There aren’t many better feelings than the one that comes right after you make the payment that gets you to debt-free.
There’s a freedom in that moment. A relief from anxiety. A feeling that now, with that debt gone, you may actually be able to do all the things you really want to do with your life.
If you’re in debt now, it may feel like that moment is a long way off. And there may be some truth to that. There isn’t always a quick and easy path to becoming debt free.
But the other truth is that it IS possible to get there. Many people have done it before and you can do it too if you have a good plan and the right mindset.
And in this post I’m going to show you exactly how to find both.
So here it is: a step-by-step guide to crushing your debt.
Step 1: Start with WHY
In his fantastic book Start With WHY, Simon Sinek shows how great leaders inspire people to action by starting with the WHY behind their mission and letting that mission dictate WHAT they do and HOW they do it.
The people who are successful at reaching their financial goals are the people who start with the WHY behind each goal and allow that vision to guide their financial decisions.
They are more motivated, they make progress quicker, and they are happier with the outcomes because those outcomes are directly tied to their personal values.
So before you search for the “best” way to pay off your debt, ask yourself some questions about why you’re pursuing this in the first place:
- Why do you care about getting out of debt?
- How will you feel when it’s gone?
- What will being debt-free allow you to do that you can’t do now?
- What does being debt-free represent to you?
Write out a clear, concise mission that defines your WHY and put it in a place where you’ll see it regularly.
If you let that mission guide your decision-making, I promise that you’ll get to debt-free a whole lot sooner than you would otherwise.
Step 2: Know what you owe
Before you can make a plan for paying off your debt, you need to know exactly what it is that you owe.
There are a few big pieces of information you’ll want to know for each debt you have. Collect this all in one place so that you can compare your various debts side-by-side when it’s time to decide which ones to pay off first:
- The type of debt (e.g. mortgage, student loan, credit card, etc.)
- How much you owe
- The interest rate
- The minimum monthly payment
For student loans, you will also want to know:
- The type of loan (e.g. federal or private, FFEL or direct, subsidized or unsubsidized, etc.)
- The loan status (e.g. deferment, grace period, repayment, etc.)
- Any other terms and conditions (the promissory note should explain these)
There are a few different places you can get this information:
- The National Student Loan Data System for student loans
- AnnualCreditReport.com to pull your credit report for other loans
- Statements you’ve received from lenders
Gathering all of this information in one place will make the next steps much easier. A free tool like this one can help with this organization, but a simple spreadsheet will also work just fine.
Step 3: Automate your minimum payments
Just like you would automate your savings, automating your debt payments is going to be the fastest, easiest, and least stressful way to get to debt-free.
And as a start, you can put all of your minimum monthly payments on auto-pilot. This will do a few important things for you:
- Remove the monthly anxiety of wondering whether you’ve made all your debt payments.
- Remove the risk of penalties for late or missed payments.
- Remove the risk of having any of your debts go into collection.
- Keep your credit history in good shape.
You should be able to set up automatic payments either through your lender’s website or by using your bank’s online bill pay system.
Step 4: If you can’t afford the minimums…
If it’s a struggle just to afford the minimum payments, you may want to look into some kind of credit counseling.
Now, you need to be careful here because there are a LOT of shady companies who make big promises about reducing or eliminating your debt, only to charge you a lot of money with minimal results.
If this is a route you want to explore, I would suggest checking out The National Foundation for Credit Counseling to see who you can find in your area.
Step 5: Track your spending
Paying of your debt is almost certainly going to require a change in your regular spending patterns, especially if you want to pay it off quickly. And the first step towards changing those patterns is knowing what they are to begin with.
The simple act of tracking your spending can be life-changing for some people. I know that for me personally, it was eye-opening to see where my money was actually going each month and how that differed from the mental accounting I had been doing up to that point.
At the very least, tracking your spending will show you exactly how much money is currently available to put towards your debt and how you could free up more money so you can be debt-free even sooner.
I personally use mint.com to track my spending. I just link my accounts and it automatically pulls in all my transactions and helps me categorize them, making it all as easy as possible.
Other people love the tool You Need a Budget, and you could even track everything with a spreadsheet or by hand.
However you do it, this information will be key to the rest of your decisions.
Step 6: Build a cash cushion
There are two big reasons why I recommend keeping some money in a regular old savings account, even if the interest it pays is nothing compared to the interest on your debts:
- Building that savings account gets you into the habit of saving, which is quite possibly the most important financial skill there is.
- That cash cushion will keep from you having to take on even more debt when something unexpected comes up, like a car repair or a trip to the ER.
$1,000 in a savings account is a good goal here. Put a plan in place to build it over time and then get back to your debt.
Step 7: Create your debt repayment plan
At this point, you have all of the information you need to create your initial debt repayment plan.
The good news is that your plan doesn’t have to be all that complicated. There are really only three important questions you have to answer:
- How much extra money can you put towards your debt each month, beyond the minimum payments?
- Which debt will you put that money towards first?
- How will you prioritize those extra payments once that first debt is gone?
The answer to that first question will come from the information you get from tracking your spending. There may also be ways to increase the amount you can put towards your debt, which we’ll get into below.
For the second and third questions, you have a few options.
Probably the most popular strategy is the debt snowball, where you line up your debts in order of balance, pay the lowest balance off first, then the next lowest, and so on. The thinking is that it’s motivating to see your debts actually paid off, which makes it more likely that you’ll stick to your repayment plan.
The biggest alternative is often called the debt avalanche, where you line up your debts in order of interest rate, pay the highest interest rate debt off first, then the next highest, and so on. The logic here is that this is the way to save the most money, since the higher interest rate debts are costing you the most.
You could also go with a hyrbid approach that combines the best of both worlds.
Really, the specific plan is less important than having a plan that you believe in and can stick to. Consistent progress, not perfection, is the goal.
Here’s a tool that will help you create your plan: A Simple Tool for Creating a Killer Debt Repayment Plan.
Step 8: Remember your other financial priorities
As you go about creating your debt repayment plan, don’t forget to factor in your other financial priorities. While getting to debt-free is a fantastic goal, there are some cases where it will make sense to put another financial goal first.
For more guidance on which financial goals to prioritize, check out my financial order of operations.
Step 9: Get an accountability partner
No important quest is ever without bumps along the way, and having someone who understands your goals, helps you stick to your plan, brings attention to your successes along the way, and helps you work through the obstacles that come up can honestly be the difference between success and failure.
I know that I owe a TON to the small group of people I’ve relied on over the years to pick me up when I’m down and push me to be as good as I can be.
If you find even one person you can rely on for support, encouragement, and advice as you work to become debt-free, it can make all the difference in the world.
Step 10: Find some debt relief
One good way to speed up your debt repayment is to reduce the amount you actually owe. And believe it or not, there are some ways to do that.
If you have student loans, you can look into income-driven repayment plans. These plans can reduce your minimum monthly payment and may even lead to forgiveness of some of your loans over time. The Public Service Loan Forgiveness Program is especially beneficial if you can qualify.
Keep in mind though that a smaller monthly payment could cause you to pay more over time, and that you always have the option to pay more even if your required payment is less. In many cases paying more than the minimum will make a lot of sense.
You can also do small things like calling up your credit card company and asking for a lower rate, or bigger things like refinancing a mortgage, all of which can make it easier and less expensive to pay off your debts.
I will say that I would personally only take this so far. While a few big wins here will be really helpful, I’m not a huge fan of chasing limited-time 0% credit card offers or anything like that. I just think that your time and energy will be better spent on the real issue of eliminating your debt, not on trying to game the system.
Step 11: Free up more cash
It really goes without saying, but the more money you can put towards your debt, the better.
Not only will bigger payments reduce the amount of time it takes to get to debt-free, but they will reduce the amount of interest you pay over your lifetime. That puts real money back in your pocket and brings you even closer to the ultimate goal of financial independence.
The quickest path to increasing your debt payments is typically to reduce your spending. You can almost always find some simple ways to free up some extra cash, such as:
- Switching to a lower-cost cellphone provider
- Cutting cable
- Packing a lunch for work
- Un-enrolling your kids (or yourself) from some activities
If you want to get serious, you could even explore some REALLY BIG wins like moving to a less expensive house, trading in a car for a less expensive model, or even switching to a single car for the whole family. These are the kinds of decisions that could knock years off your debt repayment schedule.
And if you need one more incentive to cut back, the research suggests that it may actually make you happier.
Step 12: Increase your income
Of course, cutting back can only get you so far. There IS some minimum amount you need to spend just for basic survival, and most of us are going to spend more than that so we can have at least a little bit of fun.
But there is no limit on the amount you can earn. In fact, earning more is possibly the most powerful tool you have for reaching any financial goal, including killing your debt.
There are any number of ways you could go about this, including:
- Negotiating a raise at your current job
- Finding a higher-paying job elsewhere
- Starting a side hustle
- Selling some of your stuff
The possibilities are endless and even a small amount of extra income can go a long way, as long as you’re putting some of that extra money towards your debt.
Step 13: Find inspiring stories
No matter how motivated you are to crush your debt, there are going to be points along your journey where you feel tired and frustrated. There may even be moments where you feel like giving up.
Your accountability partner will help you work through these moments, but you can also find encouragement and inspiration from the stories of other people who have paid off their debt or are somewhere along their journey just like you.
Here are a few people worth checking out:
Or if what you really need is a kick in the ass, read this: News Flash: Your Debt is an Emergency!!
Step 14: Stick to the plan
If you’ve done all of the above, congrats! You’re well on your way to being debt-free.
But just like with investing, the most important part of your plan is not actually the plan itself, but your ability to stick with it.
The only way to get to debt-free is to keep working towards it, no matter what life throws your way.
When things get difficult, look back at your WHY from Step 1 and remind yourself why this matters to you. Talk to your accountability partner. Focus on the very next step you can take to keep making progress.
If you stick to your plan and keep putting one foot in front of the other, you’ll be debt-free before you know it.
What’s your debt story? Do have any advice for people who are looking to pay off their debt? Or do you have questions about how to do it? Let us know in the comments below.