13 Super Simple Steps to Pay Off Your Debt

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You have an embarrassing little secret. It’s like a shameful four letter word that you hope no one mentions in polite company. It makes you feel ashamed and out of control. You’ve even seen the late night infomercials on how to cure it, as though it was a horrible virus you contracted after a late night shopping spree but can’t even tell your doctor about.

Okay, wait.

That was a fun intro. But really now. It’s not that bad!

Debt.

See? I said it.

So you have acquired debt. Since you are here reading a personal finance blog, I’m going to assume that you are ready to face the fact that you have debt, and now you are ready to do something about it.

So let’s do something about it. It’s time to learn the simple steps to pay off your debt. Like a boss.

Steps to pay off debt

Step 1: Accept it. And then move on.

Take one last moment to wallow in self pity and regret. You made some bad financial decisions and now you are paying the price, literally. Now it’s time to take ownership of your mistakes and take control of the situation. Once you accept that your debt is your problem, and that you are ready to remedy the mistakes you made, then you can move on.

Take note: You won’t be able to move forward and change your financial habits until you realize that it’s time you made the change. Sure, you may manage to pay off all your debt. But without change you will most likely start accumulating it all over again.

It’s time to admit that you made some poor financial decisions. And that’s okay. Because now you can follow the simple steps outlined below to adjust your spending and start making smart financial changes. Changes that will get you out of debt and achieving your financial goals for the future. So let’s move on now.

Step 2: List all your debts

Open up a blank spreadsheet, or whatever scratch paper you have handy, and start listing all of your debts. Include money borrowed from friends and family, unpaid medical expenses, every credit card you ever opened, auto loan and late fee you have.

Include the following:

Amount due
Payment date
If you are behind payments, how many
Interest rate
Minimum payment amount

Step 3: Arrange list from lowest to highest

Once you have all your debts listed, arrange them in order from lowest total to highest. This is where it helps to use a spreadsheet rather than a napkin.

Step 4: Arrange list from highest interest rate to lowest

Now, arrange all your debts again, this time in order from highest interest rate to lowest.

Step 5: Debt consolidation – Don’t be fooled

I’d like to address the option of debt consolidation. Don’t be fooled into thinking that it may be a good idea for you. Here’s why it likely isn’t:

While it does combine all your debts into one organized payment, potentially with an overall lower interest rate, the payoff time will be longer.
Longer payoff means more interest accrued and alot more cost to you.
This is why companies offer debt consolidation.
Debt consolidation treats the symptoms of poor financial habits. It allows you to make payments on everything all at once without feeling overwhelmed by all the separate payments you need to make.
Debt consolidation does NOT treat the underlying problem of poor financial habits. It does not help you change your spending habits and prevent debt from happening again.

Step 6: Pick you payoff method

Which would be more motivating for you:

Paying off the smallest debts first and seeing them go away?
Paying off debts with higher interest rates and knowing that you are saving more money in the long run by paying less in interest?

Method 1: Avalanche method:

This is where you take the money you have available to pay off debt and:

Pay the minimum balance for all debts.
Take what money you have left over and put it all toward the debt that has the highest interest rate first.
Benefits: By lowering the overall amount of interest you accrue, the overall cost to pay off all your debt will be less.
Cons: If your high interest rate debt is also a large amount of debt, it will take a long time to pay it off completely, making it difficult to remain motivated to keep making those extra payments.

Method 2: Snowball method

This is where you take the money you have available to pay off debt and:

Pay the minimum balance for all debts.
Take what you have left over and put it all toward the smallest debt you have.
Once that debt is paid off, you have more money to put toward the second smallest debt.
As debts become paid off there is an avalanche effect where more money can be applied to the next larger debt, until everything is paid off.
Benefits: It is motivating to pay off the smaller debts and feel like you are making progress right away.
Cons: If your highest debt has a high interest rate, it will cost more money overall.

You can read more about these two methods of debt payoff here.

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Step 7: Track your finances

This is a must so that you know how much money you have every month to go toward savings and debt pay down.

In How To: Track Your Personal Finances, I outline in detail how to do this.

In Step 6, I mentioned that you will need to start by paying the minimum balance for all debts, then applying everything else you have left over (after all monthly expenses) to a specific debt. But first, how do you know how much money you have to apply toward your debt?

Step 8: Calculate how long it will take to pay off your debt

Knowing that all your hard work will pay off and that there really is a light at the end of the debt tunnel is essential to staying motivated and maintaining forward progress.

Once you know how much money you have each month after all the minimum payments, you can calculate out:

How long it will take to pay off the first debt on the list.
How long it will take to pay off the next debt on the list.
So on, until all debt is paid off.

Celebrate each milestone! Just don’t make it an expensive celebration!

Step 9: Pick three expense categories to lower spending

By this step you’ve listed all your debts, made a plan to payoff each debt and calculated how much money you have to apply toward debt pay down and how long it will take.

Now, what if you found ways to increase the amount of money you can apply to your debts? How much faster would you reach your goals?

After about two months of tracking finances and making your strategic debt payments, pick three categories from your expense tracking that you could improve upon.

Here are some ideas:

Find substitutions:
- Make coffee at home or work instead of going to your favorite coffee shop for that macchiato.
- Use Netflix or Hulu instead of premium cable.
- Change your phone plan to something cheaper, such as Republic Wireless or Google Fi.
- Instead of shopping for new clothes at your favorite department store, check out your favorite fashions on online consignment sites like ThreadUP. I’m so in love with this company, I now buy at least 80% of all my clothes from them. I’ve also received hundreds of dollars in store credit by sending in my own clothes that I don’t wear anymore.
Comparison shop for better deals.
- Just a little added time online can save you so much money on everyday purchases. For instance, instead of rushing to Target every time I ran out of any household cleaning products, I now go to Amazon or Grove.com. This saves me money on the products, time and gas by not traveling to the store all the time, and hundreds in impulse purchases.
Use your grocery store app to plan shopping trips ahead of time, based specifically on meal planning and the foods on sale. First, you save money by having a plan and not simply buying everything that looks good, only to toss it when it goes bad a few days later. Second, planning your trips around the foods on sale will save approximately 25% on your total grocery bill. Erin Chase of Grocery Budget Makeover and $5 Dinner Plans is an excellent resource for learning how to lower your grocery budget. You can visit her blog atGrocery Budget Makeover.

VisitThe True Cost of Your Morning Lattefor more ideas to shave expenses, and just how much of an impact those little savings can have on your finances.

Step 10: Increase your savings

Can you think of other ways to increase your savings?

Hold a garage sale
List valuable items in your closet or garage that you don’t use on Craigslist or Ebay
Turn your hobbies into side hustles
Refurbish old furniture and sell for profit
Sell your DIY creations online
Request a raise
Take on a side job, offer lessons or consulting work

Step 11: Put that money toward your debt

Now that you’ve saved and earned a little extra cash, apply every penny toward paying off your debt. If you need a little extra motivation to not spend that money on something shiny and new, or a weekend trip, or whatever, recalculate your payoff dates using all that extra money. Seeing the calculated reality of how much sooner you can be free of your debt will keep you focused and moving forward.

Step 12: Each month review your expenses and adjust your payoff timeline

As you learn to make substitutions and continue cutting back on your monthly expenses, you’ll want to revisit those payoff dates. Not many things in life are more satisfying than seeing your goals come closer and closer to coming true.

Step 13: Keep at it!

As they say, one day at a time. You know how long this will take, now you just have to stay on track. That day will come, probably sooner than you initially calculated it would.

Bonus: Ways to not feel deprived when paying off debt

Be proud that you are taking control!
Start hosting rather than going out to dinner or happy hour.
If you feel deprived of entertainment, start your own groups to do things at low or no cost, like picnics, hikes and free local events.
Write out three financial goals and what it will cost to achieve them. How long will it take to achieve them once all your debt is paid off? Use these to stay motivated to keep making progress, you will get there!

What about student loans, car loans or mortgage debt?

For student loans, check out https://www.studentloanplanner.com/. Travis Hornsby is a wealth of information on student loans and how to create a plan to pay them down.
Not all debt is bad debt. What is the interest rate? Does your savings, investment or retirement account earn more interest than this? Put your money to better use. When it’s your home, factor in tax benefits and appreciation.
If you are actively working to increase your credit score:
- I utilized credit card debt to my advantage in order to improve my credit score. Here is when and why you might consider this strategy:
  - Only if ALL credit card debt and high interest debt is paid off.
  - Only carry financing with zero or very low interest rate, make sure it is worth it to you.
  - Companies like Walmart and Best Buy offer introductory 0% financing for one year. I bought a new flat screen tv, calculated monthly payments within the introductory period and added the expense to my expense tracking and budget to ensure that I was comfortable with the payments.
  - Then I put it on autopay and forgot about it.

The emotional ups and downs of debt

This guide is a practical resource to help you form your plan to payoff debt. But I do recognize that this article doesn’t speak to the emotions that weigh on you throughout debt journey. Which is why I’m providing a useful link which you may find valuable. Rebecca over at Financially Minded Millennial has a full series on the emotions of debt. You can check it out at: Understanding the 12 Emotional Stages of Debt – An Overview.

Recap

Debt sucks. It happened for a reason. Accept that you have made some poor financial decisions. Now, do something about it. Follow these steps and make some positive financial changes.
Make a list of all your debts.
Arrange that list from smallest amount to largest.
Now arrange your debts from largest interest rate to lowest.
Don’t be fooled by debt consolidation
Pick a payoff method –Make a plan to pay the minimum balance for every debt each month, then apply extra to either:
1. The smallest debt first so that you see them paid off quicker.
2. The largest interest rate first so that you save more money in the long run.
Track your monthly expenses to determine how much money you have, after your expenses, to apply toward debt payoff.
Calculate how long it will take you to pay off each debt.
Pick three expenses and brainstorm ways to lower them by next month.
Sell what you aren’t using and look into ways to earn extra money.
Apply that extra money towards your debt.
Review your expenses every month and adjust your payoff goals.
Keep at it!

Action Steps

This one is super easy. Start with step one and keep on going! Be sure to let me know how it goes!

13 Super Simple Steps to Pay Off Your Debt | SStoFI (2024)