Ready to Ditch Debt? Three Steps to Pay Debt Off Quickly

Having debt is no fun. Not only is it another bill siphoning money out of your paycheck, but you have to pay extra on top in the form of interest. Sometimes debt is unavoidable, emergencies do happen, or maybe you have debt but are ready to pay it off! Here are three steps to ensure your debt gets paid off quickly so you can spend that money on something a little more fun than a payment. 

Know Your Numbers

In order to make a plan to tackle your debt, you’ll want to know your numbers. What are these ‘numbers’ I speak of? You’ll want to know four things; the interest rate, minimum monthly payment, debt balance and any promotional offers such as zero interest for the first year.

When we know these numbers, we can use a debt calculator to see how long until we are debt free using scarios with various monthly payment options. You can see how long you have left if you continue to make minimum payments, pay an extra $50 a month or pay an extra $300 a month. Testing various monthly payment amounts might be the motivation you need to pay off  your debt for good!

Here is a tool by Vertex42 that I love to use (scroll down to download in Excel or Google Sheets) and I have a video here explaining how to use it.

Choose a Non-negotiable Payment Amount

Once you have decided on a payment amount that works for you, make that number non-negotiable in your brain and your budget.

When I was paying off my student loan I promised myself that before restaurants, clothing or vacation, I made my extra payment on my student loan. This was so that I could have them paid off by the date that the debt calculator gave me without things popping up and ruining the plan.

To help buffer the budget during this phase I waitressed a few nights a week on top of my day job. I say this because it allowed me to have more money for  things like vacation and restaurants. Without that extra income I would have had to reduce spending on those areas quite a bit.

Whether or not you have to reduce spending in certain areas while you are paying off debt will depend on your income and your cost of living. Maybe you have a great income you just need to streamline a bit. Or maybe you don’t have a high income and taking on another job isn’t possible right now, that’s ok you’ll just have a ‘debt free’ date that is a bit further out.

Use the Snowball Method

If you have multiple debts that you are trying to pay down, you should use the debt snowball method to focus on one debt at a time. By focusing all of your extra dollars on one debt, you can make a larger dent in the balance and ultimately pay all your debts off more quickly. 

For example, I had multiple student loans I was making payments on. By using the snowball method, I threw my entire ‘extra debt payment’ amount, that non-negotiable payment you have from above, at the debt with the smallest balance. This was on top of my minimum payment. Once I paid off that debt, I focused the minimum payment from the paid off debt along with my non-negotiable payment towards my next smallest loan. I continue the process until all debts are paid.

For the longest time I was trying to pay extra on all of my debts but I wasn’t seeing progress, I was losing motivation and I would quit. With the snowball method, my non-negotiable payment actually increased as time went on. Not because I was making more money, but because I was getting better at budgeting. As I saw my balance dwindling, I was becoming more motivated and started eliminating other expenses from my budget to focus every possible dollar towards my debt. This is how I was able to pay off more than $46,000 in 20 months.

If You Have Federal Student Loans, What's Your Plan?

May I extend my fullest congratulations to those with Federal student loans. You are granted, yet again, an extension to when your payments will resume.

Now let me put my overbearing mother-figure hat on and ask you, “what are you doing about it?” How are you improving your finances with this never-been-done-before miracle that has come out of a horrible time for our world? 

These COVID relief measures mean much more than simply not having to make your payment. The bigger piece is that you are not accruing any more interest. Compound interest can be a wonderful thing when you are earning it, but it has the opposite effect when you owe it on a debt.

What happens if you continue to make your payments when they aren’t required? This breaks down to a $393 student loan payment (the national average) going directly to pay off the balance of the loan. 

Normally a part of that $393 payment goes towards the principal balance and another part goes towards new interest that has accrued since your last payment. Your payment has less of an impact when you are also paying on interest, taking longer to pay off your loan.

Now I ask you again, what will you be doing with this newly awarded time? Are you paying off high interest debt? Are you using it to increase the amount saved in your emergency fund? Are you doing the work to get on a working budget while you have some wiggle room?

If you didn’t say yes to one of the above, I want to ask you ‘why not’? I am a true believer in ‘everything happens for a reason’ and if this wasn’t a huge wakeup call I don’t know what is.

We have been taking our health, relationships and finances for granted for decades now. I am not the first to write about what 2020 has taught us but I am here to reiterate it for those of you with federal loan debt. 

How you focus your time and energy with your finances these coming months will have a major impact on the rest of your life, good or bad.

Are you going to continue to look the other way at your debt, knowing it will ‘get paid off eventually’. Or are you going to jump in the deep end, as hard as it might be, and create a plan to change your future for the better?

Get started with tracking your spending with this free tool to see where your money is currently going. We can’t change our futures unless we dig into our past.

How Much Extra Should I Be Paying on My Student Loans?

This is a fun question because when I start digging deeper into your finances as a coach and I tell you how much you can afford on paper - the jaws drop! We have been trained to think that if we are making our minimum payments we deserve a pat on the back - because we did it! Right? We didn't have an adjusted payment, we aren't in forbearance, we made the payment. Well, sorry, but no. 

That minimum payment will cost you tens of THOUSANDS of dollars in interest that frankly, you can't afford. Nobody can! In most situations you should be able to pay double (at least!) on your loan to get rid of it! There are a lot of financial calculators online, I like Unbury.me, that help you play around with various extra payment amounts to find out just how long it will take you to pay off your debt. 

Give it a shot, it's really motivating to see if you pay just a little extra each month, the number of years you can knock off the term of your loan!

This Is What Debt You Should Pay off First!

Debt, a lot of people have it but no debt is good debt. Hear me now, I will say it again. YOU DON'T WANT DEBT.

Ok, now that we got that out of the way, if you do have debt and you are trying to get rid of what, where do you start? Reminder, no judgement, I was there too with a scary amount of student loans, but I am here to help.

Ok first, we want to list all debts from largest to smallest. I also like to put the interest rates next to them because it might effect things.

After we list all our debts, we are most likely going to pay the smallest debts first. This is snowball method, you can also use the avalanche method which is where you pay off the highest interest rates first. Back to paying off the smallest, this helps with creating easy wins as you pay them off. If it takes you a year to pay off one debt (let's say it's your largest), a year is a long time before you get a win in your journey. Too long and it's hard to keep up momentum. 

With that, if you have a $300 credit card bill that is at 25%, we gonna get rid of that.

Back to the plan, once you pay off your first debt, that money then rolls into your payment for your next debt, and so on. And that's it! Easy right? Stay on track, remember your why and life will be grand on the other side.