Debt Free: 3 Steps to Actually Get Rid of It

To become wealthy you should be Debt Free right? Wrong. You should not be entirely debt free the trick is to be able to manage your dent and have more Good Debt then and Bad Debt. To determine if your debt is good or bad depends on the reason for the debt. This is blog give a guide on how am getting rid of bad debt.

Good debt is loans taken for investment that will give you more return than the cost of the debt. That is the cost of the interest should be less than the interest in the investment you are taking the loan for. For example, your investment interest rate should be more than 14% bank loan interest rate. That’s why it is not a good idea to take a loan to put money in a money market fund. 

Bad Debt is loans taken for liabilities. That means you are taking a loan to get something that will not earn you any money. For example, to buy a house to live in or a car. These are liabilities are for status and comfort not to make money. See the difference in liabilities and assets according to Robert Kiyosaki Rich Dad Poor Dad

Steps in Becoming Debt Free

Step 1. Understand your debt.

You need to list down your debt and indicate the below.  

Debt Free
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Live a frugal life- free up money.The more money you have to top-up on your monthly loan payment the better. It’s advisable to make lump-sum payments at the beginning of a reducing balance loan. This will ensure you finish paying off the loan faster and reduces the interest you have to pay.

Living a frugal life doesn’t mean living a boring life. We believe in quality life here at Life IQ. For example, below are the ways I have reduced my expenses.

Whenever I can, I try to reduce the amount of paid data I have to buy on my phone. I take advantage of free WIFI wherever I go. I also configured my phone to always use WIFI and notify me when there are changes to date usage.  

  • Whenever I can, I try to reduce the amount of paid data I have to buy on my phone. I take advantage of free WIFI wherever I go. I also configured my phone to always use WIFI and notify me when there are changes to date usage.
  • Call people on WhatsApp when am at home or the office to reduce my phone bill.
  • Have one TV streaming app at a time. I interchange Netflix and showmax subscriptions
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    every month, I have Netflix this month and showmax next month, after all, I’ll have already watched all the interesting shows in one month. Sometimes they even have three-month offers which I take advantage of. Some people even share the account with a friend.
  • Reduce my eating-out budget. Instead of buying KFC every week at kes 5,000 amounting to 20,000. I changed this to having quality family dinner at a good restaurant per month at kes 10,000. The food is healthier, we try new cuisines every month, we have quality time with family and save money
Step 2. Earn More Money.

You need to earn more money so that you have more money to pay off your loan. And have more money to invest and grow.

You can do the following to increase your current income.

  • Pay increase: Income from your job/ career. To increase this you can work at getting a pay raise from your employer. This is sometimes challenging because most organizations are not looking to increase their wage bill. However, if you give your boss a win-win reason you will be able to get the pay raise. Your reason should be measurable like increased sales, reducing operational costs through efficiency.
  • Start a side hustle: Get another stream of income. Hire out your car, import cars for sale, sell products on social media,
  • Start a business; being an entrepreneur is not for everybody but it is one of the ways you can grow your income by 20% and more. If you have a business idea, start it now. The best time to start was yesterday, the second-best time is right now.
Step 3. What Debt to Pay-off First?

When you have extra money to pay off your debt, which debt do you pay off first? There are 3 methods to pay off debt.

  1. Merge your debts You can merge or consolidate your debts by buying off one debt with the other. For Example, from the above diagram, You can have EFG Sacco buy off the ABC Bank loan. This is by extending your Sacco loan with the balance left over from the bank loan. That means the new balance of the loan to be paid off at EFG Sacco will be 1.9m but the average interest will be 9% so, in the long run, it will reduce your interest, you have one less loan and it makes the Sacco loan a good loan. However, this is tricky since it depends if Sacco can buy off the bank loan.
  1. Avalanche –Debt stacking method: With this method, you will make minimum payments to all the accounts and pay all the extra money to the account with the highest interest rate. Once it’s paid off then you tackle the next highest interest debt with the extra money as well as the money you were paying for the loan you have finished paying. In our example above we would start with the bank loan. This method may take longer but it makes sure you pay off the most expensive loan, therefore paying less in interest.
  2. Snowball method: You will make minimum payments to all the accounts and pay all the extra money to the account with the lowest balance. Here again, you will be able to tackle the next debt with the extra money released from paying off the loan you just paid off. In our example, it would be the Sacco loan. This method doesn’t reduce your interest but it gives you motivation because you can see progress faster at the beginning of the process.


How come wealthy people have all sorts of debt. Should we be trying to be debt free? Leveraging good debt is the trick. Don’t listen to people telling you to cut up your credit cards, all you need is to know how to use credit cards and not get into too much debt.

Debt is important to help you grow. You should be able to have the liquidity to make deals that will make you money and sometimes you just don’t have the money and the only why is to get a loan.  You need to take advantage of the credit you can get, have the money to invest and grow your business while ensuring that you are paying the lowest interest.

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