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Keys To Paying Off Debt

Drowning in debt can feel like, well, drowning. No matter how hard you try, it feels like you never quite make it above the surface. You start to wonder how long you can carry on like this. I have good news and bad news. I always like to hear bad news first so here goes; getting out of debt isn't easy. As is the case with pretty much anything worthwhile, you will need to make drastic changes, many of which need to be permanent in order to avoid being a similar position again. I see a lot of dieting parallels myself. 

The good news? It is relatively simple in nature to get out of debt. Cut back on your spending. Have a plan. Stick with the plan. I can assure you that no matter how bad your situation may seem, there are countless people out there who have had it worse and made it to the other side. 

To understand debt, you must first understand yourself

Paying off debt is largely psychological. Having discipline is just about the only way to pay it off. You need to take a hard look in the mirror and understand what your relationship is with money. Typically, how we interact with money can be tied back to our youth or any number of impactful situations. The key is to figure out what your profile is. Do you have a difficult time saying no to purchases you know you should avoid? What steps do you need to take to curb impulse purchases? Identifying problems you have with your thoughts on money and make a conscious effort to change. 

Re-train your buying habits

To pay down debt, you need to spend less than you make. Take a hard look at your recent expenses. Dig into where your problem areas are and focus everyday on limiting them as much as you can, at least until you get out of debt. This won't be fun. You are going to go without for the period it takes you to pay off your debt. That means no eating out, no lavish trips, no fancy new cars, and no new clothes. This may seem extreme but keep in mind this isn't forever. Remind yourself why you are doing this and then you can return to SOME of your guilty pleasures once that debt monkey is off your back. 

Increase Your Income

I get it,  everyone would love to make more income but you have things holding you back. Career choice, non-work obligations, and underlying health conditions can all play a part. Have you looked into all options? Could you start a side business? Deliver pizzas a couple nights a week? Work a few overtime shifts? What about selling items you longer use? Maybe even bigger changes like a new career? There is nearly always a way to earn a few extra bucks. 

Not all debt is created equal

To clarify, there is no such thing as good debt. Debt means you owe someone money and they are charging you additional money until you do. Now that we have that out of the way, think of an interest rate as a rating for how bad your debt is. The higher the interest, the worse the debt is. Simple enough? Assume you have a debt of $1,000. If your interest compounds at 10% annually, you owe $100 the first year. If it compounds at 20%, you owe $200. Here is where it really gets bad. Let's assume you don't pay anything the first year. Now in the first example you owe $1,100 so it will gain $110 in interest owed. The second example will now accumulate $240 in interest. The longer this goes on, the faster it accumulates, the more you sink, and the harder it becomes to get to the surface. 

How the debt snowball works

How the debt snowball works

There are two methods we will go over for paying off debt. The first one is called the debt snowball. This one is easier from a psychological perspective. It allows you to knock out one debt at a time by focusing on the smallest one first. Here is how it works:

1. List out all of your debts individually, smallest to largest. 
2. Make a minimum payment on all debts to avoid additional charges. 
3. Pay any extra you have towards your smallest debt until it is paid off. 
4. Move on to your next smallest debt. 
5. Repeat until your debts are paid off.

Track your progress and get that rush of dopamine each time you cross one off your list and give yourself a high-five. By knocking off the smallest debts first you will be able to build momentum quickly and keep your motivation. 

The downside is by focusing on the size of the debt instead of the interest, you may end up paying more in the long run. 

How the debt avalanche works

How the debt avalanche works

The debt avalanche is another method that is based more on the technical aspects of debt. 

Here are the steps:

  1. 1. List out all of your debts individually from the largest interest rate to the smallest. Pay no attention to the dollar amount.
  2. 2.  Make a minimum payment on all debts to avoid additional charges. 
    3. Pay any extra you have towards your debt with the highest interest rate.
    4. Move on to your debt with the next highest interest rate. 
    5. Repeat until your debts are paid off

This method will likely be the most cost efficient and save you the most money. However, it can be difficult to maintain as it doesn't allow for the quick wins that the snowball method does. You will need to be strong willed for this method to work as it can take some time to start to see the fruits of your labor.

Whatever method you choose, look for ways to track your progress and have a supportive circle to cheer you on. You may be surprised how important this is. Everyone is excited to get going but after months of eating cheap (and hopefully healthy) food and not indulging in extracurriculars, you might need something to keep you going. Choose long term freedom over short term comfort.