Debts suck, and we all want to get out of them.  If they’re collecting interest (riba), then it’s even worse. In the Qur’aan, Allah tells us to take a declaration of war from Him, and the Prophet sallallaahu alayhi wa sallam has informed us that Riba is broken into 72 degrees or divisions of how bad it is, and the lowest (or least) degree is as evil as openly having sex with your mother in front of the ka’ba for all to see.

Nasty.

Next time you feel justified about taking out a riba debt, just ask yourself, would I really shag mom in front of the ka’ba with everyone watching to get this house, or to get a medical degree (or any other degree)? Is it really that much of a necessity to get into these types of business transactions?

Probably not.

My family does not live on interest credit / debt whatsoever – everything is cash only.  We’ve paid off most of our debts, and what remain are a few that are non-interest bearing (and actually more like anticipated expenses throughout this year and next), alhamdulillaah. If I stay on plan, I’ll be debt free by the April or May of next year, insha’Allah.

Anyway, what follows is a simple yet effective system for eliminating debts. I can think of at least two popular (as in best-seller) financial books and one infomercial-type product which sells this system for loads of money while loading their products with filler material and fluff you don’t really need.  I’m subtracting the fluff, putting some religion back into it, and giving you the system in one page (I know, I rock).

Pre-Requisites

1. Ask Allah to Forgive You: If you made the mistake of getting into riba (interest) debts, for whatever reason, repent and do your best to get out of it. I didn’t know better myself, and even when I found the ruling out on interest, I justified it to myself, which was wrong (college education). Stop immediately and reverse course on this.  Ask to be forgiven and formulate a new plan of action to deal with this situation.  Take your time with college and life in general – don’t let society force its ridiculous standards on you.

2. Ask Allah to Help You: We underestimate this, but remember that if you try to come closer to Allah, Allah will come closer to you faster, as was mentioned in a hadeeth qudsi. I’ll explain later how this very principle caused my wife and I to pay off all our college debts ($35,000 from me, about $8000 from her) and other lingering debts in 2 months, alhamdulillaah.

3. Financial Discipline: If you don’t have control over yourself, this system will never work. If you can’t control compulsive shopping or spending, no system will work for you. Period. If you have control issues, see a therapist, psychologist / psychiatrist, or a personal coach to help out.

The System

This system is for someone who can discipline and focus themselves on the goal of wiping out debts. That means, no luxuries for the coming months (and possibly years) ahead.  You might indulge a bit here and there, but don’t get too crazy – depending on how much you indulge, the paying off of your debts will be delayed.

Step 1:  Make Du’aa and Tie Your Camel

My wife and I had been making du’aa for a long time for our debts to be wiped out, particularly the college loans that we had because they were accruing loads of interest.  We were only able to afford the minimum payment, and it looked like it was simply something to be sucked out of my paycheck along with my taxes.

We made du’aa, we didn’t incur any other debts (poisons), and we tried to find other sources of revenue with the intent of paying off our debts to please Allah (tie the camel).  Although our efforts came up short, Allah subhaana wa ta’aala still blessed us with the means to pay off our interest debts (about $45,000).

My father-in-law recently passed away, and had taken out a life insurance policy when my wife was much younger.  No one knew about it or remembered, so when we found out, we were shocked, and we were again reminded that Allah subhaana wa ta’aala knows everything, and her father’s time of birth and time of death were set, and He knew we would be in financial need at the same time, and set up the circumstances such that when we needed the benefit, her father’s passing would provide us the means, and it’s from Allah’s Mercy that we were blessed.

It’s a good reminder that Allah can provide you from means you would not have imagined – never, ever underestimate the power of du’aa AND making the effort to achieve what you’re trying to achieve.  Do your best, and leave the rest to Allah.

Step 2:  Enumerate Your Monthly Expenses

Do you know how much money you spend on a monthly basis?  If not, you should.  When you run a family, or even just your own personal finances, you have to think of yourself as a business – are you a profitable business, or are you ready to go out of business?  A simple way to tell is your financial worth – if you were to sell anything and everything of value right now, and then subtract out all your debts, how much would you have?

Notice I’m not asking you how much money you make – that’s the way regular folks who stay in debt think of themselves.  My status is based on how much I make a year, no matter how much debt I have.  Notice that Bill Gates or Warren Buffett are not ranked on how much money they make yearly, but their bottomline financial worth.

Anyway, enough of that tangent, back to the monthly expenses.  Start enumerating everything that you MUST pay or MUST have on a monthly basis, debt free or not:

1. Rent / mortgage
2. Utilities (electric, water, gas, trash)
3. Insurance (health, auto, etc)
4. Connection services (tv, internet, phone [cell, landline])
5. Memberships / subscriptions (health clubs, magazines, etc)
6. Groceries / Eating Out
7. Auto Maintenance
8. Home Maintenance

This is just a small sampling, but you get the drift.  If you use online banking, you can connect your bank account (and all other accounts, like credit cards) to mint.com, and if you take the time, it’ll transfer all that info to mint, and you can categorize each expense and get a breakdown of your monthly expenses.  If online tools are not your thing, you can just do this on an excel spreadsheet, doesn’t have to be anything fancy (it might take a while, though).

Step 3:  List Out All Your Debts

This is the fun part because you get to inwardly cringe at all the debts you owe (at least I always did when looking at them).  You may have some debts with no clear deadline or an expected monthly payment behind them (I had a few of those).  If you have those, ignore them for now, come back to them later.

Anyway, list out all the debt (money you owe) that you have:

1. Mortgage
2. Car payments
3. Student loans
4. Credit Cards

In this one, we don’t just want totals – we want every single account.

Step 6:  Cut costs and Re-Direct Your Money

Go back to your budget now, and start cutting the fat out of it.  Using mint.com (I’m not getting paid for promoting them, don’t worry), I can break down my eating according to eating out vs groceries.  I can save lots of money by simply drinking 1 coffee daily instead of 2 ($30 / month, $360 / year).  Look into your subscriptions, your discretionary spending, and make cuts everywhere, and add up how much those cuts amount to on a monthly basis.  The more fat you can cut out and add to this amount, the better.  This money is our Debt Decimator (henceforth referred to as DD).

Step 5:  Pay Off the Debts

Alright, this is really where the fun part starts because you get to pay off your debts intelligently and the debt companies get to inwardly cringe from all the interest they’re losing.

Let’s imagine you have 5 debts:

1. Debt #1:  $1000, paying $30 / month
2. Debt #2:  $45,000, paying $300 / month
3. Debt #3:  $4000, paying $60 / month
4. Debt #4:  $3500, paying $40 / month
5. Debt #5:  $7000, paying $75 / month

That’s about $60,000 in debt.  I’m not accounting for interest rates here because I want to keep this simple (for me to write and for you to read).

Let’s also assume for the sake of example your DD is $200 / month.  Take your DD and add that on a monthly basis to the debt with the lowest amount owed (in this case, it’s Debt #1).  Keep paying the minimum amount on all the other debts.

So now, your debts will look like this:

1. Debt #1:  $1000, paying $230 / month
2. Debt #2:  $45,000, paying $300 / month
3. Debt #3:  $4000, paying $60 / month
4. Debt #4:  $3500, paying $40 / month
5. Debt #5:  $7000, paying $75 / month

Notice that Debt #1 is going to be wiped out in about 4 – 5 months instead of many years down the road.  Once Debt #1 is wiped out, let’s turn our attention to the next smallest debt, Debt #4.  Pay attention to this move because this is key – we’re going to take the DD + the minimum from the last debt and add it to the minimum payment of the next debt.  The formula would be:

DD + last debts minimum + current debt’s minimum = $200 + $30 + $40 = $270.

So the set up now looks like:

1. Debt #2:  $45,000, paying $300 / month
2. Debt #3:  $4000, paying $60 / month
3. Debt #4:  $3500, paying $270 / month
4. Debt #5:  $7000, paying $75 / month

This debt will now be paid off in about a year and a half.  Repeat the formula for Debt #3 and we get:

1. Debt #2:  $45,000, paying $250 / month
2. Debt #3:  $4000, paying $330 / month
3. Debt #5:  $7000, paying $75 / month

That’s another 10 months approximately.  Repeat again for Debt #5, and now it’s:

1. Debt #2:  $45,000, paying $250 / month
2. Debt #5:  $7000, paying $405 / month

That’s another 17 – 18 months.  Finally, let’s kill the biggest debt of all:

1. Debt #2:  $45,000, paying $655 / month

That’s about 68 – 69 months, a bit less than 6 years.

The total time you would have spent to pay off all your debts would have been 10 years, assuming your DD is always $200.  Normally, your debts are set up with a load of interest that are meant to take about 25 – 30 years.  Notice that with this system, 4 out of 5 debts are wiped out in 4 years time, and the big one is knocked out in 6 years.

The big factor here is the DD – the bigger it is, the faster your debt gets destroyed.  I placed a modest $200, but honestly, most people living on their own can go a couple of hundred higher and make this happen much faster, and people who are living with their families can create a massive DD of about $900 – $1000 or more and can out can knock debts out very quickly.  Given the state of the economy, although I don’t normally recommend it, if you can live with your folks and work a full-time professional job, then stay with them til all debts are gone.

Final Recommendation

Should you get into investments when you’re in debt?  Generally speaking (not even thinking about the economy) it’s not a good idea to have an investment that has an 8 – 9% ROI while you’re getting banged by someone else with much higher interest rates.  It’s better to focus all money on knocking out the debts first, then going back and investing.  In the longterm, you will be able to invest more money and will have lost less money to interest.