How to Pay Off Debt, The Ultimate Guide

how to pay off debtAre you in so much debt that you feel like you are drowning and don’t know where to start? The purpose of this post is to show you how to pay off debt fast, and then keep it gone forever.

Earlier this month I shared my very first financial snapshot, and it showed a couple of things that were extremely eye-opening for me. First and foremost, we have a lot of debt, $198,458 worth, to be exact. This isn’t all “bad” debt. In fact, the vast majority of our debt is in student loans and a very small car loan. Just because I say it isn’t “bad” debt doesn’t mean it is good debt either.

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How to Pay Off Debt

In my mind, there is no such thing as “good” debt. Any debt you have is a shackle around your ankle that keeps you from reaching true financial freedom.

But regardless of whether you would consider my student loan debt good or evil, the truth is it isn’t going anywhere until I pay it off. And on the plus side, the interest rate on this debt is very low (the highest interest rate is currently 5.11%), which means that I can make some serious dents in this debt once I start working my debt pay down plan (more on that in a minute).

The entire purpose of this post is to walk you through how to pay off debt even if you have no clue where you should start. It doesn’t matter if you have $500 of debt, $5,000, or almost $200,000 like me. The principles I describe in this post will work for anyone looking to pay down their debt.

As an aside, we also have a mortgage that we want to pay off quickly – I’ll write about that in another post. My mortgage is not currently part of my debt pay down action plan.

Ready to jump in? Let’s do this. The first step to how to pay off debt is to figure out what you owe.

Get all the Details of Your Debt Situation

The very first thing you should do when trying to figure out how to pay off debt is to figure out what you owe and to whom. How do you do this?

One of the easiest ways is to pull your personal credit report, which you should do at least once a year regardless of whether you have any debt. I recommend annualcreditreport.com to pull your free credit reports from all three credit reporting agencies.

Another way to do this is to gather all of your credit card and loan statements. If you have online accounts, you log into all of your online accounts and start to make a list of what you owe. I go through this with my divorce clients all the time (if you are new to the blog, I’m a lawyer by day).

This doesn’t have to be complicated and involve some fancy spreadsheet. A sheet of paper or notebook works just fine. But here are the details you want to mark down.

  1. The name of the creditor/bank
  2. The current balance owed
  3. The minimum monthly payment
  4. The interest rate you are being charged
  5. BONUS: Is it a variable rate? (Not necessary for right now, but helpful to know).

When you are finished listing all of your debts, total up all of the balances and the monthly payments. Now you will have a good snapshot of what you owe and to whom.

Here is the Debt Spreadsheet that I use.

When I first did this, here is what my snapshot looked like.

Debt Paydown Summary

Take a minute and do this for yourself before you move on to the next step in learning how to pay off debt.

Assess Your Debt Situation

Once you have figured out how much debt you have, the next step is to assess your debt situation. A couple of things jumped out at me as I was going through this process for myself.

First, we typically pay off our credit card each month, but we have had several unexpected “emergencies” creep up on us during the past several months, leading our balance to grow higher than normal. This meant we were unable to pay it all off within the grace period.

Long story short – I had no idea that our interest rate on the credit card was 25.65%! That’s a ridiculous number. We will need to pay this sucker off ASAP.

But it gets worse…

And that isn’t even as bad as the CareCredit Card. For those of you that don’t know, CareCredit is a credit card that is used to pay medical bills only. They typically do not charge interest for a promotional period of 12 months. The problem is, if you haven’t paid off the full balance within 12 months, then you get whacked with all the deferred interest charges. And at 26.99%, this is even worse than the credit card interest rate I was being charged!

I had thought that many of our CareCredit charges were still in the promotional period.

But I was wrong. So this month I got hammered with several hundred dollars of deferred interest charges on that card. Moving on…

Next, as I already mentioned, the total balance we owe is $198,458, and our total minimum monthly payment is $1,433 per month.

Now I said that I wouldn’t talk about our mortgage, but our monthly payment is currently about $2,000 per month (which includes taxes, insurance, and private mortgage insurance). So our total, MINIMUM, debt service each month is almost $3,500!

That’s more than many people budget for their entire household. And this doesn’t include food, clothes, household supplies, medical bills, home repairs and upkeep, insurance, etc. for a 5 person household (my wife and me plus 3 kids).

Is it any wonder that I consider debt to be a noose that grows tighter and tighter the longer it stays wrapped around my neck?

Now it’s your turn. Take a look at your list and ask yourself the following questions:

  • Are there any debts that stand out?
  • Am I paying more or less in interest than I thought?
  • What is my total monthly debt service amount? Is this sustainable?
  • What would happen to my family if I (or my spouse) lost my job and could no longer service this debt?

By now, you are probably thinking, it’s time for some changes. And you would be correct. The next step of the how to pay off debt process is to start to change your mindset about debt.

Let’s Change Your Mindset About Debt

Once you start reflecting on debt this way, it becomes easier and easier to see how terrible debt really is. I look at our debts as a stranglehold on our family. When I shared the information I had learned about our debt with my Wife, she was equally appalled.

We both decided that it is finally time to do something about our debt problem.

Our debt is keeping us from living the life that we want, on our terms.

Our debt is keeping me from working at a law firm that might pay me less money but would make me happier in the long run and allow me to spend more time with my family.

Our debt is keeping us from reaching financial freedom.

You see, every month that you throw money at credit cards charging a 25% APR is a month that you aren’t investing in your “freedom fund”. Your freedom fund is the money you have set aside for retirement. The sooner you get out of debt, the sooner you can ramp up your savings and change the course of your future.

But how do you do that?

You have to change your mindset. Credit cards were created for people who have a “consumer” mindset. That means that they are seeking consumption in their daily lives. They always “need” a new car, or a bigger house, or some other item or expense that won’t add to their financial future, but will allow them to “keep up with the Joneses”. The problem is, the Joneses don’t give a crap about you or your financial well-being.

A consumer focuses on spending more money, and it is typically more than they earn. That’s how they got into debt in the first place.

The best way to stay out of debt is to spend less than you earn so that you can keep a surplus of your earnings each month. But you need to do more than that – since you are already in debt, you need to spend substantially less than you earn.

That’s because you need to not only make the minimum payments on your debts, but you need to pay extra on those debts to get them paid off as quickly as you can.

You must change your focus from being a consumer to being a “producer”. A producer creates value for the world and spends less than they earn. They are more focused on giving than getting. They realize that by spending less and earning more, they can add even more value to those around them and the public at large.

So how do you do this? Where do you start?

First things first – you need to stop using your credit cards.

Stop Taking On Additional Debt

Yes, you heard me right. You need to stop going into debt.

Are you with me? If you can make a commitment to stop taking on additional debt, then keep reading.

Here’s the problem that many people have. They get serious about paying off their debt, and then one month they find an online deal that they absolutely must have. Or when flipping through their Facebook feed they see an offer that looks too good to be true. Or something else happens that requires them to spend money they don’t have.

Sound familiar?

Next thing you know they are whipping out their credit card and making an impulsive purchase.

You need to remove that temptation from your life once and for all.

“But how do I do that” you may be asking yourself? Here’s how.

The first step is to cut up all your credit cards. Don’t necessarily call up the credit card companies and cancel them, that could put a negative hit on your credit score. But you can cancel/change all your credit card numbers and cut up the new cards when they come in the mail. (I recommend doing this if you have recurring subscriptions – this will cancel your subscriptions automatically. If there is something you really need/miss after 30 days, you can reconnect the charge to your bank account/debit card – NOT your credit card).

Next, take the lowest interest card and put it aside. I don’t mean to put it back into your wallet or purse. You should take this card and either freeze it in a block of ice or seal it in an envelope and give it to a trusted friend with instructions not to ever give it back to you unless you need it for an emergency.

Stop taking loans from family and friends. If you find yourself constantly asking your friends or family members for loans, you need to stop. They are likely to thank you for this.

Don’t ever even think about stopping for a “payday loan”. Have you ever stopped to take out a payday loan? These are probably one of the biggest financial scams out there. Drive a different way home. Don’t ever do this, no matter what. If you have done this in the past that’s ok – just don’t ever do it again.

Don’t ever save your credit card number online. Many services (such as Amazon), allow you to save your credit card number online for “quick and easy purchases”. Don’t ever do this again. Is it inconvenient to re-enter your credit card number every time you want to make a purchase? Yes, but that is why you will remove it from your account. You don’t want that convenience. Resist the temptation, remember?

Hopefully, we have covered all the different ways you could take on new debt. If I missed something, please leave a comment below and let me know!

The next step of the how to pay off debt process is to reflect on how you got yourself into debt in the first place.

Self Reflect – Why Did You Get Into Debt?

So you have figured out what debts you have, you’ve changed your mindset about debt, and you have eliminated the temptation to take on new debt from your life.

Now it’s time to create your debt payoff plan, right? Wrong.

Wrong.

This is where many people go wrong. They put themselves on a plan to start paying off their debts and within 6 months they find themselves in the exact same position, or worse.

It’s a vicious cycle, and many people are completely unable to ever break free.

I contend that the reason they can’t break free is that they haven’t looked at the deep-seeded root cause of their debts. Money is deeply personal to people. We develop money habits at a very young age based on what we are taught and what we experience as a child. Breaking bad spending habits can be especially difficult.

But if you can find a way to reverse these habits – going from being a spender to a saver (or at least a more careful and thoughtful spender), then it will make a world of difference as you embark on your debt pay down journey.

So this step is a vitally important part of the process and I would encourage you not to skip ahead.

There are many different ways that people can find themselves in debt, and these are just a few of the major life events that can lead someone into debt. Being aware of and understanding how to keep these life events from causing you to incur debt is a great way for you to prevent going back into debt.

Student Loans for Higher Education

If you have student loan debt as I do, you understand the true “cost” of higher education. While I won’t go so far as to say that I regret going to law school (I would never have met my Wife or have been blessed with my kids), I will say that I wouldn’t necessarily recommend it to someone unless: 1) they absolutely want to be a lawyer, and 2) they can get a significant scholarship to help pay for school, have parents that are willing to pay for their school, or are willing to work a second job while in school to pay their living expenses.

When I started law school, I had approximately $15,000 or so in student loan debt from my undergraduate degree. Not a terrible amount, and it would have long been paid off by now. As a result of law school, between my Wife and I, we owe $183,000 in student loans. And this is 14 years AFTER I graduated! I don’t remember how much we started with, but I know that my debt alone was around $130,000 initially, and stands at about $100,000 now. So I’ve made a dent, but it is still a huge amount of money for anyone to owe.

What makes student loan debt even worse is that it cannot be discharged in bankruptcy. So not matter how bad your financial situation, your student loans will stay with you forever unless you pay them off.

Unexpected Medical Bills (Even If You Have Insurance)

I carry a high-deductible health plan that is made available to me through my state bar association. There is a $10,000 deductible, which means that my family would have to spend at least $10,000 in medical expenses before our health insurance would provide us with any meaningful benefits.

Honestly, sometimes I wonder why I continue to pay the $840 monthly premium and don’t just invest that money into an HSA (Health Savings Account) to pay for our medical expenses out-of-pocket (that’s what we are doing anyway).

For more and more people, health insurance is a huge financial burden. And whether you have it or not, you may still face ridiculously high medical bills if you have a medical emergency.

Here’s a quick example.

Last year I pinched a nerve in my neck that caused a trip to urgent care, the emergency room, an orthopedic doctor, and numerous trips to the chiropractor. To this day I still have numbness in two of my fingers (the numbness had gone up my arm). All told, this pinched nerve cost me $2,000-3,000, even with insurance. And that is pocket change compared to the medical bills that some people face.

The best way to avoid this problem is to make sure you have health insurance. Most people who work at a larger company have a better policy than our family does. Second, make sure to contribute to your HSA monthly. In 2017, you can contribute up to $6,750 in tax deferred money to your HSA. If you work for a company that offers a flexible spending account, make sure you take advantage of that as well.

Medical debts can be absolutely soul-crushing, I get it. But by taking proactive steps now, you can help to prevent or minimize these surprises when they come up.

Unexpected Death in the Family

I handle a lot of estate plans for young families in my law practice. And you would be surprised by how many young people (i.e. 30’s and 40’s) who pass away unexpectedly from cancer or heart disease, or even from a tragic accident.

The best way to protect against a huge financial loss is to make sure your family is protected with adequate life insurance. The younger and healthier you are, the less expensive the premiums.

I’m 41, a vegan, and in relatively good shape. I just purchased a new $1 million policy for myself earlier this year for $340 every 6 months. We purchased a similar policy for my wife a couple of years ago and pay $270 every 6 months. These policies are term policies for 20 years.

By the time they run out we should be financially free. But if something happens to one of us in the meantime, we can rest easy knowing that the other (and the kids) are taken care of.

Divorce

As a practicing divorce lawyer for 12 years, I can tell you first hand that divorce is a financial killer. Not only will you have to give up 1/2 of your assets, but you could also spend tens of thousands of dollars on legal fees to fight over the (literally) stupidest things.

What’s the best way to prevent against divorce? The first thing would be to make sure you are absolutely sure you love the person you decide to marry and can see yourself spending the rest of your life with that person. The second way to protect you financially in the event of a divorce is to have a prenuptial agreement drawn up.

If you have been through a divorce, I am truly sorry. I know how hard it can be.

The best thing you can do is learn from the process, start over from scratch, choose a better mate next time, and move on with your life.

And if you are in the middle of a divorce proceeding, stop fighting over stupid crap and get your case settled. Life is too short.

Losing Your Job

Losing your job can be a huge financial struggle. Assuming you weren’t at fault when you lost your job, you may qualify for unemployment benefits in your state. I highly recommend you apply for them if you do get laid off.

In addition, you may have received a severance that can help you with living expenses for anywhere from 3-6 months or longer. This will help you to bridge the gap until you find a new position.

Sometimes, (I realize this may sound counterintuitive), losing a job can be a blessing in disguise. Many people are scared to start their own business until they have no other choice. So if you are someone who is interested in becoming a solopreneur, losing your job could be the best thing that ever happened to you.

But if doing your own thing is not for you, then your best bet is to save up at least 6 months of living expenses to cushion the blow should you unexpectedly lose your job. But I wouldn’t typically do that until AFTER you have paid off your debts.

Surprise Tax Bills

If you work for an employer, you probably don’t need to worry too much about your taxes. Your employer will withhold your taxes, and when you file your return the following April, you either receive a refund or owe a small amount.

But if you are self-employed, then you do need to be concerned about taxes. Failure to save an appropriate amount throughout the year or otherwise make estimated tax payments could put you in a situation where you owe a huge tax bill without even realizing it, not to mention late payment penalties and interest.

My recommendation if you are a freelancer or own your own business is to set aside a set percentage of every sales receipt you receive into a separate “tax account”, typically 10-20%. You can use the money in this account to make estimated tax payments throughout the year and pay any additional tax owed when you file your return. For more information on how this system works, I highly recommend the book Profit First by Mike Michalowicz.

Business Failure

There is no quicker way to get into debt than to have a business failure. I know this from experience. Last year I attempted to start an e-commerce business and ended up taking out a $15,000 line of credit for new inventory. This was a huge mistake on my part.

When this business finally went under, I had to withdraw money from my IRA (and pay penalties and taxes on the withdrawal) to pay off the LOC. It was a great learning experience… of what NOT to do.

I am much more conservative now when I start a new business. I try as best I can to bootstrap the business from generated income. If I don’t have money in the bank account to pay for a service or inventory, then I wait.

Now I will freely admit that there are exceptions when this may not make sense. But those are definitely the exception and not the rule.  Every dollar you borrow from a bank or take from an investor is yet another shackle on your business that limits your freedom and future business choices. Think very carefully before you decide to take financing or give away equity in a new business.

This is also true for your personal savings. I have a client that has been losing six figures a year for the past 4-5 years for a software business. How does this client keep this business afloat? By accepting loans from family and depleting their trust fund.

Sometimes it is better to just cut your losses and move on.

Acts of God

There are times when something happens that you could never have foreseen, and your insurance won’t cover the repair. We had some strong spring storms come through our area in 2016 that ended up knocking down 4 trees on our property. Since they didn’t hit a structure, they weren’t covered by insurance. We had to pay for the removal of these LARGE trees out of our own pocket.

But this is what your emergency fund is for.

Poor Financial Choices

Poor financial decisions are probably the single biggest reasons that many people go into debt, and if this describes you, it’s time to look yourself in the mirror and have a serious talk with yourself. Because if you don’t make changes in the way you handle money, nothing about your financial situation will ever change, and you certainly won’t ever reach your end goal of financial freedom.

If you have read this far, I assume that you want to make a change in your life for the better. If you retain nothing else from this post on how to pay off debt, please think twice before you make any more poor financial decisions.

So let’s move on to the next stage of the debt elimination process, tracking your spending.

Start Tracking Your Spending

Before we get into how and why you should track your spending, let’s take a minute to talk about how people get into debt in the first place, and why it is so hard to get out of debt. You must have a clear picture of this if you are serious about learning how to pay off debt.

How You Got Into Debt

There is only one way to get into massive amounts of debt. You spend more money than you earn.

It’s simple math.

And even though this can happen in any of the many ways described above, going into debt often starts with simple choices made over and over during an extended period of time. At first, you don’t realize there is a problem. You charged something small like groceries or a night out with friends.

But over a period of months and years these purchases add up. And if you don’t pay off your balance each month then you start to get charged interest. And that small $50 purchase turns into $500 and then $5,000. Before you know it, you get into a vicious cycle where you are paying a good chunk of your income towards the minimum payments on your credit cards. And because you don’t have any money left over to buy groceries, they go on the credit card as well.

This is exactly the situation that the banks want you to get into. You have so much debt that you start trying to juggle multiple cards. It becomes harder and harder to manage the different payment dates. You are charged late fees for missed payments. You get charged more interest. When you miss a payment they increase your interest rate.

It’s easy to see how difficult it can be for many people to get out of this horrible cycle of soul-sucking and freedom-taking debt.

The First Step to Getting Out of Debt… Tracking Your Spending

Before we start putting together a debt pay-down plan for you, it’s important to know where you are spending your money. There are three ways you can start tracking this.

The first option is a good old-fashioned notebook. I recommend a small moleskin notebook like this one. Just start tracking every penny you spend over the course of a week. If you pay for something, write it down in the notebook. At the end of each day, total up your spending. You will be amazed at what you find.

The second option is an online program such as Personal Capital. After you sign up with Personal Capital, you can connect all of your bank accounts and import your transactions. Then you can immediately categorize your spending (i.e. eating out, utilities, mortgage, etc.) and get a snapshot of where you are spending your money.

The third option is to gather all of your bank statements for the past 2-3 months, (or log in to your account online), and then download your transaction history into a CSV file to open up and manipulate in Excel. This clearly will take you more time and I do not recommend it unless you are an excel junkie and that is your thing.

Analyze Your Spending

Once you have a good handle on how you are spending your money, it’s time to do some rough and dirty analysis to help you figure out how to pay off debt.

Honestly, this isn’t that hard.

First things first. Are you spending more money than you earn? If so, there is a problem and you are digging yourself deeper and deeper into debt each month.

Second, take a look at the top 2-3 categories that you spend the most money on. I suspect the top category is your mortgage or rent. The second category could be your debt payments, and the third category is probably food or entertainment (including eating out).

How are you feeling about your spending habits so far?

Next, let’s start to look at some ways that you can cut you expenses so that you can stop spending on credit and start paying off some of that debt.

Start Small

Whenever I talk to anyone about how to pay off debt, I think it is smart to start small. If you jump in with two feet into freezing cold water, your body will go into shock and you might drown. We don’t want that.

It’s better to start slow and just dip your toes in the water. Test the waters. Don’t rush in.

How do you do that? Here are a couple of ways.

Eliminate Fees

Are you one of the people I mentioned above that pays their credit card bill late and then get’s hit with late fees? Let’s not let that happen. In addition, make sure you never overdraft your bank account. Overdraft fees suck, let’s be honest. And they will quickly eat into your monthly budget.

Spending a bit more time focusing on your finances, even a couple minutes a day, could help to eliminate some of these charges. And when you do get hit with one of these charges, make sure you call the bank and ask for a refund. They won’t always give it to you, depending on how often you overdraft your account, but it can’t hurt to ask.

Cancel Subscriptions you don’t use

At least once a month or so, I review all of the subscriptions I use in my business and for my personal accounts. You would be amazed at how many services you have signed up for that you no longer use. Canceling these services is like finding free money in your account.

In addition, there is an awesome new app called Clarity. Once you log in and connect your financial accounts, Clarity will notify you of any subscriptions you have that you may want to cancel. Then they will cancel them for you if you ask, or give you instructions on how to cancel them if they can’t do it for you.

Cut the Cord

There is really no excuse for anyone to still have cable, IMO. Between an HD Antenna for live television and sports, Netflix ($7.99/month) and Hulu ($11.99/month with no commercials), cutting the cord is an absolute must. If you really need ESPN, there is Sling TV, if you need HBO, you can get that as a stand-alone monthly subscription as well.

Plan your meals and shop with a list

My two rules for shopping are that I never, ever go to the grocery store without a list, and I NEVER go if I am hungry. Follow those simple rules and you will be amazed at how much you can save on your grocery bill.

In addition, plan out your weekly meals in advance and consider making a casserole or two on Sunday that you can eat during the week. Not only does this save time, but it will also save you money by making sure you use all the food you buy.

My other tip to save money is to never throw away bad produce. This is one of the biggest wastes of money when you go to the grocery store. You get some tomatoes and when you come home you realize they are bad. Most people throw the bad produce in the trash. Not at our house. We throw all the bad produce in the freezer and return it the next time we go to the store.

I’m not kidding. You may feel a little weird at first, but trust me, $20 on a gift card for your next shopping trip is no joke.

Ask your credit card company to lower your rate

This is a tip that I’ve heard of but have never actually done myself. (Based on my financial snapshot, I probably should!) Just like calling to have a fee reversed, calling to ask that your bank to reduce your interest rate has no downside. The worst they can say is no.

And you can do this with everything from your credit card companies to your cell phone provider. I learned this tip from Lance at moneymanifesto.com, who says that this one tip has saved him as much as $120 to $600 a year! And I have to agree with Lance, this is a lot of moola when you are trying to dig your way out of debt and reach financial freedom.

Use YNAB to Start Tracking Your Budget

My all time favorite budgeting tool is YNAB, otherwise known as “You Need a Budget”.  The reason I like YNAB so much is that it doesn’t create a budget based on pie in the sky numbers. It creates a budget based on the money you have available to you right now.

So if you have $1,000 in your account, and you know that you have $900 in bills that are due before you get paid again, then you will budget for that in YNAB and you can decide how you should spend the remaining $100. Do you want to blow it on a weekend out on the town or buy groceries? It’s all up to you.

Here’s a short video on how YNAB works.

You will be amazed at how empowered you will feel once you start playing around with YNAB. It’s the tool I wish I had 15 years ago.

Now that you are tracking your spending and getting your budget set up, the next step of the how to pay off debt process is to start doing something with all that money you are saving.

Start an Emergency Fund

The very first thing you should do before you start chipping away at your debt is to start an emergency fund. I realize this may not make sense to you. It almost seems counterintuitive.

I mean, why in the world would I recommend that you put money into an account earning essentially no interest when you have a credit card bill looming that is charging 25% interest?

Here’s the reason. Putting money away into an emergency fund will give you a little extra piece of mind that you will be ok when something unexpected happens.

And by unexpected, I mean a true emergency. Not a fake emergency, a REAL emergency. Here are some examples of legitimate emergencies:

  • Your car breaks down so you can’t get to work
  • Your air conditioning breaks down at your home during a heat wave
  • Your dog or cat gets cancer and needs to go to the vet (this happened to us last month) 🙁
  • You or a family member has a medical emergency and needs to go to urgent care

Here are some things that are NOT emergencies:

  • Your favorite band is playing downtown and tickets just went on sale
  • Your kids broke one of the kitchen cabinet doors off the hinges (Yep, that happened to us as well – twice)
  • You need a new couch for the living room (that would be us as well)

So you see, a real emergency is something that will impact your ability to make money or could put your health in jeopardy. Pretty much everything else is not an emergency.

Now that you know what an emergency fund is, how much should you put into yours?

How Much Money Should You Put Into Your Initial Emergency Fund?

Everyone’s situation is unique, so the amount of money you should have in your emergency fund will vary based on your circumstances.

Medical expenses are probably the biggest unexpected expense, but we discussed this earlier in the post when I talked about having an HSA properly funded. I recommend that you contribute a small amount of money each month to your health savings account in the event of a health related emergency and continue to let this account grow.

As for other unexpected expenses, such as car repairs, home repairs, and vet bills, I recommend a minimum of $1,000 in an emergency savings fund, which is in line with Dave Ramsey’s advice. Over time, as you pay down your debt, you will begin to add more money to this account to the tune of 3-6 months of living expenses, depending on your personal situation.

I personally like the Capital One Savings Account to use for your emergency fund. As of this post, they are offering a 0.75% savings account, which is more interest than any other savings account I’ve seen, with no minimum balance. If you use this link to open up your account, you will receive an extra $25 just for signing up.

Once you have set aside at least $1,000 for your initial emergency fund, it is time to start looking at how to attack the mountain that is your current debt.

How to Pay Off Debt – 3 Debt Pay Down Methods

There are several debt payoff methods that I will cover in this section. The one that you decide to use may vary based again on your personal circumstances. The three main strategies are:

  • The Debt Snowball
  • The Debt Avalanche
  • A Custom Plan

Let’s take these strategies one at a time.

The Debt Snowball

The debt snowball is a phrase that was first coined by Dave Ramsey, but the debt paydown method is not novel. Essentially, you list all of your debts by balance owed. You would then make the minimum payment on every debt.

Extra payments would be made towards the debt with the lowest balance, regardless of the interest rate. The reason you do this is that there is it is mentally and psychologically satisfying to pay off a debt. By starting with the smallest debt, you will start to pay off debts faster, building momentum for yourself during your journey to becoming debt free.

Once you pay off the first debt, you would take all the money you were putting towards that first debt and apply it to the second smallest debt and so on. As you can see, with each successive payoff, the amount you contribute towards the next debt will continue to increase, just like a snowball rolling down hill.

You will continue this cycle until all of your debts are paid off in full.

Generally speaking, this is a great plan for people who have smaller debts that they could pay off quickly using this method. The biggest benefit is the psychological motivation that the plan gives you as you continue to see debts getting paid off quickly.

On the flip side, if you have larger balance debts with higher interest rates, you will pay more interest over the life of the plan by delaying the extra payments on those higher interest debts.

Which leads us to the debt avalanche method.

The Debt Avalanche Method

How to pay off debt method number 2 is the debt avalanche method. This is very similar to the debt snowball method, except that instead of paying off your lowest balance debts first, you will pay down the highest interest debts first. By using this method, you will save the most amount of interest as you pay off your debts, and you will, therefore, pay them off faster.

The biggest pro to this how to pay off debt method is that you will save the most money in interest during your journey to pay off your debt. This means that you will pay off your debts faster using this method than by using any other method. But on the flip side, it could be psychologically defeating to wait to see the fruits of your labor as paying off your first debt may take longer.

The difference between the two plans may be minor to you. But there is a third how to pay off debt option, a custom plan.

A Customized Debt Payoff Plan

Your debt situation may not be black and white. For many people, this is the case. It’s not as easy as saying, let’s roll with the debt snowball or debt avalanche and go with it.

You may need to manage your payments and have reasons outside of these plans to pay down certain debts first. If that is the case, it is ok to apply your extra payment to whatever debt you choose to paydown first.

Because at the end of the day, there is no right or wrong answer to how you choose to pay off your debt. The important thing is that you start taking action towards paying off your debts by paying more than the minimum payments and stop incurring new debts.

Because that is the only way that you will become debt free and reach financial freedom.

The Method We Are Using to Pay Off $198,458 of Debt

Earlier in the post, I gave you a link to the spreadsheet that I use to track my debt paydown schedule.  This is a premium spreadsheet (I think it cost me $10 or so). One of the nice things about this spreadsheet is that it will organize your debt payments according to the method you decide to use (debt snowball, debt avalanche or custom), as well as show you how much money in interest you will save with each method.

For our family, the Debt Avalanche was the best way to go. You may prefer the debt snowball or a custom scenario. It all depends on your situation and this spreadsheet is flexible enough to provide you with a plan.

Work Your Plan

Now that you have a debt payoff plan in place, it’s time to work your plan and start paying down your debt. Here’s how we do it.

First, when I pay myself (I’m self-employed, remember?) at the beginning of each month, I use YNAB to “put my money to work” and assign each dollar to an expense category. This includes all of my minimum debt payments.

In addition, I have a separate account at Capital One that I opened up to deposit all the funds for my “debt snowball”, which is the extra money I’m using to pay down debt principal. I allocate money to a separate “Debt Snowball” category in YNAB and transfer those funds to Capital One.

Once the funds hit Capital One, I make a payment on the debt that we have chosen to pay down first.

That’s pretty much it. I should mention that the reason I transfer funds to Capital One is that by doing so I’m less likely to accidentally spend those funds between the time that I get paid and the time that I apply the payment to my debt. Seems silly and stupid (some would say overcomplicated) I know, but that’s what works for me.

Earn Extra Income to Payoff Debt Even Faster

One thing you will notice as you begin to start paying down your debt is that you will only have so much money in the bank to pay down those debts each month. If you want to pay them off faster, the only way to do it is to cut back on your expenses or make more money.

Earning extra income is not as hard as you would think. I previously wrote about 14 ways to make extra money in this post. The first and most common way people think to earn extra income is to go and get a second job on the nights and weekends. But if you are like me, and have a family at home, that may not be an ideal situation.

In addition, the pay for a second job isn’t always great.

There are better ways to make extra money. Here are a couple of my favorites.

Sell stuff around your house. You have an entire house or apartment filled with crap that you never look at or need. One person’s trash is another person’s treasure. Go through your stuff and start listing things on Craigslist. You will be amazed at what people will pay for. Every extra dollar you get should go towards paying off your debt. Better yet, have a garage sale sell a bunch of stuff at once.

Sell stuff on Amazon. This is one of my favorite ways to make extra cash. I go through old books or even used items that I still have the original packaging for and list them for sale on Amazon. Alternatively, you could go to Costco or Wallmart and find things on sale. It takes some time, but if you can find items on clearance selling for less than 25% of what they sell for on Amazon, you will make money by listing them and having Amazon reselling them for you. I have a friend that makes about $150,000 per year with this strategy alone.

Start a Side Business. Service-based businesses that only take up your time are the easiest businesses to start. You could walk people’s dogs, feed and water cats, or even offer babysitting services. Tell people that you are available to help on nextdoor.com. If you are handy, you could offer to do handyman services on nights and weekends. There are a million options.

Start a Blog. Blogs are great, but they will take a long time to make any money with. That’s not to say it can’t be done. My goal with this blog is to earn enough month to assist with the paydown of our own debts, while at the same time educating, entertaining, and inspiring other parents looking to get out of debt and become financially free at the same time. (How am I doing? Please comment below!)  If you are interested in starting a blog, check out this step by step blog post that will teach you how to do it.

Regardless of what you decide to do to earn extra income, it is important that you use this money to pay down your debt. Deposit 10% of any income you receive from your side jobs into a special account for taxes, and deposit the rest into your debt snowball account and use it to pay off your debts even faster.

Make Big Changes in Your Lifestyle

So you have started to minimize your expenses, you’ve started your debt payoff plan, and you may have even found a way to earn extra income to accelerate your debt payoff.

What else can you do? What’s next in the how to pay off debt plan?

You could make some BIG changes in your life.

Listen, I understand that some of these options may not be for you. I’ll be honest, my family is not in a position to take any of these actions either. But they are there and available to you if your circumstances dictate.

Sell Your Car

Say what? Yes. You could sell your car.

Many households are able to operate with one car while one person bikes to work. It would be completely impractical for us, but it would work for other families.

Alternatively, if you have an expensive car with a huge car payment, you may want to just sell it and purchase an “entrepreneurmobile”. Not sure what that is? Click here.

Not only will this free up a huge amount of cash to put towards your debt paydown, but it will also eliminate a large chunk of debt at the same time. This won’t work for us because my Wife’s care is a 4-year-old Odyssey that is paid off, and I drive a 5-year-old Prius that I recently bought for just under $10k.

Could we sell these for cheaper cars? Yes, but it wouldn’t make much sense and wouldn’t save us that much money.

Sell Your House

If you live in more house than you need, then you may want to sell. How do you know if you have more home than you need? You have empty rooms and tons of storage space, not to mention you are “house poor” because your mortgage is much larger than you can afford.

In addition, if you have lots of equity built up in your house, you may want to downsize to pull out equity to pay off debt and/or refinance your mortgage to pay off debt and decrease your mortgage payment.

Like I said, this isn’t for everyone, but it may be an option if you are serious about getting out of debt.

As an aside, selling a house and moving is expensive, especially if you have a lot of stuff that will need to go with you. The less “stuff” you have when you move, the less expensive the move will be. One of my favorite stories about downsizing is from another attorney, Lee Rosen, who recently sold all his stuff (including the house) and is now living as a digital nomad.

Move to a Less Expensive Area

If you live somewhere really expensive, like New York, San Francisco, or San Diego, then you may want to consider moving to a less expensive city, or even a less expensive state. Where we live the income tax is modestly high, but property taxes are reasonable.

Get a Better Paying Job

I have thought long and hard about joining a firm. The pull of a steady paycheck without having to worry about administrative hassles is enticing, I won’t lie. But for now, I am content to stay on my own, building a solo practice. If I want to get paid more, I hustle a bit harder and get more clients or bill more hours.

For some of you, that isn’t an option. You are stuck with your salary until your superiors deem you worthy of a raise. If that is your situation, your only option to significantly increase your earnings is to get a new job that pays you more money.

However, be careful if you decide to look for or take a position that pays you more money. The grass isn’t always greener on the other side, and if you take the wrong job or your boss finds out that you are thinking about leaving, you may find yourself with no job at all.

How to Pay Off Debt and Keep it Off… Parting Thoughts

Congratulations! You’ve mad it to the end. At least it feels that way.

But believe it or not, this is just the beginning. Paying off your debt is just the first step in your journey to financial freedom and you can’t let off the gas pedal now.

Now that you are out of debt, if you find yourself going back to the way things were, if you stop scrutinizing your spending, if you drop your “side gigs”, then you may find yourself right back where you started.

And trust me, that’s the last place you want to be.

You need to push forward. Take the next steps and set up a larger emergency fund. Start working towards paying off your mortgage. Start maxing out your retirement and contributing to a Roth IRA.

If you work harder now than most other people ever will, then soon you will be able to live like many other people never can.

I hope you will join me on this journey as I take the first steps towards paying off $198,458 of consumer and student loan debts.


Congratulations on making it to the end of this mammoth blog post!

Whether you have an inspiring story about how you got out of debt, or if you are like me and are just starting on this journey towards debt independence and financial freedom, I’d love to hear about it. Please leave a comment below and share your story!