Using Passive Income to Get Out of Debt

Do you carry any debt? If you are like most people, then you probably have an account somewhere that you are working hard to pay off. Maybe it is that pesky credit card payment that doesn’t seem to go away or that overpriced car you should have never purchased. Regardless your situation, wouldn’t your life be easier if you could become debt free once and for all?

There are plenty of get out of debt strategies used today. One of the more popular and successful strategies is known as the debt snowball method which focuses on paying off your debt accounts smallest to highest. Other debt reduction strategies involve tackling your debt accounts with the highest interest rate first and working down the to those with the lowest interest rate. Regardless the option you choose, the most important thing to remember is that you are taking control of your finances and working your way out of debt.

cut credit card

Today, I would like to introduce an alternative debt reduction plan that is focused on building passive income. The theory here is to create alternative income streams (other than your job) that can be used to pay down your debt.

If you are interested in learning more about paying off your debt by using passive income, check out the 5 easy steps below to get started!

5 Steps to Get Out of Debt by Using Passive Income

1. Identify Your Debt

The first step is to take a snapshot of your current debt. Make a list of all the accounts that you currently carry a balance on. A few examples may include credit cards, personal loans, car payments, and even your mortgage.

Tip: You can take a snapshot of all your accounts easily with a free tool called Personal Capital.

If you have an existing personal budget then you probably already have this information collected. If you don’t, then get busy creating one! It is impossible to get out of debt if you don’t have a clear picture of your personal income and expenses.

2. Pick a Debt

Once you have your personal budget in hand it is time to pull up your sleeves and get to work! Take a good hard look at your budget and decide which debt you would like to pay off first. If you are just starting out building passive income I would suggest starting with one of your smaller accounts. Setting up a solid passive income stream will take some time, so focusing on a smaller account balance will help you avoid losing your patience.

As an example, my wife and I are paying off our car using passive income earnings in combination with our monthly payment. We made a choice to add money to each monthly payment to avoid paying a ton of interest. Instead, we are using passive income earnings to supplement our payments so we can clear this expense from the family budget.

3. Build a Passive Income Stream

After you have identified the debt you would like to pay off the next step is to start building passive income. You may decide to create several passive income streams to meet your goals. It really doesn’t matter how you decide to approach this just as long as you have a plan in place.

I have been able to build a $350+ monthly income stream just by writing content as a freelancer. While this strategy works well for me there may be other opportunities that work better for you. The key is to take action and find out the best passive income opportunity for you. A few popular passive income strategies include: writing online content, become an affiliate marketer promoting products online, or creating an eBook and having others market your work.

4. Make Extra Monthly Payments

Once your passive income streams have been established and are bringing in some money it is time to use it to pay down your debt. It is important to note that you should continue to make your monthly payments as you normally would (i.e., monthly car payment, etc.) during this step. Meanwhile, use your passive income earnings each month to pay extra on the account until it is completely paid off.

Every month I write a $700+ check for our vehicle. A portion of the check is for the monthly payment (~$250) and the other amount comes directly from our online earnings. As I continue to grow this passive income stream every month I continue to pay off more and more of our debt.

5. Repeat the Cycle

Fast forward a few months (or years) and pretend you are making the last payment on your debt. Starting the very next month you should have the allocated monthly funds from your budget as well as your passive income earnings free and clear! Instead of immediately blowing all these funds frivolously, how about using them to tackle some additional debt? There is no sense in throwing away your hard work, so why not repeat this debt reduction strategy?

My wife and I own a home that we pay a $1,000+ monthly mortgage on. Once our vehicle is paid off (in a few more months), we plan to take our $700+ car payment (passive income + monthly payment) and use it to pay off our mortgage! As time goes on, we are working to build more and more passive income streams while using the earnings to pay down our debt.

Passive Income Resources

If you are new to passive income or are looking for a place to start, here are a few helpful resources to get you going. There are plenty of helpful tips and ideas for building alternative sources of income.

Final Thoughts

No matter what, always remember that building passive income is not a get rich quick scheme. In order to create sustainable income streams long term, you need to put in some hard work and effort.

Photo by SqueakyMarmot.



Author

By , on Apr 27, 2013
John Schroeder John Schroeder is the founder of PassiveFamilyIncome.com. He enjoys writing about passive income, debt-free living, and financial independence. He also enjoys sharing his experiences in raising a family on a single income, while his wife stays home with their two children. Aside from writing about money, he is an avid runner and enjoys spending time outdoors with his kids.

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{4 Comments}

  1. This is all well and good, but I for one would like to hear more about how to make passive income online.

  2. This is an awesome article. I agree that passive income (if you have it) is great to pay down debt. A better system would be to use your salary towards debt and your passive income to tide you over for necessities. You would be able to seriously knock down debt fast doing that.

  3. Adam:

    Great article. I know most people that are saddled with debt forget about the option of making more money to speed up the pay off process. Creating a passive income is even better, because it has a residual effect and can earn you money even when you stop working.

  4. Great post. I’m working on building up our passive income and hope that it just keeps growing! :)

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