by Hillary Patin

How to Start Paying Off Debt

Ready to be debt-free, but not sure where to start? Here’s how to start paying off debt in a few manageable steps.
Start Paying Off Debt (1)

Anything owed to someone else is considered debt—including student loans and car loans. Debt can include:

  • Mortgage loans
  • Student loans
  • Car loans
  • Credit card debt
  • Medical debt
  • Home equity loans
  • Payday loans
  • Personal loans
  • IRS and government debt

In Q4 of 2019, the Federal Reserve showed that the total national household debt stands at $14.15 trillion.

If you’re ready to take action to crush your debt, here’s how to get started!

1. Don’t create new debt

No matter where you are in your journey to becoming debt-free, here’s a rule that’ll pretty much always apply: Don’t create new debt unless it’s absolutely necessary.

Sounds simple, right? All you have to do is not buy a house or go on an online shopping spree. But the reality is, most people don’t go into credit card debt because of a few big or impulsive purchases–they rack it up over time, and then don’t have enough money in their checking accounts to pay their balance off in full. They aren’t buying motorcycles or new iPhones–they’re buying groceries and medicine for their kids.

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. Credit cards, loans, savings, and even emergency funds allow you to buy more things than your income would ordinarily allow. But just because you can, doesn’t mean you should (or can afford to).

Avoid going further into debt by learning to live within your means.

Tip: Live within your means.

That means establishing (and sticking to!) a budget that allows you to cover your essentials, while making at least the minimum monthly payments on all your debts. This may mean (hopefully temporarily) cutting non-essential spending as far back as possible, in an attempt to pay down debt faster.

If you can limit yourself to working with what’s in your debit account, you’ll be able to pay off your debt sooner!

Learn more tips for living within your means here.

2. Start an emergency fund

If you don’t have emergency savings and you’re hit with a $1,000 ER bill, you’ll likely have to either borrow money from a friend or family member, or put it on a credit card and pay it off in monthly payments. That means taking on more debt!

Building up some emergency savings can help protect you from unplanned expenses, and can actually help you pay off debt faster. Personal finance experts recommend keeping anywhere from three to six months of living expenses in an emergency fund. Spend a few months dedicated to building your 3-6 month emergency fund quickly, so you can stay afloat when unexpected expenses pop up.

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 an account buffer—try keeping anywhere from $20 to two weeks of your income stashed away as your debt-paying safety blanket.

Learn more in our Simple Guide to Emergency Funds!

3. 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, and also financially responsible.

You can set up automatic payments to make sure to never miss a payment. As an added layer of security, you can pair reminders on your phone with your payments (automated or not) to make sure all your payments go through.

4. Figure out how much more you can pay monthly

Making the minimum payment on all of your debts is a great place to start–but if you can contribute more than the minimum each month, that’s even better! 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 so you can save money over time and pay off your debt faster.

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. 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.

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.

Test the impact of different payment schedules with this student loan calculator!

5. 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 likely be done paying your loans off sooner.

The snowball method is where you pay off your smallest debts 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.

6. 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 of the money you initially borrowed, plus any interest you were charged in the past that you have yet to pay off.

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 a smart move you can make.

7. 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 Expense, 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.

Disclaimer: Hey! Welcome to our disclaimer. Here’s what you need to know to safely consume this blog post: We do our best to make sure information is accurate as of the date of publication, but things do change quickly sometimes. Any outbound links in this post will take you away from, to external sites in the wilds of the internet; neither Simple nor our partner bank, BBVA USA, endorse any linked-to websites; and we didn’t pay/barter with/bribe anyone to appear in this post. Individual situations will differ; consult your favorite finance, tax or legal professional for specific advice. And as much as we wish we could control the cost of things, any prices in this article are just estimates. Actual prices are up to retailers, manufacturers, and other people who’ve been granted magical powers over digits and dollar signs.

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