I don’t want to sugar coat this, paying off debt is hard. And it’s especially hard if you aren’t making enough money to pay all your bills to begin with.
Let’s be honest, that’s how you got yourself into debt in the first place, right?
You weren’t making enough money to pay all your bills, but you wanted or needed to buy something else, so you put it on a card.
Trust me, I totally get it.
For my wife and I, meeting the monthly bills is not a problem. The problem comes when life throws us little “surprises” like a big medical bill, or our cat gets cancer, or the car needs some repairs.
Those are the hiccups that cause us, and probably most other American families, to fall deeper into debt.
This is my fundamental problem with budgeting. It works when you are making enough money, but if you have a drop in income or a spike in your monthly expenses, then the budget goes to hell quick.
But back to the real topic of the day… paying off debt.
How to Get Started Paying Off Debt in 5 Easy Steps
Here is a quick list of the 5 steps to paying off debt. Then I’ll dig into each step in a bit more detail.
- Stop Using Your Credit Cards
- Get Organized
- List Out Your Debts and Your Monthly Payment
- Determine How Much You Can Afford to Pay
- Implement Your Plan
Let’s take these one at a time.
Step #1 – STOP Using Your Credit Cards
You’ve probably heard this before a gazillion times. There is only one sure-fire way to pay off your debt and keep it off – and that’s to stop using your credit cards.
If you are paying off a credit card at a rate of $50 a month, but charging $100 a month to that card, you will never pay it off. In fact, you will just be digging yourself deeper into debt.
So step #1 is to stop using your credit cards. Take them out of your wallet or purse, hide them somewhere, cut them up, give them to a friend or family member you trust for safekeeping. It doesn’t matter what you need to do – just stop using the cards.
Step #2 – Get Organized
You can’t put together a plan to pay off your debt if you don’t know what you owe. So step #2 is to get yourself organized. Pull out all the statements for the debt you currently owe. This includes credit cards, student loans, medical bills and even your mortgage.
Step #3 – List Out and Prioritize Your Debts
After you have gathered all of your account statements, the next step is to list out these debts in a single place and start to prioritize which debts should be paid off first.
Here is a handy spreadsheet that you can use to list out your debts. (Make sure to copy this spreadsheet to your own Google Drive account before you use it).
One caveat here, I would NOT prioritize your student loans and mortgage debt.
There are two schools of thought on how to prioritize your debts. Some people will say to pay off the highest interest rate accounts first, while others will say to pay off the lowest balance cards first.
Honestly? The choice is up to you. For many people, the mental victory that comes with paying off an account is enough to push them to pay off the smaller balance accounts first, regardless of the interest rate.
Step #4 – Determine How Much Money You Can Afford to Apply to Your Debt Payoff Plan
The minimum amount you will be able to pay towards your debt payoff plan is the total minimum monthly payment for each account.
Seems obvious, right?
Here’s the problem. Some people can’t afford the minimum monthly payment for all of their accounts. In this situation, they start robbing Peter to pay Paul.
In other words, they make the minimum payments but then proceed to use the cards because they can’t afford to pay the rest of their monthly expenses.
What should you do if you fall into this situation? You have two choices. The first is to cut back and reduce your budget. The second is to find ways to earn more money that you can apply to your Debt Payoff Plan. Click here for 14 ways that you can earn more money without leaving your day job.
Now, if you are in a situation where you can afford to make all your minimum monthly payment, then this is your starting point. Make the minimum monthly payment on all your accounts, and add a little bit extra to the first account that you decide to prioritize.
If you want to add some fuel to this fire, then review the post above about how to earn more income, and add that extra money to your debt payoff plan.
One additional caveat – If you have a bunch of money sitting in a savings account, you may want to consider using a portion that money to pay off your debts. I would keep enough in savings to provide for a “rainy day fund”, but use the rest to pay down your debts.
Step #5 – Implement Your Plan
The final step is to start implementing your plan. As you pay off an account, you will take the monthly amount you paid on the paid off card, and apply that same amount to the next card or account you want to pay off.
In this way, your total monthly payment for all your accounts won’t decrease after you pay off an account, but rather you will just pay more towards the remaining accounts.
If you earn more money one month, get a bonus from work, or receive a cash gift from Aunt Sally, then you will take that money and put it towards your Debt Payoff Plan.
Final Thoughts on Paying Off Debt
Becoming debt free is the first step towards financial freedom. And that’s because once you eliminate your debts, life becomes a lot less stressful and a lot more fun. The money you earn is yours, not earmarked to pay a bank.
Leave a comment below and let me know if this was helpful to you, or shoot me an email through my contact form.