How To Pay Off Your Debt

As promised I wanted to share what method we are using to pay off our debt.

The first step is to come up with $1,000 for an emergency fund. For some people this may not be enough, but it’s a start, and will cover most emergencies. It will also give you peace of mind to know that you have something set aside instead of feeling as though you have nothing to fall back on.

Next, you need a spreadsheet that includes ALL your debts (yes, include your mortgage and those low interest rate student loans). I prefer to do this on my computer since I can move the rows around once everything is typed up.

You can use this great FREE template on GoogleDocs. I input some pretend data so you can see how it works.

There are 2 main schools of thought on debt repayment.

Debt Snowball (lowest balance-highest balance)
This is considered “the Dave Ramsey method” by some, since Dave teaches it in his classes/books. List your debts by lowest to highest balance. You tally up the total cost of your minimum monthly payments, and make a budget to figure out what extra money you can put towards your debt. It can be $20, but it needs to be something more than the minimums.

You pay the extra to the lowest balance card, and then take the minimum payment + the extra $ + the next card’s minimum payment=new monthly payment. You continue to “snowball” your payments until all your debts are paid off. See the example below.

Credit Card #1       $3000             Min. Payment         $100         12.99%

Credit card #2           $5000               Min. Payment         $150           15%

Car Loan                               $10,000         Min. Payment         $250         7.5%

Totals                                   $18,000     Min. Payment       $500

If you had an extra $100 to put towards your debt each month, you would start at the top of the list. Your payments would look like this:

Credit card #1 : $200

Credit card #2: $150

Car Loan:                     $250

Total to debt:       $600

Once the first card is paid off you would take the $200 and add it to your current minimum payment on card #2.   Your payments would look like this:

Credit Card #2: $350

Car Loan:                       $250

You continue with this snowballing your debt until it is paid off.

Debt Avalanche (highest interest rate-lowest interest rate)

In this example you do the same as the above, only you order your debts based on the percentage rate. This makes more financial sense. You will end up paying less interest over the time you are paying off your debts. For some people this can be a significant amount of money.

Using our example above here is how you order the debts based on interest rates:

Credit card #2           $5000               Min. Payment         $150           15%

Credit Card #1       $3000             Min. Payment         $100         12.99%

Car Loan                               $10,000         Min. Payment         $250         7.5%

Totals                                   $18,000               Min. Payment         $500

Your payments would look like this:

Credit card #1 :   $250

Credit card #2:     $100

Car Loan:                         $250

Total to debt:         $600

Other methods/tricks

Snowflaking

This is a method used in addition to snowballing debt. Essentially when you get any extra money you throw it at your debt. That Ebay sale, or the birthday money from great Aunt Edna-it all goes towards your debt snowball. I’m amazed by how much those little snowflakes add up.

Recession Proof Debt Snowball

This is a very solid method from FrugalDad. I think it is especially good advice for families, particularly single income families. Essentially you start with a small emergency fund of $1,000 and then add any additional funds to your emergency fund. Once it reaches the balance of your first card PLUS the $1,000 you pay off your first debt. This ensures that if you encounter any serious emergencies you don’t add more debt to your credit cards.

Debt Deluge by No Credit Needed

This method involves using the psychological boost of the Debt Snowball, and the power of the Debt Avalanche.   You start with the lowest balance, and then halfway through switch to paying off your higher interest rates.

This method would look like this:

Credit Card #1       $900       8.99%

Credit Card #2     $1200     7.99%

Credit Card #3     $5000     12.99%

Car Loan                           $5000           6.5%

Student Loan           $3000           4.25%

While many personal finance experts will tell you one is better than the other I am taking the approach that Ramit Sethi
recommends in his book, pick a method and stick to it. No use second guessing, running numbers every other day, or worrying yourself silly. It took you awhile to amass your debt, and it will take some time to eliminate it. Pick a plan and stick to it.

How we are paying off debt

We chose to start with creating an emergency fund. As I talked about previously we listed our debts on a spreadsheet, and worked on our budget with a fine tooth comb. EVERYTHING was examined, and anything that wasn’t essential was cut. We are paying off our debt starting with the lowest balance cards first for the psychological boost.   My lowest interest rate cards had 2.99% and 0% rates, but paying off the highest balance card that is at 12.99% would have taken months, and since I’m very results driven, I needed to see the changes happen as soon as possible.

I’m also throwing anything extra that comes our way at our debts. All my income, a portion of the hubby’s income, and any random money we get all go towards debt. Any “found” money in the budget goes towards our debts. The $80 a month we’re saving by cutting cable goes to debt repayment.

So far we have paid off nearly $3,500 in debt using this method. I find it very rewarding, and we’re REALLY looking forward to the day when it’s gone!

If you had/have consumer debt how did/are you paying it off?

Kelly

photo  credit:  Andres Rueda

 

About Kelly Whalen


Kelly Whalen is the founder of The Centsible Life, a blog where motherhood and money meet. Her goal is to help readers live well on less. Kelly is a mom to 4, and loves that she can stay at home with her kids, and still pursue her passions for writing, personal finance, and social media. You can often find her on twitter and Facebook talking money and motherhood.

  • http://www.outbackselfhelp.blogspot.com/ Robyn

    Very helpful article, to clear debt, I start with highest interest first.
    I use the bucket method.
    a bucket for myself/emergency, like you, I like $1000 on hand
    a bucket for saving
    a bucket for donations
    a bucket for debt payments
    and investment bucket.

    it’s all up to a persons mindset, so long as a person moves towards their goal and rewards themselves while paying off debt, they will be successful.

    I agree with Yemoonyah, your clear instructions will be helpful to others

  • http://www.outbackselfhelp.blogspot.com/ Robyn

    Very helpful article, to clear debt, I start with highest interest first.
    I use the bucket method.
    a bucket for myself/emergency, like you, I like $1000 on hand
    a bucket for saving
    a bucket for donations
    a bucket for debt payments
    and investment bucket.

    it’s all up to a persons mindset, so long as a person moves towards their goal and rewards themselves while paying off debt, they will be successful.

    I agree with Yemoonyah, your clear instructions will be helpful to others

  • http://kabai33.com yemoonyah

    Thank you for sharing this. I paid off most of my debt last year (RELIEF) and I know how hard it is. But with your instructions it should be much easier for a lot of people.

  • http://kabai33.com/ yemoonyah

    Thank you for sharing this. I paid off most of my debt last year (RELIEF) and I know how hard it is. But with your instructions it should be much easier for a lot of people.

  • http://www.TheTrimTab.com Fred Dupont

    A very comprehensive study on how to pay your debts down; clear explanations and comparisons; thank you for sharing your own experience and the method you are using.

    I could not agree more with the spirit of your article; it matters less which method you will chose than the decision to start moving towards an objective and the consistency of your actions over time.

    • Kelly

      Thanks for all the wonderful replies, and hi to my fellow 31DBBB friends!

      It is inspiring to hear how many of you have paid off or are working on paying off your debts. It keeps me motivated. :)

  • http://www.TheTrimTab.com/ Fred Dupont

    A very comprehensive study on how to pay your debts down; clear explanations and comparisons; thank you for sharing your own experience and the method you are using.

    I could not agree more with the spirit of your article; it matters less which method you will chose than the decision to start moving towards an objective and the consistency of your actions over time.

    • Kelly

      Thanks for all the wonderful replies, and hi to my fellow 31DBBB friends!

      It is inspiring to hear how many of you have paid off or are working on paying off your debts. It keeps me motivated. :)

  • http://blog.enlightenedmarketing.com Samantha Hartley | Enlightened Marketing

    Hi Kelly! What an excellent post. I found your blog through the 31DBBB How-To Carnival, and I have to say I was unfamiliar with all the fancy terms and methodologies you listed. That was very useful for me.

    I always thought it was counter intuitive to pay off small debts when other, higher interest ones were waiting, but I think I missed what a boost it would be to actually PAY THEM OFF. We’ve had real celebrations, especially when amounts like $28,000 got paid down.

    Keep up the great work, Kelly. It’s inspiring.

  • http://blog.enlightenedmarketing.com/ Samantha Hartley | Enlightened

    Hi Kelly! What an excellent post. I found your blog through the 31DBBB How-To Carnival, and I have to say I was unfamiliar with all the fancy terms and methodologies you listed. That was very useful for me.

    I always thought it was counter intuitive to pay off small debts when other, higher interest ones were waiting, but I think I missed what a boost it would be to actually PAY THEM OFF. We’ve had real celebrations, especially when amounts like $28,000 got paid down.

    Keep up the great work, Kelly. It’s inspiring.

  • http://www.panehpraise.com Lakita

    I am using a similar method. It is based on Dave Ramsey’s 12 Baby Steps.

    I was not comfortable with just $1K so I opted to make one that was a little bigger than that and continue funding it, even if it is just $20-$50.

    It just so happens my debts with the highest interest also have the smallest balance — so technically I am using the snowball…but I opted to prioritize according to interest.

    I am looking forward to the day when I am debt free! Thanks for the great article!

  • http://www.panehpraise.com/ Lakita

    I am using a similar method. It is based on Dave Ramsey’s 12 Baby Steps.

    I was not comfortable with just $1K so I opted to make one that was a little bigger than that and continue funding it, even if it is just $20-$50.

    It just so happens my debts with the highest interest also have the smallest balance — so technically I am using the snowball…but I opted to prioritize according to interest.

    I am looking forward to the day when I am debt free! Thanks for the great article!

  • Anonymous

    We use a combination :-) We did highest interest first to pay off our car and a small loan. We just add what we can to our mortgage. For our student loan we follow the method Frugal Dad talks about (because the interest on that is lower than what we are earning on the money in the bank/market)

  • Heidi

    We use a combination :-) We did highest interest first to pay off our car and a small loan. We just add what we can to our mortgage. For our student loan we follow the method Frugal Dad talks about (because the interest on that is lower than what we are earning on the money in the bank/market)

  • Kelly

    Thanks to both of you for sharing your “snowball stories.” Every day is one step closer to our goals. :)

    Liz, I bet it will be like getting a raise once both the kids are in school full-time!

  • Kelly

    Thanks to both of you for sharing your “snowball stories.” Every day is one step closer to our goals. :)

    Liz, I bet it will be like getting a raise once both the kids are in school full-time!

  • http://chieffamilyofficer.com Cathy @ Chief Family Officer

    I think the debt snowball is the most powerful “weapon” for reducing debt, and I’ve used it consistently to pay off my debts regardless of the order in which I was paying them off. The important thing is to stick with it. Because I’ve consistently built my debt snowball over the years, I was able to pay off my private student loans 14 years early, and will pay off my Stafford loans 17 years early. We also paid off a car loan one year early and pretty much paid cash for our last car (we took out a loan on that one, but paid it off in less than three months).

    It sounds like you’re doing GREAT!

  • http://chieffamilyofficer.com/ Cathy @ Chief Family Officer

    I think the debt snowball is the most powerful “weapon” for reducing debt, and I’ve used it consistently to pay off my debts regardless of the order in which I was paying them off. The important thing is to stick with it. Because I’ve consistently built my debt snowball over the years, I was able to pay off my private student loans 14 years early, and will pay off my Stafford loans 17 years early. We also paid off a car loan one year early and pretty much paid cash for our last car (we took out a loan on that one, but paid it off in less than three months).

    It sounds like you’re doing GREAT!

  • http://lookinggoodmom.blogspot.com Liz

    Hi Kelly! When we paid off our car loans and DH’s student loan, we focused most of the extra money towards the smallest balance other than the student loan, since the rate was 2.9% and we could use the interest as a tax credit. We did pay a flat $250/mo on the student loan, even though a floating rate meant that many months the payment was lower.

    We had taken out a HELOC to buy the second car, so when we sold the house, the HELOC was paid off. I took the $350/month and snowballed it into the second auto loan, doubling the payment. It only took 5 months to pay off the second auto loan, and then it was only 2 more months for the $950/mo payment to get rid of the student loan.

    The best part was that we paid this off just after I became pregnant with #2, so we bankrolled the extra in the following months, and then put it towards our huge childcare expenses once he was born and I went back to work.

  • http://lookinggoodmom.blogspot.com/ Liz

    Hi Kelly! When we paid off our car loans and DH’s student loan, we focused most of the extra money towards the smallest balance other than the student loan, since the rate was 2.9% and we could use the interest as a tax credit. We did pay a flat $250/mo on the student loan, even though a floating rate meant that many months the payment was lower.

    We had taken out a HELOC to buy the second car, so when we sold the house, the HELOC was paid off. I took the $350/month and snowballed it into the second auto loan, doubling the payment. It only took 5 months to pay off the second auto loan, and then it was only 2 more months for the $950/mo payment to get rid of the student loan.

    The best part was that we paid this off just after I became pregnant with #2, so we bankrolled the extra in the following months, and then put it towards our huge childcare expenses once he was born and I went back to work.

  • http://rainydaypennies.net Cathy

    Hi Kelly. What worked for me was a modified form of what Frugal Dad called the recession proof snowball. I consolidated all my balances onto one 0% balance transfer card. I paid the transfer fees, which was a lot less than paying the interest on each card. I paid more than the minimum, but I also started pumping money into the emergency fund. I started with only $250 in the emergency fund, and grew it over time by contributing something with every check. I paid my bills, rent. I paid what was left on the credit card balance, whether that was the minimum or more. Over time, my savings finally matched my debt. I didn’t pay it off right away, though. I let my savings grow until I had a positive net worth of $3000, then I sent a lump sum check and said ‘Cya!’.

    Any size emergency fund will help!

    • Kelly

      I’m always glad to hear success stories like yours. In the past I thought everyone had debt, and it would always be that way for us, but now I know better and hearing from people who have been through it is always so, so motivating!

      We currently have $778 in the savings account, with $250 more being added later this week (from auto-deposit). I set up a bi-weekly deposit of $100, and will be adding one of my checks in each month (roughly $200). I figure that this will be an easy and painless way to grow the Emergency Fund without thinking about it, and meanwhile I’ll ignore that it’s there.

  • http://rainydaypennies.net/ Cathy

    Hi Kelly. What worked for me was a modified form of what Frugal Dad called the recession proof snowball. I consolidated all my balances onto one 0% balance transfer card. I paid the transfer fees, which was a lot less than paying the interest on each card. I paid more than the minimum, but I also started pumping money into the emergency fund. I started with only $250 in the emergency fund, and grew it over time by contributing something with every check. I paid my bills, rent. I paid what was left on the credit card balance, whether that was the minimum or more. Over time, my savings finally matched my debt. I didn’t pay it off right away, though. I let my savings grow until I had a positive net worth of $3000, then I sent a lump sum check and said ‘Cya!’.

    Any size emergency fund will help!

    • Kelly

      I’m always glad to hear success stories like yours. In the past I thought everyone had debt, and it would always be that way for us, but now I know better and hearing from people who have been through it is always so, so motivating!

      We currently have $778 in the savings account, with $250 more being added later this week (from auto-deposit). I set up a bi-weekly deposit of $100, and will be adding one of my checks in each month (roughly $200). I figure that this will be an easy and painless way to grow the Emergency Fund without thinking about it, and meanwhile I’ll ignore that it’s there.

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