Wondering how to actually pay off your debt for good? How different would your life be if you were able to pay it all off? Imagine what you could do if you had a step-by-step debt payoff plan and we were making visible progress toward your goal!
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Debt is a tool
Debt, like a wrench, a bicycle, or a knife is just a tool. You can use a wrench to fix a car so that you can get to and from work, serving your community and providing for your family. You can also use it to smash into someone’s window and steal their belongings. I can use a bike to exercise or to run over my little sister in the driveway. A knife can be used to prepare a decedent meal shared with loved ones. It can also be used to take a life.
Debt is a tool. It can be used to allow a young couple to purchase their first home and start a family decades before they would have been able to otherwise. I can also use debt to allow spending that brings on severe financial hardship. We live in a society that readily accepts carrying debt. It’s not only ‘normal,’ but even encouraged to finance any and all wants and needs.
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Debt is a thief
Here’s the truth: debt takes away decisions.
+ Debt = – Decisions
- Debt steals your ability to truly relax on your long-awaited vacation. You know in the back of your mind that the bills you left behind, and the ones you’re wracking up on your trip, will be waiting for you when you get home.
- Debt steals a young bright-eyed college grad’s ability to buy their first home or take a job their really passionate about because their student loan payments are sucking the life out of their paycheck.
- Debt steals a mom’s ability to spend more time home with her babies because that van payment is going nowhere soon.
- Debt steals a dad’s ability to connect with his wife and kids. Even when he’s home, his mind is somewhere else, worrying about whether or not he’s going to be able to provide for his family.
- Debt steals our ability to decide where and how we live.
Debt is a thief.
No debt payoff vision, no debt payoff hope
When you carry debt, you’re in a cycle of paying for the past. We justify this because of what debt allows us to have. We willingly agree to trade our ability to make choices for years and years of payments. Why? We partly willingly trade our choices for payments because it’s become ‘normal.’ But it’s also because we’ve lost sight of another alternative.
Paying off debt is possible and so is living a debt-free lifestyle. However, I’ve found that it is not the belief alone that debt is necessary that holds people back from pursuing paying off their debt. What may be holding you back from paying off your debt is a lack of hope. There is a general lack of hope that paying off debt would actually make life any better.
A picture of a better life (without debt)
Close your eyes and picture a life where you wake up in the morning and go to a job you actually enjoy. You had the freedom to search for the perfect role because you have a flexible budget and savings in the bank. You’re not tied to a desk surrounded by equally, if not more, miserable people. You don’t have to put up with bad management or toxic culture because your payments didn’t own you.
I had a similar vision in my early years as a mom. I didn’t want to have to wake up every day and drop my babies off with someone else just so that I could spend the next eight hours with the angry and frustrated outside world. I still had a desire to work. I just wanted to be able to work a little less and be able to do something that felt like a good use of my time and energy.
We WEREN’T ‘Built Different’
In our 20’s, my husband and I did something totally ‘normal.’ We got married and then immediately went into debt. Credit card debt, school debt, car debt, medical debt, mortgage debt, you name it, we financed it. Paying off debt wasn’t even on our radar. We lived in a blissful state thinking we were winning at life because a.) My college professor told me financing my education was an ‘investment’ and b.) we were building up those credit scores like nobody’s business. Check and check.
Debt Sucks. (period)
Years of juggling payments and transferring balances to save on interest passed. Eventually, it felt like our life (and our marriage) might be falling apart. I then asked a very important question my business and finance education never answered. How do you pay off debt when there’s no money left after you make all of your payments? Is debt freedom really even possible?
I knew I wanted to be able to spend more time with my babies. I also wanted to do that work that was meaningful to me. Mostly, I wanted my husband to not walk in the door late in the evening looking like a zombie after his 12+ hour workday just so we could make our payments.
A new plan (debt freedom)
I knew we needed to make a plan to pay off our debt. Using my finance background and internet detective skills, I searched for answers. I was taught to build and protect my credit score, invest, and save for retirement at all costs. It hadn’t gotten me very far. We were stressed, stretched thin, and scared. We needed a new plan.
By making some changes, we were eventually able to pay off over $60k in debt in about two years. At our peak, this meant we were sending 50% or more of our take-home pay to non-mortgage debt payments. We lived on very little but we were happy and we survived.
How much is too much debt
Before I tell you how to pay off your debt, let’s talk about how much debt is too much. I have two answers to this question. The first is that all debt takes away our ability to choose how we spend our time, money, and life. Therefore, I could say any debt could be considered ‘too much.’ Another answer is the technical, textbook answer. This involves calculating one of your four foundational financial health ratios known as Debt-to-Income.
Debt-to-Income (DTI) Ratio
I can calculate Debt-to-income (DTI) like this:
Annual Debt Payments/Annual Gross Income= DTI
For Example
Annual Debt Payments = $12,000 Annual Gross Income = $75,000
$30,000/$75,000=0.40 (40%) – this includes mortgage payment and is 4% above the recommended limit of 36%
$12,000/$75,000=0.16 (16%) – this excludes mortgage payment and is 2% above the recommended limit of 14%
DTI = 40%
I’ve found a general consensus that a debt-to-income ratio below 35% is considered ‘healthy.’ However, this again varies on personal preferences and situation.
The time for debt payoff is now
Paying off your debt is not for the faint of heart. It’s going to take sacrifice and hard work. However, I have yet to meet a single person who regretted completing this journey. That is a 100% satisfaction guarantee! If you can commit to the plan and put in the work, future you will be so grateful for the present you’s sacrifice.
Future you is not held back by payments or stressed about money. She gets to decide where and how often she works. She has the ability to choose her lifestyle and how she spends her time. She’s confident and independent and isn’t owned by any bank or employer. She can look back at the time she spent sacrificing to get to where she is now and know that it was all worth it and she never has to go back there again.
If you’re ready, let’s get started.
Step-by-Step Debt Payoff Plan
The following is a step-by-step breakdown of everything you need to know in order to pay off your debt. It is my goal to give you everything you need to be successful in paying off debt, managing your money, budgeting, and achieving financial freedom.
Commit to paying it off now
Befriend future you
Future you will be glad that present you started NOW. There will always be a reason to put off paying off your debt. However, there is very little chance that you will regret starting before you’re ‘ready.’ Start now and commit to sticking it out no matter what comes up along the way.
No More Debt
To commit to paying off your debt now, you also need to commit to not taking on more debt. Are you committed to not using debt going forward? If not, you may as well just keep doing things the way you have been. Paying off debt while still taking more on is like taking a bath while rolling in the mud. I say this because you might as well wait until you’re done to clean up the mess.
Emergency fund first
Before even thinking about making extra payments on your debt, you first need to establish a buffer between your income and the unexpected. If you need an emergency fund still, read about emergency funds HERE. Please note that if your financial goal is to pay off debt, it is not a requirement to have a full emergency fund (3-6 months of survival expenses) saved to get started on your debt. You simply need to have enough money set aside for emergencies that would keep you from going further into debt while you’re on your debt pay-off journey.
Get organized
Total your liabilities (your debts)
Pull together all of your debts including balances (the total amount owed), the minimum monthly payment, and the due date.
Map out your monthly payments
Put your payments in order on a calendar page or a notebook. Total up the minimum payments over the course of a month.
Create a debt payoff budget and cash flow plan
Prioritize debt payoff as your current financial goal. This means that all of your money that is available to fund goals is going to be directed toward debt. You’ll need to update your cash flow plan to reflect this. If you’re not sure how to create a cash flow plan, read THIS first. Once you have your cash flow plan established, you’ll know what percentage of your income is available for paying off debt.
Pick a Pay-off Debt Strategy
Debt snowball
The debt snowball method is a debt payoff strategy that involves paying your debts in order of their total balance owed from least to greatest. This strategy is effective because it allows you to experience ‘quick wins.’ Debts with small balances are easy to pay off more quickly allowing you to check debts off your list at a faster rate. This works in tandem with psychology. If you have 10 total debts, reducing that number down to 7 by quickly paying off lower balances will feel more impactful than paying off a single higher balance debt.
Debt avalanche
Using a debt avalanche is another strategy for paying off debt. This method involves paying off debt in order of interest rates from greatest to least. This method can be effective because when you pay off high-interest-rate debt, in theory, you will have more funds available to pay down the actual principal (the amount you owe not including interest) balance.
Debt disco
For the record, I don’t believe a debt disco is a real thing. This is just the term I like to use when referring to clients who haphazardly make random extra payments to whatever debt they feel like. I don’t recommend this strategy. However, it’s a choice, therefore, it’s on the list.
Recommendation
It is worth noting that my personal preference is the debt snowball because that is how my family successfully paid off over $60,000 in debt. In addition, being trained in counseling and education, I am always looking for ways to apply psychology and behavioral science to improve execution, productivity, and efficiency. However, since we all think differently, it’s important to just pick a strategy that you feel you’ll be most likely to actually use.
Implement your debt payoff plan
Become a ‘Do-er’
Once you’ve committed, gotten organized, and picked a strategy to pay off your debt, it’s time to implement. It’s worth noting that, for most people, this is the hardest part. This is the part that separates the doers from the dreamers. You can plan and prepare until you’re blue in the face. However, knowing something without doing anything is useless.
Future Focused
Focusing on your vision for your debt-free future, start taking daily steps toward your goal. Use future you as a motivator for the sacrifices made today. Some ways to keep your goal front of mind include using a debt payoff progress chart, creating a debt-free vision board, or starting a debt-free journey journal. Choose one or all of these motivation methods to support your progress and success.
Expect ups and downs
One thing I love to do is to hike. I’ve been fortunate enough to be able to visit a few national parks over the last couple of years. This means hiking in the mountains. Hiking to the top of a mountain is an awesome experience that ends with a breathtaking view. However, hiking in the mountains is not how they show it in cartoons. Mountains do not have flat sides.
There are plenty of ups and downs along the way to the top. But what if mountain climbers noticed that they were on a downward slope and decided to turn around and go back to the bottom? They would never reach their destination and the view waiting for them at the top. Some months will feel more like back peddling than forward progress. Things will come up on your path that you have to re-route for. Don’t let this stop you from showing up and pushing onward. A bad day, week, or even month does’ have to become a lost year. When things aren’t going smoothly, refocus on your destination and get back on track.
Final Tips: Live a debt-free lifestyle
- Focus on your values – the best way to spend less and live within your means is by spending more on the things that mean the most to you.
- Take debt off the table – One of the most freeing things you can do is simply decide not to use debt. When you decide to be and live free from debt, you see the world a little differently.
- Find happiness for free (or close to it) – Just like someone looking to become more health conscious might swap
Free Debt Payoff Tracker
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