One of the toughest areas of finances to overcome can be paying the personal debt you might have accrued over a certain time period. Yet, paying this debt is so critical to improving your finances and future quality of life. But for most (including myself), it’s not easy and can be a long process.
And debt in America is not getting any better. The average person owes $46,000 in student debt, over $27,000 in car loans, and has almost $7,000 in credit card debt according to Federal Reserve Bank.
I also fell into these statistics, although fortunately not every area was as high as the average. But nonetheless, it held me back financially for years — until I took control.
Steps I Took to Tackle This Personal Debt
Everyone wants a big secret or formula for fixing personal debt or saving money. There is none! In fact, for people who know personal finances well, they will not find anything surprising.
So if you are looking for secrets, then click away now because you’ll just be disappointed.
But if you are curious about how I approached it and got results then keep reading. There will be variations in other personal debt stories, but these areas might be able to help your own strategy too.
Got real with myself
You want to make changes and see results? Then you have to get real with yourself, even if you don’t like what you see.
For years I coasted by on a mediocre salary, not paying attention to my finances, or really understood all the debt I had accumulated. I did nothing about it, other than complain from time to time.
I left years on the table of wasted time that I could have been improving and making changes. But I wasn’t ready to face the real issues. I knew it wasn’t good, but I chose to ignore it and continue on.
Worked on my mindset towards money
After a few years of sad looking financials, I was tired of it. I had a long conversation with a friend then got real with myself. It was the first part of my “financial awakening.” Cheesy, but it’s really what it was at the time.
However, I wasn’t completely ready to make a plan yet. I had to start correcting my mindset towards money. I let money control me, had this consumer mindset, and was stuck in this 9-5 traditional view of the world. This is where I started reading money books, which helped me think differently.
It made me realize I should be in control of my money, that I can make money work for me, and understanding finances is not as hard as the world makes it seem. My mindset did not improve overnight, but dedicating time to learning started to mold my brain to view money differently. And quite frankly, to actually give a shit.
Some of those books I read in the early days included:
- Rich Dad, Poor Dad
- The Millionaire Next Door
- The 4 Hour Work Week
- Your Money, Your Life
- The Simple Path to Wealth
Correcting your financial mindset is NOT EASY. If you don’t want it badly enough, it’s going to be challenging and take time.
Wrote down all my debt and interest rates
I think it’s easy for anyone to login and look at the debt. It’s also easy to put automatic payments and never look at it again until it’s paid off. But to me, that leaves everything on autopilot instead of really understanding the personal debt and the numbers.
I wanted to see everything in one place, understand the interest rates, and be able to better visualize the big debt picture. The easiest way was to put everything into a spreadsheet.
This included total debts, how much I paid so far, interest on each of the loan types, interest already paid, how long it will take paying the way I am, etc. Anything and everything about my debt, I built into one solid spreadsheet.
Choose one to pay off first
At this point, I needed to make a personal debt payoff plan. Paying the minimum each month was going to take years. For example, my student loans were to be paid off in 10 years and my car loan was for six years. I did not want to carry that debt that long anymore or pay all the interest.
There are two really popular debt payoff strategies: debt avalanche and debt snowball. The debt avalanche method involves making minimum payments on all debt, then using remaining money to tackle the highest interest rate debt.
Where the debt snowball method involves paying off the smallest debts first to remove them, then moving on to bigger ones. It sort of motivates you when you see something paid off.
I went down the debt avalanche method, with my personal twist. I certainly wanted to remove the high interest rate debt first.
But then I also wanted to tackle the highest debt bill per month too, because that extra could then go towards saving and investments (like the stock market or real estate crowdfunding).
- My credit card was first, over $1,500 on it. But the interest was over 18%! Not too big of a total loan to payoff, removes any high interest, and I get a good feeling of removing some debt. Check.
- Next, I went after my car loan. That was just over 6% interest, but I had almost 4 years left with a $320+ payment per month. This meant I needed to put extra down each month. Check.
- At the same time, I was making an extra payment when I could to my student loans. I had two each month to pay, but the interest rates ranged from 4-5%.
- Once my car was paid, I started paying more on the remaining student loan debt until it was completely gone in 2019.
- At the same time, I was saving and investing because I did not want to miss years of compound interest and I quite frankly, needed to build my savings up. For a solid stretch I put more emphasis on this than paying extra on student loans.
Increased my salary to pay off more
I think it’s a no brainer that you want to increase your salary. In order to pay off debt more aggressively, it helps to have a larger income.
But it needs to be said because it was critical to paying off my personal debt. Too often financial advice focuses on cutting expenses. It’s important for sure, but there are limits compared to making more money.
In mid 2014 after being laid off, I was really taking an interest in digital marketing. I went to college for computer science and graphic design, but it wasn’t my thing once I got into the working world.
So besides teaching myself about finances, I started learning about marketing too.
I saw the pay scale on websites like Glassdoor, that there was demand for digital marketing, and that there were opportunities for remote work too — which could cut back on driving and car expenses.
Then I started taking free certifications from Google and other marketing companies, got some freelance marketing work for my resume, and then ultimately working for a digital marketing agency to ramp up my skills.
Over a span of three years, I increased my salary by 120% by switching to marketing and working to elevate my skill set.
Will that happen for every career choice? Of course not, but I found one that was interesting to me and can pay well if you work for it.
Side hustle for extra cash
While working towards building a better strategy, something to consider in order to pay down personal debt is to side hustle. I’m not into the whole hype of side hustling yourself to exhaustion, you still need some quality of life to avoid burnout.
But side hustles can help bring in extra cash that you can use towards extra payments on your debt. I had two freelance marketing gigs that I used to save money and put a bit extra towards my debt.
I did not do this for the entire five years of this debt payment plan, but it was enough to help push through. Once my salary grew, I focused on that to really get my debt paid off.
Stuck to the plan and watched the number of debt go down
Lastly, I stuck to my personal debt payoff and plan until it was completely gone. The results were slow at first and it felt like I was barely making a dent.
Not going to lie after a year, I felt like I wasn’t making progress at all. But I stuck through it because I reminded myself of the situation I was in before and that if I was patient, results would come.
And just like compound interest when you have more time and money invested, my debt payoff started to compound quicker. Once one debt was paid and I increased my income, the chunks of my payments got bigger and the timeframe to payoff shortened.
Starting off a new decade debt free is an exciting feeling. And especially now, because I can ramp up my savings and investments further with the extra cash flow not going to debt.
More Articles from Invested Wallet: