Are you thinking about kicking your debt to the curb, but aren’t sure where to start?
While spending less than you make really is a simple concept, most people aren’t doing it. Even before the pandemic intensified financial struggles for many, 59% of Americans said they were living paycheck to paycheck.
Americans between the ages of 25 and 56 have an average non-mortgage debt total of $30,065, while the average mortgage debt for homeowners of the same age is $238,750.
So take some comfort in knowing that if you have debt you are not alone, but also know that it is possible to pay it off!
When Jesse and I started our debt pay-down journey almost 9 years ago, we had a list of fairly typical debts including student loans, two car loans, a new mortgage, and even a TV that we financed through Amazon. The total balance of our debt when we decided to get serious about paying it off was $234,667. We fit right in with the average.
Once we decided to make a change and pay it off, we were able to knock off over $80,000 of non-mortgage debt in under 3 years. And now, I am ecstatic to say that we made the very last payment on our mortgage this month! Our house is 100% ours!!
It’s true that paying off debt is a marathon, not a sprint. However, the payoff (literally) will be SO SO worth it! Even the process can be exciting and fun. I promise. Once you get into the habit of budgeting and living on less than you make, seeing those loan balances fall every month and drop off one by one is a huge motivator. It allows you to stop being stressed out about money, stop feeling like you’re over-extended, and start feeling like you’re in control of your finances! Although tackling your debt might seem intimidating because it is a long process, the most important thing is just to get started.
Sounds good, right? So, where do you start?
Here are the first 3 simple steps to paying off debt.
- See the Big Picture. It’s impossible to know where you are going without knowing where you’ve been. Or in the case of paying off debt, you first need to recognize what you have been spending compared to the income you are bringing in.
There are lots of budgeting apps and websites out there that you can use to track monthly spending and income, but I use and recommend Mint.com. It is an Intuit product (same company that runs TurboTax), so it is secure and safe. There is no software to download, and you can access it from any browser or mobile device. Maybe my favorite thing about Mint compared to other options is that it is totally free.
When you setup an account on Mint, it allows you to link all of your bank accounts, loans, credit cards, and investment accounts so that you can see every transaction in one place.
From there, you can start to see trends in your spending. Mint will take a best guess and automatically categorize transactions, so it does a lot of the work for you. It doesn’t always get it right, so I like to login at least once a week to review and categorize spending. You can choose from Mint’s extensive list of spending categories, or add your own subcategories.
- Get a Plan. Monthly budgeting is the number one most important thing that we’ve done to become debt-free.
First, make a list of all of your debts either on paper or in a spreadsheet (I like using Google docs). Note current balance, minimum payment amount, and interest rates for each. Total up your debt balances so that you know what you’re working towards. I know. If you’ve been avoiding this, looking at the numbers together can be a harsh realization. But it also is a necessary first step, and it might be a relief to know what you’re up against rather than hiding from reality, making some payments here and there and blindly hoping for the best.
Next, take a look at your spending categories and total spent in each after you have been tracking for a month or so on Mint. Once you recognize how much you have been spending in all of your categories, you have to prioritize and commit to spending less in certain areas. If you really want to get out of debt, you have to change your habits. There’s no way around it. The good news is, you’re here – and still reading – so you already know you want to do better!
To start setting up your budget, make sure your basic living expenses are covered first (mortgage or rent, utilities, transportation for work), then budget to pay all of your minimum debt payments.
Then, you will analyze your discretionary spending and challenge yourself to spend less. Set budgets for all of these categories, and play with the numbers compared to your monthly income to see how much left over income you can come up with after your essentials are covered.
- Get Rolling. Now that you’ve found some extra dollars in your budget, put them to work by making extra payments toward your debt. There are a couple different ways to do this.
Maybe you’ve heard people mention the “debt snowball” strategy, vs. the “debt avalanche” method.
The debt snowball method means that you make a list of all of your debts, and note the current balance for each one. Again, within the budget you setup you should be paying the minimum balance on all of your debts every month. You will then start your accelerated payoff by applying any extra dollars that you came up with in your budget toward your smallest debt in terms of dollar amount, regardless of interest rate.
Once you have paid off your smallest debt, you take the entire payment you were making on that one and apply it as an extra payment toward your next biggest debt, and so on. The effect is like a snowball, where your extra payment starts small but quickly grows as it rolls, knocking off your smaller balances one by one.
The debt avalanche method, on the other hand, would order debts by interest rate rather than balance, and start making extra payments on the debt with the highest interest rate. While this seems to make sense when you think about the amount that you would save on interest, it can take a long time to feel like you are making progress. You could be paying on a high-balance, high interest rate debt for several years before you are able to cross it off your list, and the number of debts you have stays the same which can feel discouraging.
We used the debt snowball method, and I would recommend starting this way. Being able to knock off even the smallest debt and move on to the next one feels like a big win and boosts motivation to keep going.
So there you have it. The 3 simple steps to start paying off your debt are:
- See the Big Picture
- Get a Plan
- Get Rolling
While there is no over-night solution to get rid of debt, if you commit and follow these simple steps, the results will be life-changing!