How’s your debt situation? Does that question create a lump in the back of your throat? Most consumers know they should be creating a debt payoff plan, but they keep kicking the can down the road, piling up debt.
The statistics are shocking…
- U.S. credit card debt jumped 18.5% and hit a record $930.6 billion at the end of 2022.
- The average American holds a debt balance of $96,371, according to 2021 Experian data.
- Less than 25% of American households are debt-free (according to the same Experian study).
It’s no wonder that a recent Gallup poll revealed that half of Americans said they were financially worse off now than they were a year ago.
Personal levels of indebtedness are an issue in our country. The helpless feeling of drowning in debt is compounded when folks don’t know how to get out from underneath this crushing weight. Where do you begin?
We need a plan to help us get out of debt and create momentum in the right direction. The pandemic represents the greatest wake-up call in our lifetimes to get our personal finances in order and creating a debt payoff plan is vital to achieving your financial goals.
Why is getting out of debt important?
Getting out of debt is so vital because debt is expensive! Way more than most people think. At the moment, debt feels like it’s free/cheap because paying with a credit card or taking out a loan is quick and easy. Using these tools isn’t actually the crux of the problem though. That debt becomes an issue when we don’t pay off the balances and the interest begins to accrue – and compound!
When we’re paying interest on a balance, we’re paying way too much for the things we likely shouldn’t have purchased in the first place. For example, a $15,000 car could easily end up costing you $20,000 or more due to interest!
Of course not all debt is horribly bad. For example, a home mortgage could be considered “good debt” because the interest rate is low and fixed. But for almost all other loans on consumer goods, debt is working against your mission to build wealth in life.
Creating a Debt Payoff Plan
If you have debt, the worst thing you can do is stick your head in the sane and pretend it doesn’t exist. Interest may be accruing on your account and missed payments could lead to late fees which will do damage to your credit.
If you’re ready to slay that debt, here’s a step-by-step approach that can help:
1. Make a list of all your debts
The first step in any plan of action is to get organized. Write down all your debts with balances, due dates, interest rates, and minimum monthly payments.
It might feel embarrassing or depressing looking at all your debts in one place, written down in black and white. But it’s important to confront your full debt reality head-on. I promise all those feelings will begin to shed away as you continue on the path towards debt domination!
2. Choose your debt payoff approach
The two most common debt paydown methods are known as the debt snowball and debt avalanche methods. Each have their benefits, but the main difference is:
- Debt snowball: More emotionally rewarding because it focuses on slashing the smallest debts first and racking up wins quickly.
- Debt avalanche: More financially efficient as it prioritizes paying as little interest as you can by focusing on paying off your debts with the highest interest rate first.
Both of these methods have their strengths. Both help you focus on completely obliterating one debt while paying minimums on the others. In both approaches, maintaining a high level of focus is the key to success. Pick whichever resonates most with you!
3. Know your budget and timeline
The next step is to review your budget. Write down how much you earn each month, and how much you spend on bills. List out ALL your expenses, such as rent/mortgage, utilities, groceries, and minimum debt payments.
Now it’s time to do some math… Subtract your expenses from your income, and find out how much extra you can put toward your debts. This allows you to figure out how long it will take to eliminate it completely.
It’s important to develop a timeline of erasing the debt to help manage your own expectations. If you don’t take this step, you might assume you’ll knock out your debt earlier than you realistically can. Math doesn’t lie. If you’re not realistically approaching your debt payoff plan, it can be easy to lose hope. Coming up with that timeline can instill confidence!
Related: Ways to pay off your mortgage early
4. Create a debt-slaying identity
Perhaps the most important aspect of creating a paying off debt is changing your mindset. You may have also heard the term behavior modification. Switch out your spending mindset with a saver mindset.
Affirmations help a lot! For example, you might say to yourself, “This year, we’re all about paying off that debt, it’s who we are!” Creating a new identity will help you not spend on a vacation, not upgrade your car, and instead throw ALL your weight behind that singular goal – getting out of debt.
Changing your mindset is a highly underrated step in your debt payoff plan. But anyone who has paid off large amounts of debt will attest to the power of focus. Again, prioritize the top debt while you pay minimums on everything else.
5. Smash One Debt at a Time
As you start applying all your excess income towards debt payments, it’s now just a matter of rinse-and-repeat.
After you’ve crushed the first debt balance, move onto the next one on the list. Regardless of which method you’ve chosen, snowball or avalanche, after that first debt is eliminated you’ll have more money to blast the next debt on your list.
It will get easier and easier as your balances get smaller and smaller. The first debt is the hardest one – but the most rewarding!!
Important note: You will make more progress by “paying yourself first“, a strategy which involves putting your debt payments and personal savings as the highest priority each month. It’s one of the oldest saving strategies in the world.
6. Give yourself a little reward
As we discussed in our gamification podcast episode, small rewards along the way can give you a renewed hope. It makes the journey fun, too!
Make a point to pause and recognize your progress. Celebrate incremental successes, as small as they may seem.
Once you’ve appropriately celebrated knocking out those credit cards or car loans, start setting your sights on the next debt to crush – maybe those student loans?
Would you rather pay interest or receive interest?
When we’re constantly overpaying for most items and services in our lives, it’s difficult to get ahead and achieve any financial goals. The progress is slow when you have interest working against you.
When you are debt free, you can start being on the receiving side of interest. With your money actually working for you, it allows you to build wealth and achieve larger financial goals that you’ve got for yourself.
After you’ve slashed your debts, continue the progress! Learn about investing, building wealth, and how compounding interest can work on your behalf.
Not all Debt is Bad
It’s important to note that we don’t think that all debt is bad. Borrowing money can be used effectively and there are reasons worth accruing debt further. Things like higher education, starting a business, or purchasing a home might be worth taking on more debt.
But just because you’re considering one of those “good debts,” it doesn’t give you a free pass to blindly take out loans to go to a fancy school, pursue your dream of owning your own restaurant, or buy more house than you can afford. If you’re not careful, good debt can quickly turn into bad debt, so it’s important to learn where to draw the line.
The Bottom Line
Getting yourself out of debt, and more importantly staying out of debt, can radically alter your financial future. And it all starts with creating and following a debt payoff plan.
Being debt-free will open more options in your life that you never had before. Additionally, shedding your debt will improve your health in countless ways.
If you feel overwhelmed and hopeless, you are not alone. Just take things one step at a time, and I promise you it will all be worth it in the end. You can do this.
Helpful debt management Resources:
- Credit score – You can monitor your credit at a site like Credit Karma. We’ve also written a great post on rebuilding a rough credit score.
- Where not to go if your debt is overwhelming – If you can’t handle the payments on your debt, don’t sign up with a debt consolidation company. They charge big bucks and rarely live up to their claims. Often you pay them money and they do little or nothing to help you in your debt payoff pursuit. You are better off on your own, or getting help from the non-profit orgs below!
- Where to go if your debt is overwhelming – Your best stop is a local affiliate of the NFCC. They are a nonprofit organization and full of helpful financial services like debt and budget counseling. They have the power to help that many of the debt payoff firms say they have but don’t.
- Apps – Qoins and Tally offer to help but they charge you to do so. We prefer the DIY, no fee approach.
- Websites – Unbury.me and Undebt.it are similar and both offer help creating a debt payoff plan. If you prefer a digital interface, give one of those a shot but don’t let tech keep you from getting a plan together. Pen and paper.
- Debt snowball calculator – This timeline helps you track progress.
Debt Plan Book Recommendations:
- The Debt Slayers: A Quick Guide for Slaying Debt and Living A More Fulfilling Life by Timothy and Dr. LeAnn Norris
- Margin Matters: How to Live on a Simple Budget & Crush Debt Forever by Jason Brown
- Money Honey: A Simple 7-Step Guide For Getting Your Financial $hit Together by Rachel Richards
- How to Get Out of Debt, Stay Out of Debt, and Live Prosperously*: Based on the Proven Principles and Techniques of Debtors Anonymous by Jerrold Mundis
Beer notes from the show!
During this episode Matt and Joel enjoyed a Barrel Aged Yeti Imperial Stout- thanks to our friends there at the brewery for donating this one! And if you enjoyed this episode, be sure to subscribe and give us a quick review in Apple Podcasts or wherever you get your podcasts. Help us to spread the word to get more people doing smart things with their money!
Best friends out!
