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I’m a 20-something with a plan to be debt free (all $50K+) in five years or less.
I’m not rich and I don’t work a prestigious job. Actually, right now I’m relying entirely on freelance and solopreneur ventures to sustain myself (Yikes!). And let me tell you what, I have yet to strike gold in the online world.
I’m just like you. I work, I play, and I hate my debt.
I want it gone.
And I know it’s possible! I’ve read stories – ones that you’ve probably read, too – about people paying off tens of thousands in debt in a few short years, or even months!
If they can do it, then what’s stopping us from doing it, too??
The steps outlined here can work for anyone, and it doesn’t have to be five years. It can be more or less depending on your situation and how quickly you prefer to get rid of your debt.
Below are the steps that I followed to create my own debt payoff plan that’s going to allow me to be debt free in five years or less.
Step 1: Create a Budget
A budget is the cornerstone to financial success, yet only 30% of American households use one. In order to get ahead of your debt, you’re going to have to start making more than the minimum payments. If you’re doing that already, then great!
If you’re having trouble making the minimum payments on your debt as it is, then creating a budget will allow you to reevaluate your financial situation and see where all your money is going. Even if you’re not struggling with your minimum payments, you won’t know how much extra you have to put towards your debt monthly until you have a clear picture of your finances.
In order to create a budget that works, you have to know your current situation (i.e. track your prior three months of expenses). Once you’re familiar with your spending habits, you can start to set measurable financial goals (paying off debt, save for a down payment on a house, etc.). From there you can find a specific budget that’s right for you and implement a system for tracking your progress.
Check out my guide on how to create a budget that works for you.
Step 2: Choose a Payoff Method
Two of the most popular debt payoff methods these days are the Debt Snowball Method and the Debt Avalanche Method. (Is it cold in here, or is it just me?) Both of these are great, and both will get you where you want to go. The difference is (depending on what your debt looks like and if you follow them to a T) one is better for motivation while the other may increase overall speed and savings.
I say may because it depends (it always depends) on your specific situation, and whether or not you decide to tweak your chosen method.
(Here’s a more in-depth comparison of the Debt Snowball and Debt Avalanche.)
Debt Snowball Method (lowest debt first)
You’ve probably heard talk of Dave Ramsey’s Debt Snowball Method. You may even know someone who uses and loves it. It’s a solid plan, and many people have found success with it.
The way the Debt Snowball Method works is this:
- List all your debts, smallest to largest
- Pay the minimum amount on all debts except the smallest
- Put as much extra as you can toward your smallest debt
- Repeat until all debt has been repaid
Every time you pay off a debt, you add the amount you were paying towards that debt to the next debt. So if the minimum payment for the debt you paid off was $50 and you were paying $200 extra per month, you would add the entire $250 (and anything extra) towards your next smallest debt.
The only hiccup with the Debt Snowball Method is that it may not satisfy those who wish to accelerate their debt payoff and save as much as possible in interest along the way. This method is not about saving money on interest; it’s about behavior modification. The idea is that once you start seeing your accounts close, you’ll be excited and motivated to continue paying off your debt.
Debt Avalanche Method (highest interest rate)
Unlike the Snowball Method that suggests you hit your smallest dollar debt first, the Debt Avalanche Method recommends you pay off debt based on your debt interest rates – largest to smallest. The steps are essentially the same as the snowball method, only with regard to interest rate rather than dollar amount.
Depending on your debt makeup, this method could save you thousands of dollars in interest. I say it depends, of course, because everyone’s situation is different. In some cases, however, it will get you where you want to be (debt free) faster than the Debt Snowball.
Highest Interest Amount
The difference between this method and the Debt Avalanche is the interest rate versus the interest in dollars. For the Highest Interest Amount Method (I’m not sure if there’s another name for this one), you pay off debt from largest to smallest in terms of interest charges.
They may sound like the same thing at first glance, but they are different. Let’s say you have an auto loan for $15,000 with an 8% interest rate and a student loan for $35,000 with a 5% interest rate. For simplicity, we’re assuming it’s month 1 for both debts. Interest charges in month 1 are as follows:
- Auto loan: $100 ($15,000 * (.08/12))
- Student loan: $145.83 ($35,000 * (.05/12))
Note: This is only the interest portion of your monthly payment. It does not reflect the principal portion of the payment.
Using the Debt Avalanche, you would pay off the auto loan first, because it has the highest interest rate (8%), and then the student loan. But with the Highest Interest Amount Method, since you’re paying more in interest on the student loan, you would pay it off before the auto loan.
The Given Timeframe Method
I think I just kind of made this one up. I mean, I’m sure some people out there do it this way, but I don’t think it’s widely talked about.
This is how I first started my debt-free journey. I decided that I wanted to be debt free in five years, made an amortization table, plugged in five years for my loan period on each debt that was longer than five years, and started making the monthly payments (and more when I could) that would get me there.
The reason I’m covering this one here is because it may just be the perfect plan for you. Maybe you don’t care if you pay a little extra in interest or you don’t need the motivation of small victories. If you just want to pick a date and set the payments on auto pay, then this could be the best method for you.
Note: I don’t use this method anymore. I’m currently trying out the Debt Snowball Method and using Undebt.it to track my progress.
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Step 3: Credit Cards First
No matter which method you choose, you should attack credit card debt first and furiously (anyone just think of Vinn Diesel?). I recommend doing this for several reasons.
First of all, credit card debt is what’s referred to as “bad” debt, and your balances on your credit cards directly affect your credit score. Thirty percent of your FICO credit score is determined by amounts owed on your accounts, the biggest factor of which is your credit utilization ratio (balance/credit limit). That is one-third of your credit score. That’s a lot. Therefore, paying off your credit card debt has the potential to positively impact your credit score in a short period of time.
Secondly, credit card interest rates are astronomical. According to CreditCards.com, the national average annual percentage rate (APR) was 15.07% in 2014. Quickly paying off your credit cards decreases the amount you’ll pay in unnecessary interest charges over time.
Step 4: Track Your Progress
Coming up with an awesome plan doesn’t do any good if you abandon it. In order to stay motivated and on track, it’s important to keep a record of your progress.
I recommend using a tool with some kind of visual, whether it’s some fancy online software or an Excel amortization table – whatever works for you!
You may have heard me mention this before, but I <3 Excel. Historically, I have used Excel for budgeting, creating and tracking my debt payoff plan, organizing research on places to live, and pretty much everything you can use it for.
If you’re old school (is Excel old school??) like me and like to see and play with your numbers in a well-formatted table, then feel free to download my free amortization table.
I recently heard about this awesome online tool from another blogger, Lindsay over at Notorious D.E.B.T., and I decided to give it a shot and see if it was worth ditching my spreadsheets.
After about 20 minutes of tinkering, I knew that Lindsay was onto something.
Undebt.it is awesome! The interface is clean and super simple. All you do is enter your debts, choose your payment method (options for Debt Snowball, Debt Avalanche, and others!), and enter your payments as you make them. So easy! Undebt.it tracks your overall progress and the progress on each individual loan. I’m pretty new to the system, but I’m already completely obsessed with watching my “Overall Progress” bar increase with each payment!
Don’t Stop Here!
If you really want to accelerate your debt payoff, then keep looking for areas to cut expenses, ways to save, and side hustles to bring in more cash. Here are some ways I’ve been able to accelerate my debt payoff:
Teaching English Online
I teach English online with a company called VIPKID. As someone who really enjoys working with children and doesn’t get to nearly enough, this has been a great way for me to earn extra income! The hours are flexible, and since you’re an independent contractor, you can work as many hours as you want! I usually teach from ~6-10a.m. because that’s what works best for my schedule. I’m not a morning person, but it gets me up and about early, and my students are totally worth it!
I’ve signed up for several freelancing websites in the past couple of months, but and these are my two favorite so far:
- PeoplePerHour – I really like the professional look and feel of PPH. You can customize your seller page much like a social media profile, which makes it feel really personal. You also have the option to post “Hourlies”, which are fixed-price services that anyone can purchase.
- Upwork – Though I’ve been primarily focusing on my PPH freelancing, Upwork has been a successful venture as well! You receive 10 connects per month to use for job proposals. After that, you can purchase credits for $1 each.
If you have writing skills and are looking to make extra money working from home, then freelance writing could be the perfect option for you. Holly Johnson’s all-encompassing freelance writing course, Earn More Writing, walks you step-by-step through the entire process, from gettings started and building an online presence to finding your first paying clients. Oh, did I mention Holly makes $200K+ freelance writing? So she sort of knows what she’s doing.
Have you used the Debt Snowball or Debt Avalanche? If so, how did you like it? What are some methods you’ve used to accelerate your debt payoff?
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I’m a financial coach and author + owner of Goodbye to Broke. I love all things personal finance, money management, and healthy living. And I talk to my dog way too much, if we’re being honest.