Debt seems to just be a way of life now.
Student loans, cars, home loans, credit card debt…
It’s just hard to make ends meet now.
Debt can suck a lot of your much needed extra cash that you could use to live, so if you’re wanting to pay it off you’re not alone. Paying it off helps you in so many ways. It will lower your monthly expenses, and give you more wiggle room, and let’s be real it feels oh so good to pay it off!
However, paying it off isn’t as easy as saying, “Bippity boppity boo!”, it’s hard to know where to start, and how to go about it.
That’s why I’ve outlined a specific method for you to follow.
Step 1: Make room in your spending plan
It’s important to make room for extra debt payments in your “budget” or spending plan. If you don’t make it a priority, you’ll never pay it off. You need to be putting a certain amount towards your debt every month aside from the minimum payments, and make it as high of a priority as breathing (that may be a little dramatic, but you get the point).
That’s why I recommend upside down budgeting. This is where you decide how much you want to put aside for debt (usually in the form of a percentage of your take home pay), then make room for everything else you need to pay for like rent, groceries, and utilities. It sounds backwards, and it is, but it works.
Step 2: Pick which debt to tackle first
After deciding how much to pay towards debt every month, you need to pick which debt to put that money toward. You want to pick one debt at a time because if divide it into multiple debts, it is just going to be much longer, and much more painful to pay them off.
As outlined in this beautiful post (which I highly suggest you read!), there are three ways to pick which debt to pay off first.
For all these methods you need to still make minimum payments on your all your other debts (don’t want to have the debt collectors coming after you), but the money from Step 1 will go towards the debt you pick. The three methods are the debt snowball, debt avalanche, and emotional debt.
Snowball:
I generally recommend this method in most cases because it gives the quickest results.
The debt snowball is paying off the smallest loans on your list first, then moving onto the bigger ones. The monthly payments of the debts you pay off are rolled onto the next debt. Include things like “I owe $50 to my coworker from lunch” because checking easy things like that off the list can help you get the ball going.
Pros: It’s great for making you feel good right away! You can cross debts off your list quickly, especially in the beginning.
Cons: It may not technically save you the most money on the interest.
Avalanche:
I recommend this method for people whose debts are really close to the same amount for each debt.
You find the loan with the highest interest rate, and pay that one first regardless of the balance. Once again, any monthly payments on loans you pay off are put towards the next highest interest debt on your list.
Pros: You save the most money in interest.
Cons: You may spend a lot more time paying off one debt and become frustrated because you’re not getting immediate results.
Emotional:
This method is great for relieving guilt quickly. I recommend it for people who have a particular debt that’s bothers them a lot, and they need to get that burden off their shoulders. I would only use it for one or two debts, then convert to one of the other methods.
You find the debt that is weighing on you the most, then pay that one off first. For example, if you feel really bad for going into so much debt for that engagement ring, you pay off that one first.
Pros: Gives you relief from guilt and lets you move on from past mistakes.
Cons: Not the most effective way in terms of numbers.
Step 3: Automate and have an end date
If you didn’t know already, I’m a HUGE fan of automation! Automation is great because it does all the heavy lifting when dealing with your personal finances. You’re going to want to put your debt on autopilot so the money put towards it is out of sight, out of mind. You’ll hardly even miss it!
Set up an automatic withdraw from your bank account directly to the debt every month. If you don’t know how to do that, I show you how step by step in this other post.
Next, you’ll want to have an end date figured out. This will help you when things get hard to realize that you don’t have to do this forever, it’s only a temporary situation!
A great tool I love to use is Unbury Me. It shows you how long it will take you to pay off your debts without you having to do any math! It also looks beautiful with awesome charts and a great interface (and if you were stumped on which method to use on the second step it can help you with that too).
Step 4: Throw extra money at it
At the end of the month when you are reviewing your spending plan, sometimes you are going to have extra money sitting around. If you seriously want this debt gone, throw all your extra money at it! This will quicken the process even more, and you will be debt free before you know it!
Step 5: Be patient with yourself
Look, sometimes it’s hard to pay off debt, I’ve been there right with you. You would much rather use that money to go out to eat, or go on a fun vacation. But guess what? You are setting yourself up to do that more in the future!
So even if you slip up, realize you are on the right path. You are doing it, and you have a plan, which puts you further than most people. Just keep going! The important thing if you fall off the horse is to get back on. Realize you’ve made the mistake, observe why it happened, see how you can improve, and move on! Don’t beat yourself up so much it debilitates you.
Debt is a beast, and I’m so proud of you for taking it on! You can do it! 😀
This is an important journey, and one that will feel amazing when you’ve reached the end! So hang in there!
If you have any questions, or if I missed a step, comment below! I’d love to hear your thoughts!
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