10-Step Strategy to Live Debt Free

Start The Envelope System

It's an oldie, but a goodie. If numbers on a spreadsheet don't inspire you to keep save, try divvying up your income at the beginning of the month into envelopes earmarked for housing, gas, utilities, groceries, savings and entertainment. When one envelope runs dry, you'll have to draw from another -- entertainment -- to stay within your budget.

Next: Live On Less

Live on Less

It's a bit of a no-brainer, but you can't expect to cut out debt if you spend more than you make. Calculate how much you bring in each month, and reduce your monthly expenses accordingly. Depending on your income, however, that may require some tough choices.

Next: Make More Money

Make More Money

Ultimately, the only real way to combat the rising cost of living is a bigger paycheck, says Loral Langemeier, author of "The Millionaire Maker's Guide to Creating a Cash Machine for Life."

Ideas? Take photographs, clean someone's house (or a local business at night), become a personal chef or pallbearer, do handyman work on the weekends. "It's not sexy -- these are service-based jobs that you can do in addition to your full-time job," says Langemeier, noting it only takes an extra $50 a day (Monday -- Friday) to earn another $1,000 per month.
Next: Don't Use Credit

Don't Use Credit

You should always keep a credit card for emergencies and to establish credit history, but don't carry a balance. Save for what you want before you buy and make sure you pay off your cards every month.

"Borrowing to pay for home furnishings, vacations and, even worse, day to day bills, can get you into huge trouble," says Randall.

Next: Pay Cash For Your Car

Pay Cash For Your Car

It's still possible for many consumers to pay cash for their car -- particularly those who live near urban centers. By using public transportation "and saving for three or four years" you can save enough money to buy a modestly priced car outright. "That way, instead of making payments, you're saving monthly for your next car," says Randall.

Next: Establish a Budget

Establish a Budget

You can't eliminate debt if your budget's got the best of you. You'll need to establish a realistic budget (allowing for some entertainment and flexibility) to avoid going back to plastic when the money gets tight. "The easiest way to get out of debt and stay out, which 90 percent of Americans don't do, is to establish a budget," says Randall.

Next: Pay Off Your Credit Cards

Pay Off Your Credit Cards

If you're making the minimum monthly payment on multiple credit cards, you'll never get out of hock. You'll reduce your total debt fastest by sending the most you can every month to the card with the highest interest rate and making minimum payments to the rest. Once the first card is paid off, move on to the one with the next highest rate until they're all paid off.

Next: Create A Rainy Day Fund

Create A Rainy Day Fund

Start setting money aside every month for an emergency fund that will sustain you if you lose your job, become ill or suffer a short-term financial hardship -- all of which can send your bank account into a tailspin and back into debt. Most planners recommend saving three to six months worth of living expenses in an interest bearing account. (If you're self-employed or your income is unsteady, you'll need nine months to a year.)

Next: Save For The Future

Save For The Future

The ultimate financial freedom is having enough put away to live a comfortable retirement, without running out of money or having to borrow from your kids. For every year you work, you should save at least 10 percent of your salary in tax-friendly retirement funds like a 401(k) or IRA.

Depending on your standard of living, the age at which you plan to retire, your life expectancy and how much you earn, you may need to sock away far more -- up to 100 percent (or more) of your pre-retirement income for every year you plan to spend in retirement.
Next: Manage Your Expectations

Manage Your Expectations

Living debt free is not so much a strategy as it is a mentality. Unless you've got a trust fund waiting in the wings, you'll likely have to give up fine dining and foreign sports cars to cut out debt for good. Once you get used to living without payments and saving money on interest, however, you won't miss those luxuries a bit. Well, maybe a little.

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