Pay Off Debt - 6 Simple Steps to Get Out of Debt (2024)

If you have debt you are in the right place. Most likely, you want to get rid of debt but have no clue where to start. These 6 simple steps to get out of debt helped us pay off $107K of debt in 33 months.

Debt Freedom

Being debt free is critical to financial success. For us, it was just the beginning. By paying our debt off it established a foundation for which to build our financial future on. It allowed us to live off one income and either save the rest or have Erin stay at home with our kids.

If you pay off $107K in 33 months do you think a thousand-dollar emergency or even retirement is scary? No, it puts all of that within reach because you’ve now aggressively gotten rid of thousands of dollars of debt in a short amount of time. By being intense about getting rid of debt it sets you up for success in all aspects of your life.

The steps we learned on our path to becoming debt free are also applicable towards building wealth too. This makes it more about lifestyle and frame of mind and less about finding get rich quick schemes that don’t truly solve your problems.

Becoming debt free though involves a lot of hard work, determination and patience but it is so worth it. We have broken down the process to getting started in 6 simple steps.

Additionally, the articles we write about on Debt Free Happens will focus on both small and big ways to support your journey towards debt freedom. At the end of the day though, these steps are the core principals of getting control of your money and paying off debt and building wealth.

6 Simple Steps to Get out of Debt

The following steps are what Erin and I used to pay off debt fast. Each of these played a role in our success. There is no one magic bullet. It is really the combination of these steps that breeds long term success.

The steps are a combination of practicality and personal behavior. In fact, they lean a little heavy on the personal behavior side. As much as I love math and analyzing our finances we really believe that our personal behavior is the ‘x’ factor that makes the difference. It is the glue that holds together the items such as budgeting and increasing your income.

So, with that, here are the 6 simple steps to getting out of debt.

1. Add up your debt
2. Find Your why
3. Track your expenses, budget and start cutting
4. Make a plan of attack
5. Increase your income
6. Immerse yourself

STEP 1: Add up your debt

The first step is to simply understand how much debt you have. You can’t make it a goal to pay it all off without understanding the total amount. As obvious as this sounds, I find many people don’t know the overall amount they are in debt. They just seem to know what their minimum payments are.

This can be scary because you are probably afraid of what it is. Don’t worry, if you are nervous to add it up, you are normal. I know I never wanted to truly face that overall number for a long time.

The truth though is that once we added it all up we felt empowered. It was now quantifiable. At that point, we knew what we had to do.

When you are thinking about your numerous bills and loans it is easy to for them to each carry a ton of weight in your mind. This prevents you from acting and knowing where to start. Let’s look at it a different way and take the power away from it.

So, with that, add up your debt down to the last penny. Take complete control. For us, it was $107,042.73. What is your number?

Types of Debt

So, what kind of debt does this include? The short answer is all non-primary mortgage debt. This includes the following.

• credit cards
• student loans
• car loans
• medical bills
• IRS debt
• personal lines of credit
• second mortgage
• rental property
• personal loans from family and friends

These debts all carry major risk and are holding you back from living the life you want to live. Eliminating these minimum payments frees up your cash flow. In turn, that gives you freedom in your job and daily life.

This isn’t about ‘possibly’ being set for retirement years down the road. This is about giving yourself freedom in your near future. As a result, the lessons you learn and implement today turn into sustainable long-term success.

It takes hard work though to pay it off but you’ve taken the first step. Now if you are wondering what debt to pay off first hold that thought.

One thing you can do is use this useful debt thermometer to track your debt payoff. Now that you know your total you simply can input the total in and you will be ready to start chipping away.

STEP 2: Find Your Why

No one wants to be in debt. It is very easy to fall into debt. It is much harder to get out of debt. Of course, you want to get out of it but WHY do you want to get out of debt?

Do you want to travel more, buy a house, save for your kids’ education or not be as reliant on your job for security? Maybe your situation is much more direr and you are facing foreclosure or bankruptcy. Maybe your marriage is falling apart because you can’t get on the same page with money.

Regardless of where you are at dig into your long-term goals. Allow yourself to dream with this. I understand that can be difficult when facing foreclosure or divorce but we need long term foundational change here.

If your reason for getting out of debt is to simply avoid your current situation you will probably fall back into debt later. We need to establish a foundation for which to build our future and give ourselves a long-term focus.

We have a series of questions of tasks to help you find your why. Of course, no need to limit yourself to just these items so feel free to explore deeper and more personal questions.

Also, don’t feel you need to solve all of these now. If you don’t have an answer that is fine but it is worth returning to these as you work through your journey. It isn’t uncommon for us to revise and/or further define our goals.

Clear your mind and think about the following things.

List Your Goals

Go ahead and start listing goals that you have. Break them out into short term (within a year), mid-term (3-5 years) and long-term (10+ years) goals. Here is a sample of what these goals could look like. Yours will obviously be different and specific to you. Include items that are both fun but also realistic or pressing items.

Short Term Goals

• Pay off debt
• Fix your car
• Get current with bills
• Not take on more debt
• Build a $1,000 emergency fund
• Tithing

Mid Term Goals

• Buy a new car
• Save for a house down payment
• Build a bigger emergency fund
• Have kids
• Remodel house

Long Term Goals

• Pay for kid’s college
• Retire with dignity
• Travel for extended periods of time
• Build a house or vacation house

These are very standard goals that one might have. Depending on your age and family situation these will vary as well. For instance, if you are 25 then paying for your child’s college is a long-term goal but if you are 45 it could be a short term.

These goals don’t have to be “right” from a financial point now. We can worry about that later. The point though is to take all of these things bouncing around your head and putting them in one spot.

Questions

Next, ask yourself a series of questions.

1. If you didn’t have debt, how would your life be different?
2. How would it benefit you and others?
3. What has your debt prevented you from doing?
4. If money didn’t matter, what would you do?
5. What has prevented you from getting out of debt?
6. What are your money fears?
7. How did you get in debt?
8. Why do you want to be out of debt?

At this point you will have both your goals and answers that will start to shed light on WHY you really want to get out of debt. It isn’t just because it would be nice to get out of debt. It is because it is affecting aspects of your life. You are sick and tired of how this debt is weighing you down.

Going Forward

Now that you know your why let’s keep it at the forefront of your mind during your debt free journey. I suggest putting these goals on your fridge as a reminder. You can take it down for company, but let’s not forget what you really want and are working towards.

The next step involves getting your spending under control. As you go along your debt free journey you will be tested and tempted to fall back into old habits. Knowing your why can help you overcome those temptations. It also helps you realize if the daily decisions you are making get you closer to these goals or not.

STEP 3: Track Your Expenses, Start Budgeting and Start Cutting

So often we feel we don’t have enough money to pay off debt or save more. The best way to find that money is to start understanding where it is going. Also, budgeting gets a bad rap just like dieting. Sorry, I do hate to say it but you do need a budget if you want to get your money under control and blast away your debt.

Budgeting though has never been easier with the many available online tools to budget with. The trick though, for us, was to track our expenses in addition to just budgeting.

Track your expenses

An easy way to track your expenses and budget is to use a software such as Mint, YNAB or Every Dollar. We have primarily used Mint for many years and it is free. YNAB seems to have the best reputation for budgeting and costs a few dollars a month. Every Dollar, which has both a free and paid version, is associated with Dave Ramsey. Try one, or all three, and see what suits you best.

If you use more than one debit or credit card for daily transactions when viewing your account you only see the transactions related to those accounts only. When viewing your accounts in this piecemeal format it gives you the illusion you are spending less than you are. We want to look at everything at once to understand exactly what you are spending your money on and how often you are spending it. Each software allows you to import your transactions and see them in one place.

Perceived Behavior vs. Actual Behavior

So often, we say, “oh, I don’t spend much on frivolous stuff but I just don’t have any extra money for debt”. Well, if you track your expenses you will see exactly what you are spending your money on. Then you really know if you are being frivolous or truly don’t have any extra money for paying off debt as you claim.

You don’t even need a budget to start tracking your expenses. My suggestion is to make tracking the first step. Once you start tracking you will more naturally want to budget so that you can more accurately forecast your spending.

A big part of it is just being aware of where your money is going. That alone will start to influence your behavior and lead to better decisions. You now have a very clear mirror telling you where your money is going.

The next step is to create a budget. Once you do so, though, don’t forget to keep tracking your expenses. That is what will make your budget work because it will translate into your budget categories.

Budgeting

Now, no one likes a budget, but it is the only way to plan how you will spend your money. Most people give up on budgeting within their first month I bet. To sustain success with your budget we recommend doing 2 things.

1. Base your budget off your transactions that you are now tracking. Don’t just start a budget without that knowledge of what you are spending on food, gas or entertainment. To be clear though, you will want to cut in some areas when making your budget but use these transactions as a point of reference.
2. Identify what you value most in your daily activities. These are the items we want to preserve and/or find a more efficient way to do. If you maintain these highly valued activities/expenses you will be more likely to stick with the budget. Let’s cut the expenses that aren’t doing much for us.

Create the budget however you feel best. This can be on paper or in a spreadsheet. Once you have the framework you can put it in one of those 3 tracking tools I mentioned above. This will be the most efficient way to track your expenses and ensure they are meeting your budget. Tracking by hand is OK but it takes more discipline.

Most budget categories will be specific such as rent/mortgage, utilities, but it will help to have more broad categories such as ‘shopping’ to pick up those more random purchases.

The big thing to focus on with budgeting though is the overall number you are trying to keep your spending under. Don’t beat yourself up if you are off in a category but use that as an opportunity to analyze what happened. What is important it to align what you think you spend and what you actually spend.

Start

What I want you to do is to just start. Work on the process of tracking your expenses and reconciling them with your budget. As great as all three of those tools are for tracking/budgeting you will still need to spend a few minutes with each one to do two things on a weekly basis.

1. Basic housekeeping. Make sure the transactions are going to the right categories. See if you need to add in a category that you forgot about when setting it up.
2. Track your progress. See where you are at with the month and see if you need to adjust your spending. By revisiting your budget weekly, it will be at the forefront of your mind as you make purchases.

Once you have started the budget and made cuts identify an amount that you plan to put towards debt every month. Every dollar counts here as you cut and set aside money. Let’s push this amount as much as you can.

Where to Cut

Some areas that you can look to cut spending is that gym membership you don’t use, the cable channels you don’t watch, your phone bill, entertainment and especially eating out. That was big for us.

Maybe you have some monthly subscriptions that you just aren’t using anymore. Those can add up to big savings since they repeat each month.

Unless you truly can’t afford it, don’t necessarily cut items that you enjoy right away. While you need to act like an adult and spend less than you make let’s not throw the baby out with the bathwater. Start small and work in new cuts each month.

Going back to the idea of finding value in your purchases analyze why you buy what you buy.

For instance, say you go to Starbucks every morning and buy coffee. You might be resistant to cutting that out but why are you really buying it every day? Is it because you value that purchase so much? Maybe, but maybe not. Maybe you just really enjoy spending 30 minutes in the coffee shop checking e-mail. Or maybe you just can’t make coffee at home since you feel it takes too much time. It could be you enjoy the time you spend with a friend.

Whatever your reason is, by analyzing the real reason you make certain purchases you can now find a way to cut the expense and still give you the strong majority of what you want. In this case, maybe there is another place you can go for 30 minutes to relax that doesn’t require a purchase. Or just avoid making a purchase but still taking the time to spend time with the friend. Maybe there is an adjustment you can make at home to allow you to make that coffee at home instead.

The Bigger Point

Keep in mind, it isn’t about restricting or depriving yourself. It is about telling your money where it should go. This will give you the most long-term benefit and achieve what you truly want. You are now in control! This is what you truly deserve.

Daily, we all make multiple decisions with money. Those moments are when your budget either sinks or swims. That is when we either win or lose with money. By having a budget and by keeping an eye on where your money is going it gives you the opportunity to make decisions that reflect that plan and contribute towards your financial goals.

You can’t solve your problems all at once but these daily decisions are cumulative. If you make enough right decisions, no need for perfection, you will ultimately win with money.

STEP 4: Make a Plan of Attack

Now that we have a budget in place and we know how much we can throw at debt each month, let’s make a plan for how we are going to pay off your debt.

There are three ways you can pay your debt down. Let’s review.

1. Debt Snowball Method – Pay off the lowest balance first regardless of interest rates. Focus on one loan at a time. Make minimum payments on all other loans.
2. Debt Avalanche Method – Pay off the highest interest rate first regardless of balance. Focus on one loan at a time. Make minimum payments on all other loans.
3. Equal payments – Pay an equal or proportional amount on all loans regardless of balance or interest rate.

These studies from the Harvard Business Review and from Northwestern University’s Kellogg School of Management will help us review these options. I’ll also use personal experience since we had 15 loans that we had to sort through during our debt pay off.

Out of the gate, let’s get rid of option 3. Paying equally on all loans will most likely lead to failure per the Harvard study. Why wait years to get any sort of benefit from paying off loans? Let’s focus our time on one loan at a time. The studies support this.

Now, we have the snowball method and the avalanche method left. To stereotype, numbers people always favor the avalanche method and emotional people favor the snowball method.

If you were to ask me what the best method is without me knowing anything about your situation I would say the snowball method. This is based on my experience, the studies and the countless stories I have heard from those that got out of debt.

Hybrid Approach

For both the debt snowball and the avalanche methods you will focus on one loan at a time. Put all extra money towards the loan of choice depending on your method. Once paid off, you will take the minimum payment from the first loan along with the extra cash in your budget and put it towards the next loan in your plan. For the third loan, you do the same until all debt is paid off.

While I suggest doing the snowball approach I do realize that higher interest rates can cause you to pay more. That is why I suggest a hybrid approach.

My suggestion is to start with the snowball method. If you have a small loan, just pay it off, even if it is 0% interest. We need to see some movement in our situation and paying this off does just that.

As you go along if you have two loans that have similar balances such as $4,000 or $6,000, $16,000 or $18,000 and the higher balance is the higher interest rate, then just pay off the higher loan. Otherwise, just keep using the snowball approach and work your way up to the larger loans.

Do not pay off a $20,000 loan before paying off a $2,000 loan. Just pay off the smaller loan so you can focus your effort on the bigger one. I bet you that you will get almost as much satisfaction from paying off the smaller loan as you do the larger loan.

How much money are you really going to save over a couple thousand dollars? If you really want to know you can use this amortization schedule with extra payments. That is a great way to understand how interest works and provide additional motivation.

Set Goals

Staring down a big loan or savings goal can be intimidating. What you want to do is set a monthly goal and only focus on that. You can measure your progress each week and even daily by realizing that each decision you make can impact this goal.

Maybe the goal is to save a certain amount of money or pay off a certain percentage of a loan. Be aggressive, but be realistic. Start small in the beginning and as you find success reach further each month.

Track your progress by using a debt thermometer which will visually show how far you have progressed. The benefit of tracking your progress is that you receive gratification sooner in the process. Debt payoff often takes a few years so you need to find as many wins during the process as possible.

Where to keep your funds

The best way to ensure that the money you intended to put towards debt is still there at the end of the month is to keep it in a separate account. If you keep it in your checking account you risk spending it on something besides your intended purpose.

The best kind of account to use for this goal is a high interest online savings account. It will earn you about 1% of interest typically. That is much more than what you get at a brick and mortar bank. We also don’t want to invest it since we don’t want it subject to the whims of the market.

You can easily set up a transaction between your checking account to put the money in or even have your paycheck directly deposit it into that account. It is all about making it automatic.

The whole point is that it is out of sight, out of mind and then when you are ready to make an extra payment towards debt it is ready for you to use.

STEP 5: Increase your Income

We have already addressed your budget and making cuts. Let’s look at the other side of the equation by talking about your income. Everyone is different. Some just need to make cuts and others must increase their income.

Either way, the point is to increase the gap between what you spend and what you earn. Whichever way you do that is fine but I suggest both cutting and increasing your income.

There are two ways to increase your income.

1. Sell stuff. By using the resources we have today we can almost immediately get some extra cash and put it towards debt. Every little bit counts.
2. Work more. This can be tricky depending on your circ*mstances but don’t be too proud to take an additional job to get rid of this debt. It doesn’t have to be forever, but if you want to accelerate your debt payoff an extra job makes a lot of sense.

During our debt payoff, we did both. Neither solved our problem overnight, but we did finish earlier because of it.

Those are short term suggestions. Long term though, you might need to strongly consider finding a career/job that pays more. That is a whole other issue but do know that if you are able to budget and pay off your debt you will need less to live on.

While we want you to continue to build your wealth to allow you to give more and find financial independence, there is a lot of freedom knowing that your cost of living is relatively low. That is one of the benefits to being debt free.

STEP 6: Immerse Yourself

This is a step that a lot of people miss. For me, if I am going to be successful at something I need to be passionate about it. I don’t casually do things. I’m either in it or not.

We got passionate about getting rid of debt. The idea of getting rid of our debt was at the forefront of our minds when making decisions.

Environment

Sometimes passion or will isn’t enough though. We need knowledge and an environment that supports our goals. If everyone around you is telling you to just accept debt then that will be your reality. Fortunately, it is much easier to find likeminded individuals to help you than ever before.

Here are some ways you can immerse yourself and develop that much needed community.

1. Podcasts. There are so many but two I would recommend starting with are the Dave Ramsey show and the His and Her Money Show. There are many more out there so don’t limit yourself but those are a good start.
2. Read success stories. On the heels of those two podcasts there are many stories that are like yours. Find those stories and you will realize it is possible to become debt free.
3. Become part of a community. Join a Facebook group for getting out of debt and interact with others in similar situations.
4. Take Financial Peace University. This 9-week course is a great introduction to personal finance. There is no one better at getting people out of debt than Dave Ramsey. Plus, the connections you make with other people in the class make it worth your time and investment.
5. Get an Accountability Partner. Find someone you trust who can be there to talk through your budget or upcoming decisions.

A big part of immersing yourself is listening to and learning from others that have had success. That has been one of the best resources we have used during our journey.

In Summary

I realize that is a ton of information, but that covers so much of what we did to get out of debt. It wasn’t an accident that we got out of debt. The success stories you hear don’t just happen because someone wished for it. They believed it would happen because they knew the steps they were taking lead to success.

These 6 simple steps to get out of debt lead to success.

Fortunately, the lessons we learned to get out of debt also apply to building wealth. We are still learning but we built a strong foundation. We want you to build that same foundation so you can find financial freedom and live the life you want to live.

Even if you just start with a fraction of this information you will be better off for it. Try not to get overwhelmed. Just focus on one thing at a time and realize that these steps will add up.

The most critical step though can be summed up in two words.

Just start!

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