Pay Off Debt: The Ultimate How-To Guide

Hey fam! Did you know millennials carry an average debt amount of $67,400 each? We’ve likely all carried some form of debt during our lives. There’s no shame in that game. But I also know if you’re here, you’re looking for financial stability and those credit card balances are holding you back. So, let’s talk about it. Where do we even start? What’s the best way to pay off debt? 

Debt can create anxiety that’s hard to shake. It can result in a precarious financial position. It might limit the opportunities you’re able to pursue. BUT! The good news is, it’s possible to live without debt. See that? That’s the light at the end of the tunnel. Today, we’re going to cover WHY it’s important to pay off debt, and HOW to do it. And just know, I’m right there beside you, cheering you on. I believe in you!

Why is it important to pay off debt?

Listen, friend. I believe this wholeheartedly: debt doesn’t define you. It’s only a small part of your story. HOWEVER. Consumer debt holds us back from accomplishing our goals – whether they’re financial goals or otherwise. Debt limits our choices and our freedom, and takes an emotional toll. Not great, fam. 

If you’re perpetually making monthly minimum payments on debt, you’re locked into that cycle. There’s an opportunity cost. That money isn’t working for you. If your money is obligated to pay off debt, you’re potentially missing out on investment opportunities that could allow you to shorten your working years.

Making minimum payments is one strategy. But I’m going to be blunt – that is NOT A GOOD STRATEGY. When you make minimum payments, you’re also making MAXIMUM payments in interest, and prolonging the amount of time the debt stays in your life. Remember that ex who wouldn’t stop calling? Never a good look. 

Using this Bankrate calculator, let’s look at an example: maybe you have $1,500 in debt on a store credit card that charges 23% interest. If you make minimum payments, it will take you 161 months to pay off completely. ALMOST THIRTEEN YEARS, my friend. To pay off just $1,500. Don’t forget the interest – you’ll pay more than $2,100 in interest too. 

Before we get too much further, I do want to pause here to acknowledge that we’re focused primarily on high-interest consumer debt today. Think of things like your store credit cards, regular credit cards, some student loans, personal loans, car loans, etc. If your interest rate on your debt is lower than what you could earn on investing, we err on the side of investing. In that case, we’re still working in the background to pay down debt, but the focus is on investing. 

So, let’s get you on the right path. The goal here is to pay off debt in a quick, yet sustainable way. And I gotta tell you, your future’s looking bright, my friend. 

We’ve got to figure out how much you owe.

Hello and welcome to the nuts and bolts of this post. Without doing this step, it’s hard (nay, impossible!) to get a plan to pay off debt. Check all of your bank statements for information on your credit cards, student loans, car loans, mortgages, etc. 

Once you’ve done that, record the name of the debt item, interest rate, minimum required payment and outstanding balance on the item. You’re welcome to download my debt tracker template.

Pick a debt paydown strategy.

Now that we have all of our debt identified, we’ve got to figure out how to prioritize the payoff strategy. If you only have one debt line item, this is easy, but if you have more than one line item, we’ve got to figure out where we start.

There are a couple of different options below. BUT. (have you noticed there are an unwieldy amount of big buts here?) Personal finance is personal. It truly doesn’t matter which of these strategies you use, just that you choose one and stay consistent. 

No matter what approach you choose to pay off debt, you’re going to continue making minimum payments on ALL of your debt items. Then the approach you choose dictates where your EXTRA payments are going.

Here are some options: 

Prioritize by interest rates (debt avalanche).

Focus first on the line items with the highest interest rates. Mathematically, this approach will likely save you the most money in interest at the end of the day. But as we’ve discussed before, money isn’t all about math – it’s also about feelings and emotions.

Use your debt tracker to adjust the payoff order based on the interest rates. Here’s a visual example:

Prioritize by amounts (debt snowball).

This approach starts with the smallest debt amounts. Once the first small debt item is paid off, keep going! Work your way down the list from there. This results in immediate, visible progress and that can help you build momentum and excitement toward your goal.

When I talk with people who want to start paying off their debt, this is the approach I recommend. The mental aspect of paying off debt can’t be ignored, and this approach allows you to build up real momentum as you go along. Here’s an example of the debt snowball approach:

Prioritize by minimum payment.

If your budget is pretty tight already, starting with the debt item that has the highest minimum payment amount might be a good option. This gives your budget flexibility down the road as it can free up some cash. Here’s that example:

Use another approach.

This is your world, we’re just livin’ in it. So if a hybrid approach or something completely different feels like it would work better for your lifestyle, go for it! Whatever will keep you motivated and encouraged on your journey.

Some examples:

• Pay off debt items with the highest minimum payments, and then pivot to the highest interest rate.
• Maybe one of your debt items comes with some emotional baggage (ex. A credit card you opened and regret). If it’s going to make you feel better to remove that line item so you never have to look at it ever again, by all means! Put your energy there first.

Stick to it.

Once you choose a strategy to pay off debt, the only thing to do is hit the ground running. 

But, if you decide the strategy you chose isn’t the one that’s motivating to you, you can switch strategies. If you entered the process with the debt avalanche method, but it’s taking too much time to feel the progress, and you’re losing momentum, then pivot to the debt snowball method instead. The important thing is that you’re continuing to funnel money toward paying down your debt.

Track your debt paydown journey.

If you’ve been around here much, you already know I’m a huge fan of the saying, “If you track it, you can control it.” In this case, tracking your payoff journey can remind you of your progress along the way. When you’re losing steam, and feeling frustrated, you can refer back to your progress tracker. You really are making progress! The numbers are shrinking and the light at the end of the tunnel is getting brighter!

There are lots of ways to track this. A quick Google search will turn up an overwhelming number of software options and apps for this. But I prefer good old pen and paper. 

For example, draw a thermometer and designate line items as debt payoff milestones. Pin to your fridge, and fill in that thermometer each time you hit a milestone! If your drawing skills aren’t up to snuff (you’re in good company!), check out the wide world of debt free printables. Plenty of free options to download and print out for the same purpose. 

Have a plan for any “bonus” money.

There are times in life when we stumble on “bonus” money. Birthday money, Christmas money, an extra commission from work, or maybe your friend finally pays back the money they owe you. This is money you haven’t budgeted and likely haven’t planned for. 

Let’s make a plan upfront for how you’ll use that money. Does all of that money go to pay off debt? Or would you prefer to use a partial amount to pay off debt, and apply the remaining to your fun money fund or a savings account (or another financial goal)? It doesn’t matter, but I find that having a “rule” is helpful. As soon as I find bonus money in my bank account, I know EXACTLY where it’s going and I’m not tempted to spend it all.

Don’t miss any payments.

This is important! Whatever you do, don’t miss any payments. If you have an unexpected expense, or run into any bumps along the way, you have permission to pull back to minimum payments only. But don’t lose your momentum. Dust yourself off and get back on the horse! Remember your “why” and dig deep to keep going.

Celebrate your accomplishments.

Viva la debt payoff revolution! You’re slaying it. Don’t forget to stop and smell the roses along the way. Before you start, designate a couple of big milestones along your journey where you will pause to celebrate your progress. 

Go for a hike with your friends, buy yourself a new outfit, splurge on a nice dinner! Whatever it is, take a moment to be proud because you CAN do this. 

And then buckle yourself back in the driver’s chair and KEEP GOING.

In conclusion.

As we know now, life without debt is completely possible. With some time and effort, paying off debt can propel you down the road on your financial journey. It can help minimize your anxiety around money, and open up doors to opportunities you never thought possible. Paying off debt, combined with building up a healthy mindset and tracking your money, can launch you into an exclusive minority, where financial stability is possible and the possibilities are endless.