Debt can be stressful. But YOU have had the power to conquer it all along! There is no magic potion to make debts disappear. But there is a secret to paying off debt! It helped me get rid of $38,000 in debt! No, you don’t need to have military level discipline and adopt a super frugal lifestyle!
The key is to make a plan and break down your debt into small, achievable goals and ONLY focus on those milestones. Make regular, consistent payments instead of throwing thousands at the loan one month and giving up for the next 5 months! If you keep thinking about the big number, you’ll worry that you aren’t making a dent and give up.
I’m going to show you step by step instructions that you can follow to make build your debt payoff plan! Your debt-free life is waiting and I’m so excited for you!
1. Analyze your debts
Make a list of all your debts. Write down your monthly minimum payments, your loan terms and the interest rate for each loan. If you don’t know your interest rate, call your lender. They’ll provide you with this information.
Sum up your debts. But don’t freak out about the numbers! Visualizing this number helps you get a clear picture of where you stand. It will help you set meaningful, achievable goals today!
2. Figure out your income & expenses
Next, write down your monthly income and expenses. If you don’t know your monthly expenses, use the free spending tracker to find out. You will find it on our free resources page.
Subtract your expenses from your income. How much do you have left over? That’s the amount you should divide between your debts and your other savings goals like emergency funds.
Note: Even if your top priority is debt payoff, always make sure that you have enough in your emergency savings. If 2020 has taught us anything, it’s that we need an emergency fund at all times!
Leveling down
Once you have all your debts, income and expenses listed out, take a deep breath and analyze them. See if there is any place where you can level down your lifestyle in order to improve your savings or completely eliminate that debt.
For example, when I did my analysis, I identified two areas where we could level down.
- We could either downsize to a cheaper apartment or we could get a roommate. We ended up getting a roommate until the lease was up and then we downsized. It was a little hard but it was ABSOLUTELY worth becoming debt-free!
- I realized that our car was too much for us. I didn’t want to be in debt for 5 years just so I could drive a nice car. So we downgraded it and bought a sensible, pre-owned car with our savings and completely eliminated our auto loan! I won’t lie, the luxury car was fun to drive. But the thrill of watching your net worth rise is far superior!
The shame surrounding debt and downgrading your lifestyle needs to go! Focus on your happiness and your money goals. It’s not worth wasting your precious energy wondering about what others may think.
Increasing your income
There is so much you can cut back on when it comes to decreasing your expenses. The most effective and underrated way to make larger payments is to increase your income!
Haven’t received a raise or a promotion in years? Research your market worth and negotiate for a higher pay! Look into improving your skills by doing online courses or certifications so that you can qualify for better paying jobs.
Have a hobby or a creative skill that you can monetize? Explore that option and start selling! Look into side hustle ideas and flexible part-time jobs where you can work on your own time and earn some extra cash.
Extra payments
While you’re on your debt free journey, consider using any extra money that comes your way like annual bonus, tax returns etc. toward your loan repayment.
When you’re making extra payments, make sure that you are paying toward the principal of your loan and not just toward interest or your next installment. Paying toward the principal, reduces the overall loan amount you owe. So that means, you’ll be saving money on interest!
Most lenders don’t make it easy to make payments toward your principal. So call them and ask how you can do this! Also find out if they have any pre-payment penalty for paying off your loan early.
3. Pick a payoff strategy
Debt avalanche
The debt avalanche method focuses on paying off your high-interest loans first. Find the loan with the highest interest on your list and make that your top priority. With this method, you will be paying the least amount in interest over your debt payoff journey. This is the method that worked for me!
Let’s say you were paying an extra $500 in addition to the minimum payments on your high-interest debt. Once you pay off that debt, use this $500 toward your next highest interest debt.
Pros: You’ll be saving money on interest which can be used toward paying off other loans.
Cons: Your high-interest loan could be your largest loan, so it may take time to get that checked off your list. This method requires discipline to stay on track.
Debt snowball
The debt snowball method focuses on paying off your smallest loan first. On your list, spot the loan with the least amount of balance remaining and make that your priority. The idea behind this method is that eliminating a loan will boost your confidence and give you the motivation to tackle the rest of your debt.
Pros: Paying off your smaller loans quickly will help you feel in control of your finances. You’ll have the confidence to keep pushing forward.
Cons: You would be accruing more interest on your larger, high-interest loans.
Automated payments
No matter which loan you are targeting first, make sure to set up minimum payments for all other loans on autopay. This helps you avoid missing loan payments which can hurt your credit score and lead to a note on your credit report. Also, by setting up automated minimum payments, you’ll be protecting yourself from late fees/penalties and increased interest rates from your lender.
Accelerated payments
No matter which debt payoff strategy you pick, consider making bi-weekly payments toward your loan instead of monthly payments. This has three great advantages!
- First, by making bi-weekly payments you would make 26 payments in a year. This means that you’ve made one extra month’s payment by the end of the year!
- The second advantage is that by making these extra payments toward your principal, you will save money on interest fees!
- Lastly, because of the extra payments and the savings on interest, you will be able to shave months off your loan. For example, by making biweekly payments on a 60 month loan, you can shave off about 5 months!
4. Don’t forget to pencil in some fun
Make a plan that works for your lifestyle and break down your repayment goals into smaller milestones. For example, if you have a $20,000 debt, set four milestones for every $5000 paid off. And celebrate those achievements! Treat yourself for sticking to your plan and racing along your debt-free journey!
Parting thoughts
Don’t forget the key! Once you make a plan to break down your $20,000 into monthly payments of $800, focus only on paying that $800 every month. Small, consistent steps will lead to incredible results! Go ahead, you’ve got this!
Wow! Very well explained! Thank you.