When it comes to paying off debt, there are simple and effective ways to really make the process quite satisfying. Use our DIY Pay Off Debt Guide below to help you get started!
What is debt?
Simply put, debt is money owed to a financial institution that we agreed to pay back based on a set of predefined terms we agreed upon. In lending us the money, the borrower will pay an interest charge on that money to that financial institution.
For example, my mortgage is with Wells Fargo. Each month, I pay my mortgage to Wells Fargo, and a percentage of the payment goes towards the principal, while another percentage goes to the interest charges.
Common forms of debt you may have/include:
- Student Loans
- Credit Cards
- Auto Loans
- Personal Loans
- Lines of Credit (HELOC)
What to look for when listing your debt:
- The principal amount owed (For example, if you took out a $10,000 loan, and you currently owe $9,000 – the principal you owe is $9,000)
- The interest rate (Also, is it fixed or variable)
- The minimum monthly payment required
What debt strategies are the best for you?
Once you have written down all of your debt from least to greatest (I recommend using my Google Sheet here) the next step to pay off your debt is to pick a debt payoff strategy!
All strategies when it comes to paying off debt stem around a once central premise: Pay Extra Each Month!
To do this correctly, paying extra month requires determining an amount you can afford to dedicate towards debt, typically using the pay yourself first method.
Using this method, you will be able to make extra payments towards your principal each month, thus paying off the debt quicker!
Make Extra Payment Strategies:
The key behind paying off any kind of debt is making extra payments. Freeing up money and making more money to throw at your debt is essential to getting ahead on your debt.
As you read you will learn the biggest focus should be on driving the principal down, not getting so caught up with interest rates. Whatever you do – just make extra payments. Even an extra $50 a month is an extra $600 a year towards your debt.
To use the debt snowball, do the following:
- Line up your debts from the least amount owed to the greatest
- Determine how much extra you can pay
- Only pay extra towards the smallest amount owed, while paying the minimum towards the rest
- Pay off one debt a time, then roll the money into the next debt.
- Wash, rinse, repeat.
To use the debt avalanche, do the following:
- In the avalanche, you will list your debts in order of highest interest rate – not the smallest amount owed
- Determine how much extra you can pay
- Pay that extra amount towards the debt with the highest interest rate
- Pay off the highest interest debt off first, then pay the next
- Wash, rinse, repeat.
The Cash Windfall or “Financial Windfall” method is simple.
Throughout your life you may come across a windfall of money – anything over $1,000 – be it from a tax refund, wedding gift, inheritance, or something else.
In the chance, you get a windfall, instead of spending that money, instead use either the avalanche or snowball to make a one-time large principal debt payment. Doing this will accelerate your debt payoff goal!
Cash Flow InDex
The Cash Flow Index is a unique concept to help you identify which debt/loan to pay first based on the efficiency of the loan.
Using the formula above, by dividing the loan balance by the monthly minimum, you can determine a efficeny score.
A high number (over 100) means the loan is efficient. A low number (under 50) means it is inefficient. Attack the lower numbers first. Regardless of temptation, you will see results based on this efficiency formula!
Ultimately, deciding on a strategy isn't as important as just simply starting! As you begin to pay off debt, you will increase your financial IQ and learn which strategy works best for you!
For example, in our journey to paying off $300,000 in student loans, we used elements of each above! While some will argue which method or debt strategy is the BEST, they all stem from the idea of paying extra.
Doing what is best for your personal needs is what is always BEST. For more ideas, use this list of 25 ways & ideas to pay off debt faster.
There are many tools out there that will help you with your debt.
Tools like apps, budget sheets, financial negotiation apps, and even refinancing. Below are some of the favorite tools we (MLW Team & Myself) love and use. As always, not every financial tool or method is best for you, this is simply a guide:
Personal Finance Apps:
Tips to staying steady:
Knowing and doing are two different things. We may know how to may off debt, just like we know how to eat healthy, but that doesn't always mean we do what it is we know to do!
So how can you “Do More” in regards to paying off your debt? Here are some ideas.
1. Know why you are paying off your debt.
When you know why you need to be debt free, you will be more inclined to stay persistent, which is key.
For us, it was a family. We wanted to start a family and we knew that meant being debt free. Anytime we wanted something short term, we reminded ourselves what we wanted the most long term!
2. Don't compare yourself to others
When you pay off your debt you will need to be willing to make some short-term sacrifices! But like anything in life, the bigger the sacrifice, usually the greater the reward!
This means you have to live based on your values and avoid comparing yourself to others. This is especially vital when it comes to paying off debt! If you can't say no and you're constantly trying to keep up, you will ultimately have trouble paying off your debt.
3. Run your race
The fact that we paid off $300,000 in student loans might scare some people. However, keep in mind that we essentially made $1 payments 300,000 times if you want to look at it with a different way.
In other words, run your race. If you can make one extra $50 payment per month, start there and improve each month. Don't think you have to be an expert or keep up with others.
4. Reward yourself after you hit a goal
We often give into our sudden urges, don't. Reward yourself after you hit a goal, and earn that reward.
Let's say you need a new kitchen table. Maybe once you pay off $10,000 in debt and save $500 for the table, then you can get that table. That is what it takes to make debt freedom happen. It starts with delaying the good, our final point.
5. Build sound money & financial habits.
Money is behavior, and behavior is our habits. Don't get it twisted. Simply saying no more, yes less, and delaying the good for a few months or years can make a huge impact on your life.
Building sound financial habits will help you save more money and invest better long term too!
Here is a list of great articles and resources that will help you with your journey to becoming debt free!
- Millennials & Social Lives – the reason why you're in debt.
- Avoid Lifestyle Creep – don't be boujee and avoid keeping up.
- Pros & Cons of Baby Steps – is it the right path for you?
- Why You're Broke – and 11 ways to fix it!
- Low Income? – How to get out of debt with a lower income.
- Delayed Gratification – How to say NO to yourself
Top 10 Student Loan Articles:
- Great Lakes Student Loans: What Borrowers Should Know in 2021
- 121 Personal Finance Tips for 2021
- 21 Alarming Student Loans Facts and Figures for 2021
- You Graduated College: 6 Tips You Need to Now Know
- 5 Reasons Your Doctor Has a Side Hustle
- Paid Off Student Loans: $262,000 in Student Loans to $0 in 4 Years
- MyFedLoan: Your Definitive 2020 Guide
- Should You Refinance Your Student Loans? (4 Things to Consider)
- The Big 7: A Complete List of Federal Student Loan Servicers
- 23+ Creative (& Unique) Ways to Pay Off Your Student Loans
Top 10 Debt Payoff Articles:
- The 13 Best Part-Time Jobs to Consider for 2021
- How to Not Be Boujeee – Avoid Lifestyle Creep
- 14 Smart Money Moves to Make (When You Earn Less Than $50,000 A Year)
- Pros & Cons of The Infamous Dave Ramsey Baby Steps!
- I Got My Tax Refund Now What? 11 Smart Ways to Use Your Tax Refund
- 6 Things You Didn’t Know About Paying Off Debt
- 11 Reasons Why You’re Broke: And How to Fix It!
- 25 Smart Ideas to Pay Off Debt Fast (A Complete Guide for 2020)
- Student Loans: We Paid Off $55,000 in 2019 (Plus 5 Tips For You)
- How this Couple Was Able to Pay Off $180,000 in Student Loans in 36 Months