My Passive Income Journal

4 Budgets To Bust Free Of Debt

Convert Bad Debt Into Financial Independence

Question: How do we get from a position of bad consumer debt through to being financially independent? AKA how do I bust free of debt ?

Answer:  By stepping through a logical series of targeted budgets (spending plans if you prefer). This is how we bust free of debt.

Tackling bad consumer debt starts with accepting the situation with no judgement and looking to the future. Thinking about the future helps rewire our brains away from mulling and stressing about the present and the past.

The future means this: having a chunk of cash for emergencies, no bad consumer debt and a portfolio of holdings that pay us passive income regularly.

This can be achieved by following this simple set of four consecutive budgets step by step. Each of the four budgets tackle the most important part of your financial journey in logical order.

The following explains each budget in order and the transition point from one budget to the next. Enjoy!

The 4 Budgets

Each budget assumes that every dollar that comes our way will be apportioned as per the percentages listed.

Budget 1 – Creating an emergency fund

  • 30% to a separate emergency bank account
  • 60% to cover all living expenses
  • 10% to spend on whatever delights us

How much should you have in an emergency fund?  Enough to cover 3 months of unemployment at a minimum.

Once a suitable amount of money is sitting in the emergency fund bank account, move on to Budget 2.

Budget 2 – Conquering consumer debt – AKA Bust Free Of Debt!

  • 20% to extra debt repayments (tackle debt with the highest interest rate first)
  • 60% to cover all living expenses
  • 10% to keep adding to our emergency bank account
  • 10% to spend on whatever delights us

As each consumer debt is paid off, then roll that entire payment plus the 20% and apply it to the next debt. This is commonly known as the debt avalanche method.

Once consumer debt is cleared, move on to Budget 3.

My Passive Income Journal

Budget 3 – Buy income-producing assets

  • 20% invest in wise income-producing assets (income investing)
  • 60% to cover all living expenses
  • 10% saving towards large purchases
  • 10% to spend on whatever delights us

This budget continues till the income from our investments create a reliable passive income.

Once this is achieved, move on to Budget 4.

Budget 4 – Living a full life

  • 10% continue income investing to increase our income year on year
  • 60% to cover all living expenses
  • 10% spend/donate to society and community (meaningful causes)
  • 10% saving towards large purchases
  • 10% to spend on whatever delights us

Budget 4 is how old-money families live.

This final budget will ensure our income continues to grow year on year. This is important to combat inflation. Additionally this final budget continues to let us live very well and also allows us to consistently contribute to important community and social needs and causes. Contributing to important community and social needs gives extra meaning to life and a genuine sense of self-actualization. It also provides us with a higher order purpose outside of ourselves.

Making The 4 Budgets Work

The 4 budgets are very simple to understand but not always easy to smoothly implement in real life. Here are some observations to assist in shifting the paradigm.

Don’t be tempted to get rid of the “10% to spend on whatever delights us” part of the budgets. This is vital to remain happy and to avert a sense of lack or drudgery from scuttling the whole process. It seems counter intuitive, but from real life experience, it is vital for success.

The most challenging part of each budget, believe it or not, will be keeping all living expenses to 60% of income. Yes, this may initially mean getting a side gig to help the process. It will also mean that spending inside this part of the budget will need to be very mindful. Sometimes extremely mindful in the initial stages.

Finally, do not dismiss this exercise as impossible. Many, many people achieve this outcome or better, even on small incomes. This is where we must allow our minds to be inventive and seek solutions (this is what our minds do best actually). Incidentally, living on 60% of our incomes is fully supported by the simple living community world-wide who actively and practically share all their tips, tricks, support and encouragement with astounding generosity. Remember, the frugality part of the exercise will not last for ever – it’s a temporary means to an end.

Bust free of debt!


Hugh Walker