Backpacking through Patagonia, working out of a Bali Coworking office for the Sprin

g, quitting your job and starting a blog… we all have large aspirations but all of it takes smart planning.  Let’s talk about the first step of the Sabbatical Essentials … getting out of debt.

According to Business Insider, you may feel like you’re alone in debt but that couldn’t be further from the truth.  Check out these stats they uncovered:

“The total amount of consumer debt in the US is nearly $2.4 trillion.”

“33% of debt is from credit cards, $6,500 per person in the US.”

“One in twenty are sixty or more days late on payment.”

– Business Insider, 9 Alarming U.S. Consumer Debt Statistics

These stats are a pretty sobering depiction of the state of consumer spending right now.  Fortunately, there are strategies to get out of it and take your first steps towards your goals.

DISCLAIMER:  First I would not recommend anyone to quit their 9to5 if you’re in any sort of debt with the exception of a mortgage (we’ll speak about how to leverage this in a later post).  I can not stress this enough… there is NO such thing as good debt.  No, not even student loans (it’s actually the debt you should pay off first since it can’t be written off by bankruptcy, but that’s for another post).  Full disclosure, I started my plan to become debt free well before planning on being a digital nomad.  From the start of my plan to becoming debt free took four years, but with focus it could have been done sooner. Here’s a step-by-step guide on how I did it…

Know Where You Stand With Your Debt

One in twenty are at least sixty days late on payment, and this is mostly due to not knowing where their debt is.  Many people carry 10 or more credit cards and it can be overwhelming.  Whether you do paper statements or track online, gather all of your last statements.

• Add up all of your balances and minimum monthly payments.
• Also, look for your pay off date.  This is calculated assuming minimum monthly payments.  The latest date is your current pace to becoming debt free and more than likely to be 10+ years.
• I recommend consolidating in Excel or a Google Sheet.  There are plenty of templates for private use you can find HERE.

TIP 1:  If you do find that any of your accounts are past due, pay them off immediately.  If you don’t have the means to do so, avoid paying off with other means of credit.  Instead, call your bank and ask for leniency to allow you the time to pay it off.  More often than not, they’ll work out a plan as it’s not in their best interest for you to default.

 

TIP 2:  If you do have multiple credit card balances, consider consolidating into one credit card with a good introductory interest rate and low fees.  You can often find deals with 0%-3% APR for the first year lessening the burden on monthly payments during your payoff period.  As of 2016, the CHASE SLATE offers great intro transfer fees and low APR for the first 15 months.

Start Tracking Your Debt Spending and Payments

Next, find a system to be able to track your balances over time.  For me I love MINT, and best part it’s FREE!  Follow the prompts to connect to all of your accounts.

TIP: As a bonus, it also displays your Credit Score which could be crucial if you plan on getting into entrepreneurship

After connecting all of your accounts, using the labeling functionality under the Transactions page, label all of your expenses according to the three categories below under the “Category” cells.  This will help identify where you can start cutting spending. (TIP: You can even take it a step further and edit the description in case MINT algorithm isn’t to your liking.  For the sake of time, I skipped the step myself)

Where to edit your Categories in MINT

• Fixed expenses – rent, mortgage, cell phone, car… anything recurring usually monthly
• Variable expenses – dining, entertainment, groceries… things you usually pay for with a Swipe or an App
• Debt expenses – Credit Card and Loan Payments.  This includes interest and fees you pay to your bank

How far back you got to re-categorize is up to you.  I’d recommend one month to get an immediate handle on your spending.  The good thing is MINT optimizes its labeling based on your inputs over time.  Check every couple of days to make sure each payment is properly labeled.

Once your transactions are labeled, you can filter by each expense category and even export to excel if you want a more robust filtering tool.

Create a Debt Payment Plan that works for You

Now that you know where you stand, let’s figure out how to pay it off.  First, pick a TAKEOFF date, the date you want to start your Career Break or Sabbatical.  My method is 50% of time focused on debt repayment, 50% of time on building savings.  For example, if you plan on leaving in two years, that means you want to achieve ZERO debt in one year.

Now that you have a ZERO date, calculator apps become your best friend.  I prefer BANKRATE’s, they’re free and simple.

Debt Calculator from Bankrate

• Enter in all of your credit card payment info, including your current monthly payments, to see when you’re on pace to pay off your debt.
• Continuing on with our scenario, $400 payments would take 31 months.  If you’re doing the minimum of $161 it will take 10 years!  Neither of these scenarios will work into your plan.
• Under “Desired months until debt free”, enter 12 and clear the entry from “Payment Amount Per Month”.  You’ll see that in order to reach your goal, you’ll need to pay $902 a month to achieve it.
• Whatever this number is for you, deduct your current monthly payments from it to get the SPREAD you need to account for to reach ZERO.  In this scenario, $902-$400= $502 is now your SPREAD.

TIP 1:  Organize your debt from smallest to largest and plan on paying off the smallest first and so on.  Closing one of your accounts will give you the personal boost needed to stay on goal.  Also, you can do this by largest to smallest interest rate.

TIP 2:  Consider using some savings to pay down your debt.  Always make sure to have a three month expense safety net in case you need it.  I would never recommend long term travel unless you have three months of expenses saved for when you’re back (assuming you have no income streams). Fastest way to get into more debt is to have no savings in a time of need.

Make Lifestyle Changes to Pay Off Your Debt

Okay, so now you have your TAKEOFF date, your ZERO date and your SPREAD.  So now you need to start trimming the fat to cover your SPREAD of $402. I would start by referencing back to MINT and looking at your Variable expenses.

Ideas on cutting back on variable expense:

• Stop eating out!  Instead, learn how to cook healthy and cheap by watching YouTube videos.  Bonus, you might even impressive that special someone you’ve had your eye on 😉
• Look at your Gym membership.  Are you using it?  If not, get rid of it immediately.  And if you are but the premium is high, consider asking for a discount or downgrading to a cheaper gym.  Also, lot’s of DIY options to stay in shape.  And if you’re paying $30 per Soul Cycle class five times week, cut back!  There’s cheaper ways to get a good cardio workout.

If that doesn’t get you to your SPREAD number, consider cutting back on fixed expenses:

• Get rid of your $300 car payment and $100 for insurance by using public transportation and biking.
• Downsize that 1br 1bath and move into a roommate situation.

And finally, tips for additional income to meet the SPREAD:

• Keep the car and moonlight as an Uber Driver
• Use sites like Ebay, Craigslist and Decluttr to sell your unwanted things.
  

Start tracking all of these expense savings in your Excel or Google Sheet you created in the first step.  Once you reach your SPREAD, start making those payments!  And if you need further motivation, the guys over at The Minimalists have a ton of blog posts and podcasts to motivate you.  Trust me, these guys will change your life.

TIP:  If you have issues making your SPREAD payment each month, try making payments with cash and debit cards instead of credit cards.  Mentally, it helps me keep spending low if it’s automatically deducted from my wallet.

Transition your Debt Payments to Savings

You’ve done it, your 12 months are over and you’re at ZERO!  But remember that’s only half the goal.  Leverage your new lifestyle changes to transition those payments into savings.  Using this example, you’ll accrue over $10k in savings in 12 months.  Plenty of capital to travel or smartly invest.  But that’s for a future Sabbatical Essentials post!  As always, let me know how you’re doing in the comment section below.  And how I can further help you get out of debt.  And just remember, this might seem like a daunting task but I’ve done it!  Let this picture of drinking under a Santorini Sunset motivate you…