Ah, the suffocating feeling of debt.
There isn’t really another feeling like it.
The constant worry, stress and anxiety can make it hard to breathe.
But, we’re here to help you so that you don’t feel that way anymore.
And, we know exactly how it feels because we’ve been there too.
We’ve stared at a computer screen with a six-figure amount of student loan debt, unable to think clearly about how we were going to pay it all back.
But, we did it.
And, it’s one of the most wonderful feelings.
Not only that, we also learned how to take advantage of debt.
Enough about us though.
This guide is all about YOU paying off your debt and feeling the sweet sweet relief of being debt free and financially stable.
So, what do you need to do first?
We have a few posts on Debt which we’ll highlight in each section to walk you through your journey.
We recommend you read our post Is
Then, let’s look at…
How Much Debt Do You Have and Who Do You Owe?
The first step is to face the facts of your debt situation.
You need to create a list of all of your debts.
If you owe money, put it on the list.
You want to find the principal amount to put on the list.
Then, total all of the debt amounts to find the total amount of debt that you owe.
For some of you, it may be the first time that you truly know what you owe.
Sometimes, it’s easier ignore how much debt we actually have for our own mental health.
You’re already panicking every other second about paying it back so what good is more panic and worry for you?
Well, it’s time to know because soon you will no longer be feeling worried or stressed if you follow the steps in this ultimate guide.
Remind yourself that once you go through this guide, you will be on the path to being debt-free.
What comes next?
Decide When You Want to Get Out of Debt
Yes, you read that correctly.
We want you to decide when you want to get out of debt.
This will be a rough estimate right now but will become a specific month of a specific year later on in this ultimate guide.
So, if you could pick a timeframe for paying off the rest of your debt, how long would it be?
Six months? One year? Two years?
Three years, four months and eighteen days?
Pick an amount of time that would make you feel satisfied.
Obviously, the bigger the amount you owe the more time it will take, but you’ll see later on that you’re in control of when you get out of debt.
Let us repeat:
YOU ARE IN CONTROL.
You’ve also just created a financial goal!
You are going to pay off your debt in [amount of time].
Now, let’s see if that goal is achievable or if we need to change it a bit.
Check out our post on What Debt Should You Pay Off First to help you with the next step.
What’s the Plan?
Next, you need to create a debt payoff plan so that you can accomplish your new financial goal.
You’ll need to determine which debt you’ll pay down first and how much you need to pay each month to achieve your goal.
Let’s try to keep it simple for now.
Divide your total amount of debt you owe by the number of months you set as a goal to pay off your debt.
So, if you have $6,000 of debt and you want to pay it off in six months its:
$6,000 divided by 6 months =$1,000/month
If you want to accomplish your goal, you need to pay $1,000 each month towards your debt.
Wait, but what about interest?
The worst part about debt is interest.
It’s the thing that keeps you from paying off your debt faster.
It’s also the reason why you have to create a debt pay off plan in a spreadsheet.
Every month you are paying interest on your debt, which is extra money you’re spending.
To find out how much extra money you’re spending (it may surprise you) click here to read How Much Money Does Your Debt Cost You Each Day?
Either you can try to create a spreadsheet or continue keep it simple for now and incorporate interest.
The easiest way to do this does require some math.
Find out the weighted-average interest rate of your debt.
If you have one debt, it’s easy because your interest rate on that debt is your total interest rate.
Here’s how to figure out the weighted average if you have 2 or more forms of debt:
Debt 1: $5,000 @ 5.5% Interest Rate
Debt 2: $2,500 @ 3.75% Interest Rate
Total Debt: $7,500
$5,000 divided by $7,500 multiplied by 5.5% plus $2,500 divided by $7,500 multiplied by 3.75% equals weighted average interest rate.
Multiply this amount by the number of years for you debt goal.
Then, multiply this by the total amount of debt and add it to the total debt.
Going back to the first example, let’s say the average rate is 5%.
So, 5% times 0.5 years (six months) equals 2.5%
2.5% multiplied $6,000 equals $150.
$6,000 plus $150 equals $6,150.
Now, we can take that number and divided it by our goal of six months.
$6,150 divided by 6 months equals $1,025.
This is a better estimate of how much you’ll need to pay each month.
***IT IS STILL AN ESTIMATE***
Please don’t send us an email about how this isn’t the actual amount you ended up paying.
So, where are you going to come up with the money?
You Are in Control
You may be thinking we’ve already discussed that you are in control.
But, we really need to let this sink in.
The process of getting out of debt is all about your actions.
Your actions determine if you pay off your debt next month, next year or never.
You now have an amount that you could pay each month and be debt free in a time that you would be happy about accomplishing.
Figuring out how you’re going to come up with this money is the hard part.
You’ve got money coming in, you’ve got money coming out each month.
Do you you know how much of each?
What about where that money going out is actually going?
We’ve arrived at the part where we tell you that you need a budget.
Do You Have the Money to Accomplish Your Debt Free Goal?
A budget is really just a method to keep your spending in check.
You create budget goals for how much you’re going to spend in different areas.
When you create a budget, you bring your spending habits a little more into your conscious.
You don’t actually have to create a budget to pay off your debt.
But, you do need to know if how much money you have to put towards your debt.
The best way to do this is to create a personal income statement to know where and how much you’ve been spending.
From there, you can create a budget if you need to spend even less to pay off your debt in the amount of time you set as a goal.
If you want to learn more about building a budget and organizing your finances check out our Ultimate Guide on Organizing Your Finances and Understanding Your Money.
After you know how much money you can put towards your debt and you have a plan for where that money is going to go, the only thing left to do is to start making payments and stay motivated.
Paying Off Debt is Challenging but Achievable
Like with all goals, staying motivated to pay off your debt can be challenging.
You don’t necessarily feel the positive emotions throughout the process of paying off debt.
It’s similar to trying to lose weight.
The scale says you’ve lost a few pounds but you look in the mirror and don’t look different.
You don’t feel different.
The same thing could be said about paying off debt.
You’ve made a few payments and you can see that you have a lower total balance.
But, nothing has really changed so you don’t feel any different.
You still don’t have any extra money.
This may be why you’ve failed in the past. It’s not even your fault.
You’re doing everything you need to be doing but everything feels exactly the same.
It can be excruciatingly frustrating.
And, that’s how we slip back into our old ways.
It’s even more difficult if you’re trying a combination of spending less money and paying off your debt.
That feels something like going on a restrictive diet to lose weight.
It’s easy to lose sight of the finish line and forget that you will not have to pay off debt anymore at some point in the future.
So, what can you do to defeat debt?
How to Stay Motivated While Paying Off Debt
If you can stay motivated while you’re paying off your debt, you’ll achieve the positive benefits in no time.
A lot of what paying debt comes down to are habits and consistency.
Again, paying off debt is similar to losing weight.
It’s a battle of trying to maintain your routine until you see results.
One way to stay motivated is by creating mini-goals or achievements.
The debt snowball method is a complete debt payoff strategy that focuses on staying motivated.
You start by paying off the smallest debts first so you quickly see results of different debts disappearing.
The problem with this is that it ignores the cost of your debt.
You’ll likely end up paying more money when you use the snowball method.
And, by paying more money, we mean wasting money.
So, what can you do to track your debt being paid off that feels like accomplishment?
We like to use interest.
Debt is stuff we’ve bought.
With debt, you’re just paying back money you’ve spent.
Interest is the expense we pay for using debt to buy the stuff.
So, with interest you’re paying new money on stuff you’ve already bought.
Wouldn’t it be great to watch that amount go down each month?
Let’s look at an example:
You have $500 each month to pay off debt.
Last month you had to pay $75 towards interest and $425 towards the balance.
Because the balance is smaller, this month you only pay $74 towards interest and $426 towards the balance.
You’ve paid less interest and more balance, pretty sweet right?
Track this each month and you’ll feel a monthly sense of accomplishment, paying less money on interest and more of the balance.
One last thing, paying off debt will not be for the rest of you life.
It may be worth imaging the things that you will use that money on once you’re out of debt.
If you want more information on the steps to getting out of debt, check out our post:
How to Get Out of Debt | 5 Steps to be Debt Free
Other Resources
We’ve covered the basics of paying off debt but what about all the other stuff involving loans, credit cards, and other forms of debt.
Our main source of debt was student loans so we’ve learned the ins and outs of them.
One of the most common questions is what is student loan refinancing?
Additionally, we’ve seen, committed and read about all kinds of student loan mistakes.
Check out our post:
9 Student Loan Mistakes to Avoid
Another common question regarding all debt is whether you should invest your extra money or pay off debt.
Check out our post:
Should You Pay Off Debt or Invest Your Extra Money
Once you’ve conquered your debt, you should learn about the ways you can take advantage of it.
Check out our post:
