12 Steps to Make Paying Off Debt Easier
For many people, the thought of paying off their debt in full feels insurmountable and far out of reach. It can be hard to know where to start and without a clear plan, you will find yourself getting nowhere fast. It doesn’t have to be that way though.
Everyone has a unique debt story and situation, but following these 12 steps will get most people on the road to successfully reaching their financial goals:
1. Make a List of All Your Debts
The first step you must do in order to start paying off debt successfully is to get organized. You cannot come up with an effective game plan if you don’t know all of the details about the money you owe.
Sit down with a pen and paper (or on your phone, computer, etc.) and make a list of every single one of your debts. Include amount owed, minimum payment amount, and interest rate (make note of whether it is a fixed or variable rate).
When you finish, you should have a complete list of any credit card debt, student loans, mortgages, car loans, medical debt, or personal loans that you have. This can feel overwhelming, but it is absolutely necessary if you want to take back control of your finances.
2. Figure Out How Much Money You Bring in Each Month
This might be an easy step if you have predictable paychecks, but what if your income varies every month? In this case, I would write down how much income you made each month over the last year and then find the average.
Another method would be basing the amount off your lowest month. See if your lowest month is enough to cover your expenses. If it is, great! Anything extra you earn above that can go directly toward debt.
3. Determine How Much You Spend Each Month
Write down every single one of your bills including mortgage/rent, utilities, auto loans, childcare, subscriptions, internet, minimum amount for each debt payment, etc. Then write down other monthly expenses such as food, gasoline, clothing, dining out, entertainment, miscellaneous, etc.
You might need to go back through your credit card and banking statements over the past year and figure out the amount spent each month. This can be tedious, but it will give you more accurate information than just guessing. I think the easiest way is to print out the statements and use different colored highlighters to indicate each type of spending (your local library should offer printing).
Write down the total for each month and then find the average. This will give you a baseline number to start with which you will be able to refine over time. I always include a miscellaneous category as a buffer for stuff that doesn’t quite fall into a certain category and unexpected expenses that come up.
4. Subtract Your Average Spending Amount From Your Total Income
If this is a positive number, great! This is how much extra money you have to put toward debt (or building an emergency fund) each month. If this is a negative number, you will need to find ways to cut expenses and/or make additional money.
Even if it isn’t a negative number, I think it is a good idea to find ways to cut down expenses and make more money. The more money you can put toward debt each month, the faster you will become debt free and the less amount of interest you will pay in the long run.
5. Cut Down Expenses
Are there subscriptions you don’t need or can put on pause? Can you eat out less often? Maybe you can find a cheaper cell phone plan?
There are lots of different ways you can cut down on your spending. If you feel that you have cut down as much as you possibly can and there still isn’t enough money, you will NEED to find ways to earn additional income.
6. Find Ways to Earn More Money
Sometimes this means asking for a raise or finding a higher paying job. Or you could find a second source of income, commonly known as a “side hustle”. If you do a google search, you will find tons of lists and articles on different side hustles you can try.
As a busy mom, it might not be possible to leave your house to make additional money. One of my favorite ways of earning extra money is to sell stuff on Facebook Marketplace. I feel like there is so much around our houses we can sell, especially when we have kids. I’ve also sold on eBay and Poshmark.
7. Cautiously Consider a Balance Transfer Credit Card or Debt Consolidation Loan
Credit Card Balance Transfer
Sometimes credit cards will offer a promotion of 0% interest for a specified number of months (12-15 months is common). Some of these cards will allow you to transfer existing credit card balances from higher interest cards to the 0% card. Usually there is a fee associated with this, but it is great because it allows you to pay that balance down without accruing more interest.
However, this is not a good option for everyone. Many people tend to spend more after transferring their balances to a 0% card. And if you don’t pay the balance for the entire card by the time the promotion ends, you will be charged the total amount of interest that would have accrued at the cards new rate. This rate is usually ridiculously high and can cause you to be in a much worse financial position than you were before.
Debt Consolidation Loan
There are also pros and cons to a debt consolidation loan. Some pros are you could possible get a lower interest rate, it might help you get out of debt faster, and you will just have to worry about managing one monthly payment. The cons are you might not qualify for a low rate, there are usually additional fees, and missing payments could put you in a worse financial position.
In addition, one of the biggest cons for both debt consolidation and credit card balance transfers are they do not address the root issues which caused you get into debt in the first place. When people don’t address these issues, they often fall back into debt within a few years.
8. Build an Emergency Fund First
When you want your debt to be gone as soon as possible, it can be really hard to stop making extra payments toward debt and instead put that money into an emergency fund. This is a really important, but often overlooked step. The reason this is important is because you don’t want to take on new debt if you have a huge unexpected expense or lose your job.
It is generally recommended by the personal finance world, to have 3-6 months of expenses saved. That definitely sounds like a lot of money, and I’d consider it more of a long term goal. So instead of saving that much right off the bat, try to save 1 month.
After you have 1 month saved, you can start putting your extra cash toward debt (especially if you have a lot of debt with higher interest rates). Later down the road, you can work on building up 3-6 months worth of expenses.
9. Choose Only 1 Debt to Focus On
This step is very important. You are going to make the minimum payments for all of your debts, but you will choose 1 debt that you will funnel all your extra money toward. This is way more effective than putting a little bit extra toward multiple different debts.
So how do you choose which debt to focus on first? Well there are 2 methods recommended by pretty much all of the financial experts out there: The Debt Snowball Method and The Debt Avalanche Method.
The Debt Snowball Method
The Debt Snowball Method is when you concentrate on paying off the smallest debts first. You start with the smallest one, and when that is paid off you focus your attention to the next smallest debt.
The amount of extra money you have to put toward the monthly payment progressively increases as each debt is paid off. You will continue to do this until all of your debts are paid.
The Debt Avalanche Method
The Debt Avalanche Method is when you focus on paying off the debt with the highest interest rate first, regardless of the balance. Again, after each debt you pay off, the amount of money you have to put toward your next debt will increase.
You will save more money in the long run using this method, but some people find the snowball method to be more motivating. This is because it is easier to see progress and experience quick wins the beginning. It can take a very long time to get that first debt cleared if the highest interest rate also has the largest balance.
I personally am an avalanche girl, but will be successful no matter which method you choose so see which one feels right for you. Remember: you will continue to make the minimum monthly payments on all of the other debts.
10. Temporarily Stop Your Investments Until High Interest Debts are Paid Off
High interest debt is typically considered above 7%. When you have debts with interest rates higher than 7% you want to stop your investments. Put the money you are no longer investing toward debt. Once your high interest debts are paid off, start contributing to your investments again.
However, there is one exception. If you are lucky and get a match on an employer sponsored 401k or 403b plan, continue contributing, but only up to the match amount. This free money you shouldn’t pass on.
11. Make a Budget and Start Tracking Your Spending
When you are working toward debt repayment, you have to keep track of where your money is going to be successful. You can do it the old fashion way by writing down each purchase you make, but there are plenty of budgeting apps out there that make it easier and more convenient.
If you cannot afford to pay for an app, there are free ones out there, so do a little research and find something that will work for you. The best way to do it is whatever you will be most consistent with. You don’t have to be obsessive, but I would check in daily at least in the very beginning.
12. Remember, You Don’t Have to Be 100% Debt Free
Definitely make it a priority to pay off any credit cards or high-interest debt. If you have debt with a lower interest rate though, it might make more financial sense to pay that off slower and turn your focus toward investing for retirement.
The average stock market return on average has been about 10% per year for nearly the last 100 years, as measured by the S&P 500 index. This means that on average, you should see your invested money grow by 10% each year. Remember, this is an average, so some years you could see a much lower return and other years it might be higher.
So if you have a 4% interest rate on your mortgage for instance, it might not make financial sense to pour all of your money into paying that off early in order to save on 4% worth of interest. Instead, you could be investing that money for retirement and earning 7-10% of interest over the long run.
There are a lot of different factors at play, so I would definitely talk to a financial advisor if you aren’t sure about what to do.
Conclusion
As you can see, there are many things you can do to make the road to debt payoff a little bit easier. Implementing even just a couple of these changes will make a positive impact on your journey to debt freedom.
Looking for even more ideas? Check out my list of “100 Ways to Save Money”.
