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If you’re anything like most Americans, you have student loans, credit card debt, a financed car, and a mortgage. This adds up to massive debt that keeps you from living your life the way you really want. It’s hard to pursue your dreams when your money is gone before you’ve even earned it.
No matter how much debt you have, hundreds of dollars or hundreds of thousands of dollars, make it a priority to get out as soon as possible. Have you heard the Proverb “The Borrower is Slave to the Lender?”
Break the shackles of debt and be a slave no longer.
You can do it, but it takes time and discipline. I know from experience. We’re currently in the process of paying off $70,000 in debt.
You might falter from time to time, but if you keep on track long-term, you will get there. You will be debt free. In this post, I’ll show you how.
In this post, I will assume you’ve already created a budget and saved a basic emergency fund of $1,000 – $2,000.
Step 1: Add Up All Your Debts
Getting started is the hardest part. It might feel overwhelming to really face the mess you’re in, but you must get a baseline before you can start making progress.
Use a simple pen and paper or a spreadsheet on your computer. Log in to every single credit card account and write down the total balance, interest rate (necessary for the debt avalanche method of repayment), and minimum payment due.
Do the same thing for student loans, consumer loans, car payments, and any other debts you have. Then add up the total amount due and total minimum payments.
Your list might look something like this:
|Debt||Balance Due||Interest Rate||Minimum Payment|
|Mastercard||$ 5,465.90||25.99%||$ 129.00|
|Visa Card||$ 1,154.37||19.99%||$ 32.00|
|Discover Card||$ 2,506.20||4.99%||$ 52.00|
|Student Loan #1||$ 5,023.61||6.80%||$ 65.69|
|Student Loan #2||$4,352.52||4.29%||$ 45.48|
Our example family is over $36,000 in debt and paying over $700/month in debt payments. Just imagine what they could do with an extra $700 per month once they’re debt-free.
Making your own “list of debt” will be a sobering experience, especially if you’ve never looked at what you truly owe. Let it sink in. This is the reality of your finances, but it doesn’t have to stay this way.
Step 2: Choose a Payback Method
There are two ways to handle paying off your debt. You can use the debt snowball method or the debt avalanche method:
- Debt snowball: List all your debts from smallest to largest, and start paying off the smallest one first.
- Debt avalanche: List all your debts from the highest interest rate to the lowest, and start paying off the highest one first.
There are benefits and drawbacks to both methods. The debt snowball gives you a feeling of accomplishment earlier as you make progress sooner, while the debt avalanche saves you money in interest over time.
Choose one and stick to it.
Step 3: Set Goals
Setting goals helps you see the light at the end of the tunnel. Set both short-term and long-term repayment goals.
A short-term goal might be to pay off a single debt by a certain month.
Your long-term goal will be your debt-free date.
You can also set intermediate goals, especially if you have a large amount of debt. An intermediate goal might be to pay off $25,000 in debt or to reach the half-way mark.
Write down your goals and look at them often. Here’s an example of how that might look:
- I will pay off the Visa Card by January 2018.
- I will pay off the Discover card by April 2018.
- I will pay off all Student Loans by January 2019.
- I will be half-way to debt-free by June 2019.
- I will be completely debt-free by August 2020.
As you complete your short-term goals, cross them off the list. If you hit setbacks, re-write your goals and keep moving forward.
If you aren’t sure how to determine your goals, use a debt repayment calculator based on the repayment method you chose. There are great free calculators out there for both methods.
Step 4: Pay Off Debt
Once you have your list of debts organized based on the payback method you chose, it’s time to start making extra payments. When you created a budget, you decided how much extra money you have each month to put towards debt.
Now it’s time to put that money to work.
Our example family decided to use the debt snowball method to pay off their debts, so they’ll tackle the smallest debt first – the Visa Card with a balance of $1,154.37.
They’ll put all the money they’ve budgeted for debt towards this balance until it’s completely paid. If they have $1,000 in their debt budget, it will take a little over 1 month to pay off the balance.
Next, they’ll focus on the Discover Card until that balance is paid, and so on until all the debts are paid off and they’re debt-free.
It seems easy enough, but there will be bumps in the road.
How to Handle Setbacks
During our personal debt repayment journey, we’ve had to deal with numerous setbacks. Because we have a basic emergency fund, none of them have hurt too much. Here are some tips for handling these situations:
Using Your Emergency Fund
It will happen eventually.
In the past year, we have had a bike stolen (which is Andrew’s primary mode of transportation to work), and an unexpected funeral in another state to attend.
Both events required us to use nearly our entire emergency fund. I don’t know what we would have done without this safety net – probably racked up more debt.
Both times have also set us back a couple months on our debt repayment plan.
When this happens to you, don’t give up or feel discouraged. Be thankful you had the money to take care of your situation, use your extra money to replenish your emergency fund, and then continue your debt repayment. Update your goals and move on.
This is the reason you have an emergency fund. You don’t have to take on any new debt and you can financially handle any emergency that arises.
The Temptation to Spend
It’s happened to me, and if you’re human, it’s probably going to happen to you. Hopefully, you can learn from my mistakes.
I wanted a new computer and I wanted it bad. Mine was seven years old and not aging well. I couldn’t play the new games I wanted to play, and I started lusting after a new gaming computer.
I knew we were in debt, but I hadn’t spent any money on myself in so long. We had already paid off $5,000 in debt. We were doing great.
So, I let the temptation get the better of me and I bought a new computer…on a credit card.
I justified the purchase to myself because it was one of those “zero interest if paid in 12 months” deals. I thought, “It’s no different than saving the $125 a month and then buying it with cash. I’m just getting it now instead of later.”
The problem was that it was different. I bought something I couldn’t afford with money I didn’t have and added to my mountain of debt. That’s an extra $1,500 that I should have put towards my debts, and now I’m stuck with more “monthly payments.”
The zero-interest deal sucked me in, and I was suckered. Don’t let this happen to you.
After your debt is paid, you can save for and buy all the things you want. It takes self-discipline to make debt repayment successful, but you can do it if you want it bad enough.
Just remember that every dollar of debt you repay is another step closer to financial freedom.
If you do make a mistake, don’t beat yourself up too much. Regroup and get back on track immediately. Recognize that what you did isn’t compatible with your long-term plan, and don’t let it happen again.
Friends and Family (Just Don’t Understand)
You’re going to be saying no. A lot.
If you have friends and family who like to go out to eat, shop, or otherwise spend money in a way that doesn’t fit into your budget, you will have to say NO.
It might not be easy at first, but you must stand up for yourself.
The best thing to do is explain from the beginning that you would love to go out and do whatever money-wasting thing they’re inviting you to, but you have to do what’s best for your family right now. And that means spending less and focusing on debt.
You could say something like, “Oh, I’d really love to go out, but we don’t have any money left in our entertainment fund for this month. We’re sticking to a strict budget while we pay off some debt. Maybe next month.”
Give yourself a small entertainment budget every month so you don’t go insane and become completely isolated, but once it’s gone, just SAY NO.
Debt’s Days are Numbered
Now you have a plan, you have goals, and you have all the tools you need to pay off your debt once and for all. Revisit your goals frequently and keep reminding yourself how great life is going to be when you’re finally debt free.
You can do this. It will take time and discipline to pay off debt, but you can do it.
Thousands of people have done it before you, and you’re stronger than most of them.
Keep your head down and keep your eye on the prize.
And don’t forget to come back and comment to let us know how you’re doing on your journey!
More Posts in the Personal Finance 101 Series
This is the fourth post in my Personal Finance 101 Series. See the following posts for parts one. two, three:
How to Create a Budget – (Part One) Learn how to create a budget so you can get out of debt and save more money for the things you want. This is my personal budgeting method and I’ve used it for many years with success. Don’t put it off any longer. Take back control of your finances!
How to Track Your Spending – (Part Two) After creating a budget, the single most important thing you can do to control your money is track your spending. You should know where every dollar goes to make sure you’re sticking to your budget. Learn three different methods of tracking and choose the one that works best for you.
How to Save Money – (Part Three) Saving money doesn’t come naturally to everyone. My natural inclination is to spend, and I had teach myself how to save. After quite a few failures, I finally figured out what works. In this post, I’ll show you how to save money for emergencies, retirement, and all the other fun stuff you want.