. There are many ways you can watch your favorite shows or shows similar to the ones you like for half the cost. I personally use Netflix for our entertainment option, and the next best thing is YouTube.

Netflix’s basic plan is $8.99 compared to the average cable bill of $85.00 per month according to USA Today. This alone would save you $912.12 a year less any fees for breaking your contract.

If you do not want to get rid of your cable because it is a bundled internet package as well. Then you must call your cable provider to tell them you are thinking about leaving to save money. Cable companies will negotiate with you more often than not. And it is worth a phone call to attempt to get your cable bill reduced.

6) Get rid of subscriptions

Do you love apps on your phone? Chances are you have $0.99 subscriptions hitting your bank account every month without notice. Go into your app store to end the subscriptions that are costing you money every month.

7) Meal plan

Meal planning every week can feel daunting, but it is totally worth it. My wife and I list out every meal we plan to eat for the week. When we plan ahead, we know precisely how much of what item to buy at the store. This will save you money because you’ll no longer buy random stuff at the store.

We use the free app called Mealime. This app has recipes available as well as grocery lists. All you have to do is choose the meal you want to make, click on it, then the items you need will be put on a generated grocery list. It is super simple.

You will need to meal plan over the next year because to get out of debt you can not go to a restaurant.

8) Drive less

It is hard to realize how much we are spending on gas each month until you dramatically reduce your drive times. My wife and I both stopped working full time when our daughter was born, we could do that because we were 100% debt-free, we saw a massive drop in our monthly fuel costs.

While working full time we averaged $250 per month in gas between both of our cars. When we went down to part-time our fuel budget dropped in half.

While you will still be working there are ways to be more efficient when making trips. Try to group trips together. If you know you have an appointment on Tuesday across town, try to fit another errand into that drive. Instead of going grocery shopping on Monday switch your shopping day to Tuesday when you will already be out of the house.

If you can cut your mileage down by even 10 fewer miles per week, you can save substantial money.

The chart below shows you how much money you can save over the year if you reduce your miles driven each week by 5, 10, 15, and 20. This assumes your car gets 28 miles per gallon and gas is $2.75 per gallon.

The average American drives 13, 476. If you were able to eliminate your drive time all together and just bike to and from everywhere you could save $1,323.53 per year using the above example.

While the savings you earn from driving less may be small, every penny adds up.

9) Cut your rent or mortgage bill

The next thing you will need to do to save some serious money is to move in with friends or family. This move alone could save you over $10,000 a year. Try to make an arrangement where you can live there for free in exchange for cleaning, mowing, shopping, or all other services you can provide value without having to pay cash to live there.

Check out this article covering 51 Truly Creative Ways to Save Money.

Step 8: Monthly and milestone check-ins

Place your pay off design in a prominent place in your home. We placed our plan on our fridge. Then every month I would cross off half of the row and my wife would mark off the other half as we paid down debt.

This monthly check-in on the fridge kept us accountable until all our debt was paid off.

Step 9: Be proud of yourself for becoming debt-free

Now that you have finally achieved debt freedom you need to be proud of yourself and share your story with others. Nearly 8 out of 10 Americans are in debt, you are now or will soon become one of the few.

It is a weird feeling the month after you become debt-free. Money in your bank account is truly yours, you owe no one. Now is the time to think about your future and what you want to do with this amazing blessing.

Emily and I used our surplus to take a year off work. I left my full-time bank job earning $62,500 for a commission only real estate agent position, I’m weird and always wanted to try out a real estate career. However, my income wasn’t eliminated. I received a part-time income from serving in the Army National Guard. My wife Emily worked but one day a week as a nurse practitioner.

We went on a two-week vacation to Arizona in the spring of that year. Then in the fall, we went on a two-week vacation to South Carolina. The flexibility of being debt-free is worth the struggle of getting there.

Final thoughts…

Becoming debt-free is hard, but the freedom it brings you is worth the sacrifice. Maybe doing it in a year for some people is not worth the sacrifice and that is ok. But if you would like to release the shackles of debt as fast as humanly possible, this is the only way to do it.

Follow these simple steps, and you can achieve debt freedom in a year. And worst-case scenario it takes you seven years as it did for Emily and me. The time on this planet will pass regardless the sooner you start your journey to debt freedom the sooner you will achieve your dream.