by Hillary Patin

How to Start Paying Off Debt

While paying off debt can be difficult, it's extremely rewarding. If you're at a loss for where to start, here's how to get going.
Start Paying Off Debt (1)

1. Don’t spend money you don’t have

Don’t create new debt. Simple, right? Adopting this mindset will help you rule your finances, rather than letting them rule you. Credit does have its place for big-ticket items, like buying a house, car, or education—but as far as everyday living goes, make sure you’re living within your means. If you limit yourself to working with what’s in your debit account, you’re off to a great start.

It’s also a good idea to keep a buffer of extra cash in your checking account, just in case you find yourself in a bind. You can start small with account buffers—try keeping anywhere from $20 to two weeks of your income stashed away as your debt-paying safety blanket.

2. Make the minimum payments on all debts

Making the minimum payments on time consistently for all of your loans will not only keep you from defaulting and incurring late fees, but will also boost your credit score. You can set up automatic payments to make sure to never miss a payment, but also see if it works for you to pair all payments, automatic or not, with calendar reminders to make sure that you don’t get hit with fees if something goes wrong with the payment.

3. Figure out how much more you can pay monthly

Take your monthly income, subtract out living expenses (rent, bills, food, transportation, account buffer) and see what you have left. The more you pay off now, the less interest you’ll be paying in the future, and the more you’ll save overall. If you can afford paying more than the minimum payments, commit to paying an extra amount of money every month. It may be tempting to make this number as high as possible, making it equal to all of your disposable income, but try to be realistic so that you’ll stick to it in the future.

For instance, say your minimum loan payments make up about 30% of your income. You decide to put a realistic extra 5% of your income on top of that minimum payment every month. The idea is to make this a habit. You’ll get yourself used to the idea of having your “loan money” separate from the money that affects your day-to-day life. If you start to see some money building up in your bank account after a few months, you can make a large lump sum payment every once and awhile on top of the 35% that you pay monthly, which feels great.

4. Choose a payment strategy: avalanche vs. snowball

If you can make more than monthly minimum payments, take that x amount extra you can pay and choose a debt payment strategy: the avalanche method, also known as debt stacking, or the snowball method. Both methods have a few things in common: you pay the minimum on all of your debts, you aggressively pay your debt down by putting extra money towards one loan at a time, and once you finish paying off a loan, the minimum you were paying on that loan is put towards your next loan. In other words, if you start out paying $300 monthly towards all of your loans, you should continue paying (at least) $300 monthly even when you have only one loan left.

The avalanche method is where you pay that extra amount towards your highest-interest loans first—until those are gone—before moving on to paying other, lower-interest loans. With the avalanche method, you will pay the least amount of money over time, and you’ll be done paying your loans off sooner (because math says so). The snowball method is where you pay off your lowest-amount loans first before moving onto bigger loans, regardless of the interest rate. With the snowball method, you pay more money over the long-run and will be paying off the debts over more time, but you gain the satisfaction and momentum of knocking out those smaller loans upfront.

Pick whichever method you think would be easiest to live with. This depends on your habits and your loans: if you have a decent history with keeping tabs on your money, are a fervent rationalist, and your largest loan is not your highest interest loan, you’ll probably gravitate towards the avalanche method. If you’re just trying to get on your feet with your finances, and your largest loan is your highest interest loan, you may benefit more from the gratification of the snowball method.

5. Pay loans with compound interest first

If you have a debt with compound interest (like most credit card debt) as well as debt with simple interest (like most student loans), try paying off your credit cards first. Compound interest grows at a much faster rate than simple interest, meaning it’s more expensive to have credit card debt than it is to have student loan debt. With student loans, generally the interest you’re being charged is only calculated off the amount of money you initially borrowed, or the principal. With credit cards, the interest you’re being charged is based off the money you initially borrowed, plus any interest you were charged in the past that you have yet to pay off.

For example, if you had a $5,000 student loan and $5,000 in credit card debt, both with a 10% interest rate for 10 years, it would cost you $5,000 in interest on the student loan and $7,968.71 in interest on the credit card debt. Since credit card debt compounds and credit card interest rates are generally much higher than student loan rates, paying extra towards your credit card debt first is likely the smartest move you can make.

6. Make it a fail-safe system

Automating your payments, keeping your loan money separate from your day-to-day money (such as in a Simple Goal), and rewarding yourself when you reach set goals are all things you can set up to make paying off your loans easier. The less you rely on your limited amount of willpower, the more likely you are to stick to your plan.

Don’t put this off! You made it this far, so do yourself a solid and complete the above steps today. You’ll be glad you did.

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