How to Live Debt-Free Using the 80/20 Principle

Feel trapped by debt and looking for a way out?

By finding a strategy and pinpointing the reasons behind your debt, you can start on the path to a debt-free future.

In 2016 I was deep in debt. I didn’t know how to get myself out of the situation I had created.  I started to research different strategies to become debt-free and landed on the 80/20 rule. This was a game-changing strategy that helped me break free from debt. It eventually lead me on a path to financial independence.

Below we will explore understanding the 80/20 principle, identifying the root causes of your debt. You will learn how to transform your relationship with money and create a brighter financial future. We’ll also look at how to implement the strategy to reach our debt-free goal quicker.

Understanding the 80/20 Principle

The principle suggests that 20% of your efforts will result in 80% of your outcomes.  

By focusing on the most impactful strategies and making effective financial decisions you can maximize your efforts. Soon you will begin to see significant progress toward becoming debt-free.

Identifying the Root Causes of Your Debt

To become debt-free, it’s crucial to identify the root causes of your financial situation. Take a close look at your spending habits, lifestyle choices, and emotional triggers that may have led to accumulating debt.

Many reasons we are in debt are out of our control. Unexpected medical expenses, job loss, or higher costs of living are just a few.  However, many are our own doing.  If you consistently rely on credit cards and spend beyond your means, it’s crucial to address the root of the problem. Otherwise, you may end up in the same situation. By understanding the underlying causes of your debt, you can begin to make meaningful changes and take proactive steps toward financial stability.

Implementing the 80/20 Strategy to Become Debt-Free

As we learned above, the principle suggests that 80% of your results come from 20% of your efforts. In the context of your finances, this means identifying the key areas where you can make the most impact in reducing your debt. Focus on the 20% of your expenses that are causing 80% of your debt, such as high-interest loans or unnecessary purchases.

When I began to drill down on my debt, I realized that I could not do it without a strategy. I used the 80/20 principle along with the Snowball method. I successfully paid off $25,000 in debt on a modest salary in just over a year.

While this method may not be best for everyone, I realized I work best with motivation. I had seven student loan debts that totaled over $25,000.  By following the Snowball method I started with the loan with the lowest balance. I then kept knocking them off one by one. As soon as I paid off the first one, I rolled that payment into the next smallest loan, etc., etc.…

Not only will seeing progress motivate you to continue, but you can also be motivated to find other ways to save money. Use those savings as extra payments so you can become debt-free quicker.

But we’re getting ahead of ourselves. First, you need to see how to write a budget with the 80/20 principle in mind.

➡️ Don’t want to do the math yourself? Grab the spreadsheet here. ⬅️

• Write out your net income – this is the money going into your bank account when you get paid. Include all other income like child support, alimony, or any other non-traditional side jobs.
• Write out your expenses including all fixed and variable expenses. Include items that would fall into a sinking fund. You’ll need to include everything like food, pet expenses, gas, etc.
• Subtract your total expenses from your total income and this is what you have left to apply the 80/20 principle to.  For simplicity’s sake let’s say you have $1000 left.
• 80% of $1000 ($800) will go towards your debt, while the remaining 20% ($200) will be put into savings. 
• When any unexpected or irregular income comes in, like tax refunds or gifts, apply the same principal – 80% towards debt, 20% to savings.

Tracking Your Progress to Become Debt-Free

Tracking your progress and staying motivated becomes easier when you have a clear plan in place to address the most impactful aspects of your debt.

Like I mentioned earlier I used the Snowball method to pay off my student loans.  I continued making minimum payments on all, but 80% of what was left in my budget went towards the loan with the smallest balance. 

While this worked for me, you may be better served by knocking out the debt with the largest interest rate.  This is called the Avalanche method and may be more beneficial if you have credit card debt with higher interest rates.

Another helpful tool for tracking your progress is to regularly review your financial statements and debt balances. Keep a close eye on how much you owe as well as any fees or charges that may be adding to your debt.

Make it simple – keep a monthly record of your total balance and hang it on your fridge. 

Download Debt Snowball Tracker Here

By staying informed about your financial situation, you can make more informed decisions about where to allocate your resources and how to prioritize your payments.  I used to avoid the mailbox like the plague and kept my phone on silent, so I didn’t hear the debt collectors calling.  Only when I started facing my situation head-on did I really start making progress toward my goal.

In addition to tracking your progress, it’s important to find ways to stay motivated throughout your debt repayment journey. Celebrate small victories along the way, whether it’s paying off a credit card or sticking to your budget for a full month.

Surround yourself with positive influences and a support system that encourages and uplifts you during challenging times. Remember, staying motivated is key to staying committed to your financial goals and achieving long-term success in managing your debt and becoming debt-free.