Debt can feel like a heavy burden – a constant source of stress and anxiety. Credit card balances, student loans, personal loans, medical bills, and other debts can quickly snowball out of control. The average American household carries around $90,000 in debt, excluding mortgages. While debt is often unavoidable, having a plan and strategy to pay it off can provide much-needed peace of mind. This comprehensive guide takes an in-depth look at steps you can take to assess, strategize, and commit to becoming debt-free.
Carrying high amounts of debt can negatively impact many aspects of your life. It can prevent you from saving, investing, and working toward other financial goals. Debt usually comes with high-interest rates, minimum monthly payments, and penalties – making it challenging and expensive to pay off. It can harm your credit score and make it difficult to qualify for loans or other financing in the future.
But most importantly, being burdened with debt can take a toll on your overall wellbeing. It can be a constant source of stress, anxiety, and depression. It can strain relationships and prevent you from taking career risks or investing in personal growth.
The good news is that it is possible to pay off debt, even large amounts. With concentrated effort, discipline, and the right strategy – you can become debt-free. The sense of accomplishment and relief can be life-changing.
This guide will provide a step-by-step plan to assess your debts, choose payoff strategies, create a customized repayment plan, and remain motivated. While the process takes time and commitment, having a structured approach makes it manageable – and helps you reach debt freedom.
Assessing Your Debt
The first step in any debt payoff plan is gaining clarity on what you owe. Pull together all of your account statements and bills to tally up your debts. Categorize each debt by:
- Type: Credit card, mortgage, student loan, personal loan, auto loan, medical debt etc.
- Total owed: The current balance.
- Interest rate: Usually expressed as a percentage (%) per year. The higher the rate, the more interest is applied.
- Minimum payment: The least amount due per month. Making only minimum payments results in more interest paid over time.
- Due date: The monthly date payment is due.
Create a simple table to organize this information and provide an overview of what you owe. Here is an example:
| Type of Debt | Total Owed | Interest Rate | Minimum Payment | Due Date |
|---|---|---|---|---|
| Chase credit card | $5,200 | 17% | $130 | 3rd of every month |
| Federal student loans | $28,000 | Varies by loan between 4-8% | $300 | 15th of every month |
| Auto loan from Ally Bank | $14,000 | 4% | $315 | 12th of every month |
| Personal loan from Prosper | $9,800 | 11% | $290 | 27th of every month |
This debt overview will serve as your guide as you work to pay them off. Update it as balances decrease or you add new debts.
Prioritizing Debts
All debts are not created equal. Some have higher interest rates and pose larger burdens. To optimize payoff efforts, rank your debts in order of priority – from highest to lowest.
There are two primary methods for prioritizing debts:
The Debt Avalanche
With this method, you prioritize debts based on interest rates. The debt with the HIGHEST interest rate is paid off first, regardless of balance size. This saves money on interest overall.
For example, based on the table above, credit card debt would be priority since it has the highest 17% interest rate. Then the personal loan, student loans, and auto loan would follow.
The Debt Snowball
This method prioritizes debts based on balances owed, ignoring interest rates. The SMALLER debts are paid off in succession first, regardless of rates. This helps build momentum through small “wins”.
Using the example, the auto loan would be first priority since it’s the smallest balance. Then the personal loan, credit card, and student loans would follow.
Ultimately, choose the method that fits your financial situation and provides the most motivation. Some other factors to consider are due dates, penalties for late payment, and if the debt is secured (like a mortgage) or unsecured.
Strategies for Paying Off Debt
Once you’ve assessed your debts and prioritized them, it’s time to choose a strategy to start tackling them. Here are some of the most common and effective approaches:
DIY Debt Repayment Plan
This is a flexible, customized strategy you create and manage yourself without external help. Steps include:
- List all debts by priority
- Determine how much money can be allocated monthly for repayment
- Make minimum payments on all debts
- Put any extra funds towards the top priority debt
- Once that debt is paid off, move to the next one
- Repeat until all debts are repaid
Pros:
- Complete flexibility and control
- No fees
- Builds budgeting skills
Cons:
- Requires self-discipline
- Easy to veer off track
Debt Management Plan (DMP)
A DMP is structured repayment plan hosted by a credit counseling agency. Steps include:
- Meeting with a nonprofit credit counseling agency
- Provide details on income, debts, assets etc.
- Counselor will recommend a customized DMP
- Consolidates debts into one monthly payment
- Lower interest rates negotiated with creditors
- Repaid in full over 3-5 years
Pros:
- Lower interest rates
- Single payment
- Counselor guidance
- Many fees waived
Cons:
- Monthly fee for agency (avg $25-75)
- Missed payments reported to credit bureaus
- Interest continues accruing
Debt Consolidation
Consolidating combines multiple debts into one, usually through a consolidation loan. Steps include:
- Research consolidation loans from banks, credit unions and online lenders
- Choose loan with lower interest rate than current debts
- Loan pays off and consolidates existing balances
- Repay new consolidated loan in monthly installments
Pros:
- Simplifies repayment through single loan
- Lower interest rate saves money
- Fixed monthly payment
Cons:
- Application rejected if poor credit
- Closing accounts hurts credit score
- Lengthy loan terms means more interest paid
Balance Transfer Credit Card
Transferring high-interest balances to a new 0% introductory credit card. Steps include:
- Find offers for 0% balance transfer cards lasting 12-18 months
- Apply and transfer balances from old card to new one
- Make payments on new balance before intro period ends
Pros:
- 0% interest for over a year
- Pay down principal without interest
- Boost credit with responsible management
Cons:
- Balance transfer fees apply
- Eventual expiration of 0% rate
- Need good credit to qualify
Debt Refinancing
Taking out a new loan with better terms to replace an existing loan. Applies to loans like student, auto, mortgage, and personal. Steps include:
- Research current refinance rates from lenders
- Apply and undergo credit check and approval
- Pay off old loan with new refinanced loan
- Enjoy better rate and/or flexible terms
Pros:
- Lower interest rate saves money
- Flexible loan lengths (15 vs 30 years)
- Opportunity to reduce monthly payments
Cons:
- Refinancing costs like appraisal fees
- Risk of increasing loan length/interest costs
- Poor credit can disqualify application
Debt Settlement
Negotiating and settling debt for less than the full amount owed. Usually through a debt settlement company. Steps include:
- Research and engage debt settlement company
- Stop making payments to creditors
- Company negotiates with creditors for reduced payoff amount
- Creditors agree to settlement offers
- One lump sum payment made per settled account
Pros:
- Pay significantly less than owed
- Settled debts reported as “Paid in full”
- One payment per settlement
Cons:
- Severely damages credit score
- Risk of getting sued before settlement
- Large tax bill if forgiven debt over $600
Creating a Debt Repayment Plan
Once you have decided on a debt repayment strategy, the next step is to create a detailed plan. Include the following elements:
Set Specific Goals
Having measurable goals is key to staying focused and motivated through the debt repayment journey. Clearly define targets such as:
- Paying off your 5 highest credit cards in 12 months
- Having $0 student loan debt in 4 years
- Saving $500 each month toward paying off debt
Revisit and adjust the goals as needed. But always keep the end result in sight.
Calculate Disposable Income
Determine how much money you can realistically allocate each month toward debt repayment. Calculate your disposable income:
Monthly Take-Home Income
- Monthly net income after taxes: $4,000
Monthly Expenses
- Rent: $1,200
- Car payment: $320
- Groceries: $400
- Utility bills: $150
- Insurance: $100
- Entertainment: $200
- Total monthly expenses: $2,370
Disposable Income
- Take-home income: $4,000
- Minus expenses: -$2,370
- Equals disposable income: $1,630
Aim to put most, if not all, of your disposable income toward debt repayment. Look for any areas to save on monthly expenses as well.
Debt Repayment Schedule
Map out an exact monthly plan for allocating disposable income across debts. Here is an example:
| Month | Disposable Income | Minimum Payments | Extra Debt Payment | Total Debt Payments |
|---|---|---|---|---|
| January | $1,630 | $1,035 | $595 towards CC #1 | $1,630 |
| February | $1,630 | $1,010 | $620 towards CC #1 | $1,630 |
| March | $1,630 | $985 | $645 towards CC #1 | $1,630 |
This schedule reflects paying minimums on all debts, except the top priority (CC #1) which gets the most funds allocated to accelerate payoff. Adjust monthly as debts are repaid.
Budgeting Strategies
Budgeting ensures disposable income is maximized and smart spending habits are implemented. Two budget methods:
1. 50/30/20
- 50% to needs (rent, bills, groceries)
- 30% to wants (dining, entertainment, shopping)
- 20% to debt repayment and savings
2. Zero-based budget
- Income – Expenses = $0 left each month
- Every dollar gets allocated to something
- Helps identify wasteful spending
Choose the budget style that optimizes your behavior. Over time increase debt repayment allocation.
Staying Motivated
Paying off debt takes sustained focus over months or years. There will be setbacks and frustrations along the way. Having motivational strategies helps maintain commitment when willpower weakens. Useful techniques include:
Celebrate Small Wins
Paying off even the smallest debt is an accomplishment. Make it satisfying and rewarding through celebrations like:
- Taking yourself or loved ones out for a special meal
- Seeing a movie or show you’ve been wanting to watch
- Putting the money you would have paid toward that debt into savings
Mark each paid-off debt by doing something fun and meaningful.
Debt Repayment Motivation Board
Create a physical or digital board to track progress and keep motivated using:
- Your debt payoff goals
- Total debts paid off so far
- Account balances decreasing
- Uplifting quotes and affirmations
- Pictures of your envisioned debt-free life
Refer to this motivating visual reminder often, especially when you need a boost.
Find a Support Buddy
Staying disciplined is much easier with a partner to lean on. Recruit a trusted friend or family member to be your motivation buddy. You can:
- Check-in weekly on your respective progress
- Share struggles and receive encouragement
- Celebrate successes together
- Hold each other accountable if goals go off track
Knowing someone has your back makes the process less intimidating.
Notice the Changes
As the balances decrease and debts are repaid, take note of the positive impacts such as:
- Less stress, anxiety, and sleepless nights
- Money freed up each month in the budget
- Improved credit score
- Excitement about the future without debt
Real, tangible improvements will reinforce your motivation.
Additional Tips and Resources
Here are some final tips and resources to accelerate your debt repayment efforts:
Reduce Interest Costs
- Call creditors to request lower interest rates
- Transfer balances to lower interest credit cards
- Refinance high-interest loans if possible
- Pay more than the minimum each month
Every bit of interest saved means more funds toward principal balances.
Pay Debts From Biggest Cost to Least
If you have $500 extra one month and 3 debts to put it toward, apply based on accruing interest rather than fixed payments. For example:
- Credit Card A: $1,000 balance at 17% interest
- Credit Card B: $3,000 balance at 15% interest
- Car loan: $8,000 balance at 4% interest
Even though the car loan is the biggest balance, the credit card interest costs more per month. So apply the $500 first to Credit Card B, then A.
Seek Side Income
Use spare time to earn supplementary income through:
- Part-time jobs like food delivery, rideshare driving, tutoring
- Selling unused items on Craigslist, eBay, Facebook
- Freelancing skills like writing, design, programming
- Participating in surveys and user testing
Every extra dollar should go straight to debt repayment until you are debt-free.
Resources for Support
If you need professional help getting out of debt, consider:
- Credit counseling from NFCC.org
- Debt repayment programs from ConsolidatedCredit.org
- Debt relief options from Debt.org or Resolve.org
- Bankruptcy advice from Debtorcc.org
Don’t be afraid to seek objective guidance.
Conclusion
Escaping the burden of debt takes diligence, commitment, and time. But implementing the steps in this guide will put you on the path to regain financial freedom. Stay focused on the goal of becoming debt-free and know that life without debt is within reach. With a plan customized to your situation, and motivation to see it through, you can pay off any debt – and experience the relief you deserve.
