Paying off debt isn’t a “one size fits all” approach.
While there are a few different methods you can use to pay off your debt, they all require pretty much the same thing. Start living on less than you earn, then throw the extra money you save towards your debt payments.
Sounds simple right? So how is it that so many people struggle to pay off their debt? How is it that sometimes people feel like they’ll never be able to pay off all their debt in their lifetime?
The truth is, paying off debt is not about analyzing all the numbers and treating it like some math equation. Paying off debt is all about mastering your mindset.
And while you may hear that there is a right or wrong way to pay off debt, here’s what I believe–as long as you pay off your debt, it doesn’t really matter how you get there.
If you want to become debt free but just don’t know how, read on to learn how to start your own debt payoff plan.
Step 1: Find out exactly how much debt you’re in
Sometimes this first step can feel a little painful, but it’s necessary to know what you’re dealing with before you can get started.
Go through all your credit card accounts, student loan information, bank loans, your car loans, and any other debts you can think of. Create a list of how much you owe on each of your debts.
Note: You can choose to include your mortgage here or not. If your goal is to live in your current home forever, I would say add it to the bottom of the list to pay off last. If you plan on getting rid of the house soon, I wouldn’t worry about including it.
I like to keep a running tally of all my debts and update how much I owe on them after each payment I make. I keep this as a list in Evernote that way I can update it on my phone or computer as I go. It’s incredibly motivating to watch those numbers go down each month!
Step 2: Decide what order you want to pay your debts off
This is where a lot of people talk about the Debt Snowball Method vs the Debt Avalanche Method. If you haven’t heard of them, the snowball method is where you list all your debts in order of balance from smallest to largest, then pay off your debts starting with the smallest and work your way up. The avalanche method is where you list your debts by interest rate, and pay the one with the highest interest rate first then continue in order of highest rate.
Both of these are good methods and have their ups and downs. With the snowball method, you get some quick wins by paying off a few small debts first, and you can keep your momentum up longer. With the avalanche method, you can save some money by focusing on paying less in interest over the long run.
What I want to point out is this–you don’t have to choose one or the other. This is your debt payoff plan and no one else’s. There is nobody standing over you telling you you HAVE to stick to one way or the other. Instead, decide what makes the most sense for your debt list.
I’m choosing to do sort of a hybrid plan between the two methods for my debt payoff strategy. I started out with the snowball method. I had a few credit cards with low balances on them and knocked those out quickly. It felt awesome and really encouraged me to keep going!
Next, I got to some debts with higher balances on them. I’m not able to pay those off as fast, so I just keep plugging away and paying them off little by little.
But then I did something out of order–I decided to pay off my credit card with the biggest balance next. This way I can free up an almost $200 a month payment, and stop throwing away so much money on interest.
Take a look at your debt list and decide in what order you want to pay them off. Remember, there is no right or wrong answer.
Step 3: Consult your budget
This is where the fun begins: actually starting to pay off those debts!
I want you to take a look at your monthly budget and find the areas you could afford to save some money on. Start with your entertainment and food categories. Chances are, you could afford to cut back in those areas.
Never created a budget? Need a refresher? Check out How to Budget: The Complete Step-by-Step Beginner’s Guide for Beginners
Take some time to examine your budget and find the money leaks. Are you overpaying for cell phone data you don’t even use? Are you spending way more than you realized going out to eat? Look over your budget and comb through your bank statement.
Add up how much you could be consistently applying towards your debt each month.
Step 4: Create a timeline
Now that you’ve listed out your debts and determined how much you can pay on them each month, create a timeline of when you’ll be able to call yourself Debt Free.
You could do this by simply adding up the total of all your debts and dividing that total by the amount you can pay extra on them each month. This won’t be an exact figure, but it will give you a good ballpark of how many months it will take to pay off your debt.
Are you happy with the number? That’s great! If not…
Step 5: Pay it off faster
This is the creative stage. This is the part where you wrack your brain to think of any way you can throw some extra money on your debt mountain.
Look around your house and think of all the things you can sell. Do you have any designer jeans that don’t fit, perfumes you never wear, or tablets you don’t get around to using? Round ’em all up and list them on a Facebook garage sale or eBay to make some quick cash you can throw on your debt.
The way you’re really going to make some damage on your debt is by earning extra income. You could pick up a part time job working retail or waiting tables, watch some kids in your neighborhood, or use your skills to tutor students. Once you start brainstorming, there are endless ways to make extra money!
If you’ve ever wanted to pay off your debt but felt overwhelmed at where to start, follow the five steps above to create your own debt payoff plan. To sum up, here are those steps again:
- Step 1: Find out exactly how much debt you’re in
- Step 2: Decide what order you want to pay your debts off
- Step 3: Consult your budget
- Step 4: Create a timeline
- Step 5: Pay it off faster
I’m rooting for you and I know that you can do it! Creating your plan is the first step towards financial freedom. Will you start today?