To read Part 3 of How to Get Out of Debt Series, go here.
How to Pay Off Your Debt
If you’re reading this, chances are you have debt but you’d like to not have debt.
Before you can determine the debt payoff strategy that will work best for you, there are 4 key aspects of your financial strategy you’ll want to look at first.
All too often, people are so focused on paying off their debts (no thanks to how experts tend to talk about it), they skip over these really fundamental and essential steps.
But these steps help to ensure you don’t find yourself back in debt after you’ve paid it off, so I promise, they are worth tackling first.
Step 1: Keep some extra money in your checking or savings accounts
I know you’re excited and ready to be done with your debt. But if you take everything out of your checking or savings account today and throw it toward your debt, then tomorrow your car breaks down, how will you pay for it? If the answer is your credit card, you are putting yourself in a vicious cycle that is not only financially devastating but mentally and emotionally as well.
It is false progress. When you do this, you don’t really have the money to pay down your debt so aggressively. Here’s the mantra I want you to adopt:
It is better to make slow but true progress than fast but fleeting progress.
Step 2: Make sure you’re prepared for upcoming expenses
Chances are you have a category of expenses that tend to cause you the most stress and are the biggest culprit when it comes to your debt balances. I call these your non-recurring or random expenses or better known as – The Whammies.
These are the expenses you have that don’t happen every month, but when they happen, they happen big. Just when you think you’re gaining traction or getting ahead, one of these whammies strikes.
These expenses cause the most stress because they create the largest fluctuations from one month to the next and most people are simply not ready for them when they happen. They cause you to scramble because you’ve just got to “figure it out” when they happen.
Think of car repairs, travel, gifts or annual bills like your car registration or insurance (if you pay it semi-annually or annually).
Before you start throwing extra money to your debts, just make sure you’re ready for these so they don’t end up going on a credit card when they happen.
You can see how I recommend managing these here.
Step 3: Strengthen your savings strategy
When you’re in debt, it can be hard to truly appreciate the connection between your income, expenses, and savings in relation to your debt. This is because people naturally get hyper-focused on their debt.
But your savings determines your ability to weather financial storms and is ultimately the thing that means you can stay on the path of getting out of debt despite bumps in the road along the way.
Step 4: Recognize your buy-in and excitement determines your trajectory
There is no one right way to get out of debt. Some people want to pay it off as quickly as possible and will sacrifice a lot to achieve such a timeline. Others want to get out of debt, but live life in the process.
When you feel excited about the debt payoff method you choose, it translates to
(1) Greater commitment
(2) Better problem-solving
(3) More creativity
(4) Stronger follow through
And all those things result in faster progress and an increased chance of success.
Your excitement boosts your trajectory and has a bigger impact on your progress than the interest rate or balances you carry.
Now You’re More Prepared
Once you’ve committed to those four aspects of your financial strategy, then you can begin tackling (paying extra toward) your debt.
But first, you’ll want to have total clarity on what you’re working with. So make a list of your debts. Your list should include:
- Name of debt (i.e. Chase, Discovery, etc)
- Interest rates
- Minimum payments (not what you’re currently paying, but the minimum you are required to pay)
- Any special notes such as the interest is changing or there are added fees
Once you have your debts written out, you can determine the best method for paying them off.