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Jan 102016
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By Jackie Beck, The Debt Myth

Many people believe getting out of debt is all about math: spending less than you earn and paying the difference to your debt until it’s gone. In truth, becoming debt free for good is about more than math. It’s about changing your money habits and the way you view debt, plus putting in some good old-fashioned work. Here are the steps that can get you there.

Wiping out debt: the big picture

First let’s talk about the big picture — things that will truly make a debt-free life possible long-term.

Change the way you see debt. The use of debt as a tool is ingrained (and heavily pushed) in America, but if you want to become debt free, the first step is to admit that it’s not a tool that works for you. Yes, you can get things now and make monthly payments — but that only works when everything is perfect.

Since we don’t live in a perfect world, it’s time to start viewing debt as dangerous. It’s risky and expensive. (Even 0% interest debt — because what happens if you can’t make your payments? Or you miss that final payment deadline?) Commit to a new attitude of only buying things with money you already have, and you’ll have made the most critical change in wiping out debt.

Learn new money habits. The next most important change involves learning new money habits. “Only buying things with money you already have” means “No more borrowing.” Period. Work at getting in the kind of financial shape that will allow you to avoid borrowing.

Build up at least a small emergency fund, if you don’t have one already. (Start with whatever you can scrape together and go from there.) Make sure you’ve got a plan in place for how you want to spend your money. This is your monthly budget. Finally, track your spending (just write down what you buy as you buy it) so you can see where your money is really going. This will help you stay on track with your budget and find extra money to put toward debt. Reducing your expenses (at least temporarily) and increasing income can help, too.

Wiping out debt: the nuts and bolts

As you’re learning and implementing new money habits, of course you’ll be actively paying down your debt at the same time. Remember that doing so takes time, and that you don’t have to be perfect. You just have to be persistent. Here are the nuts and bolts of getting your debt repayment plan together:

What debts do you have? Start by identifying all of your debts. Find out the following information for each debt:

  • The name of the creditor
  • What kind of debt it is (such as credit card, car loan, student loan, mortgage, home equity line of credit, personal loan, etc.)
  • How much you owe
  • The interest rate
  • Due date
  • And your minimum monthly payment

Lay it all out there, and if you’re feeling brave or are the type to be scared straight, add it all up when you’re done.

Organize your debts. Now that you know what your debts are, it’s time to decide in which order you want to pay them. There are several schools of thoughts on this, but I’ll tell you a little secret: Don’t get overly caught up in finding the “ideal” order. If you get stuck, just pick a debt (any debt) to focus on first and go from there.

Typically you’ll put your debts in one of the following orders:

  1. Lowest balance to highest balance: Best for most people because of the quick wins and motivation factor
  2. Highest interest rate to lowest interest rate: Good if you are a very persistent person or have extremely high-interest debt
  3. Custom order designed by you: Good if there are specific debts that you really want to pay off ASAP.

Start knocking out those debts. Once you’ve gotten your debts in order, start knocking them out as quickly as possible. That means using the debt snowball method. To do so, make minimum payments on all of your debts except for the first debt on your list. Send the minimum payment to that debt, plus as much extra as you possibly can each month until it’s gone. That’s when the magic starts.

Once the first debt on your list is repaid, you’ll have more money available to send to the next debt on your list. This is because you’ll be able to take what you had been paying to debt #1 and apply it all to debt #2. The process continues as you pay off each debt, with the size of your payment growing like a snowball rolling downhill each time. Until one day, you are DONE.

Jackie Beck is so passionate about getting out of debt that she not only paid off her house, but she created an app called Pay Off Debt to help others get out of debt, too. If you ever want to talk to her, just give her a shout.

Image by Renjith Krishnan,



  3 Responses to “How to wipe out debt — this time, for good”

  1. Making an amortization schedule is extremely helpful. It’s easy to do with a spreadsheet program. You can see how making extra payments or amounts starts wiping off payments at the end, and also the total amount paid out.

    We paid off our first home in 5 years before we were 30, a second home in 2 years before we were 40 and now our third home will be paid off next year in 3 years before 45. Both homes after our first were due to moves. Each time we pay off a home, we are debt free again, which is so nice.

    The “envelope” system of budgeting is extremely helpful. We do it in the computer, not in actual envelopes. But if the money is not in an account, you cannot get it…or you have to borrow from a different account.

    Annualizing all your expenses is extremely helpful also. This means even a once-a-year bill like property taxes. We annualize each category (and sub-category) then divide it by the number of paychecks. That’s the amount that goes into each account every paycheck. That means $80 per paycheck for a vacation, or $2 per week for the newspaper (paid annually), etc. That in itself is another type of “emergency fund” because if you have, say $1000 in property taxes mid-year and you need that money for something else, you can use it, then build that $1000 back up before the taxes are due.

  2. Julie, that’s awesome how quickly you’ve paid off each of your houses :)

  3. Well, it’s a nice goal, but I’m not sure it’s feasible for us. I’m the sole wage earner. I made a fair wage, but we’re not able to make double payments on the house or anything like that. Plus, we need to funnel some of our money into IRAs because disability made me miss out on my 20s and the first couple years of my 30s.

    We just got a mattress for 0% down for five years. We only did this because I may get a bonus again this year. If so, part of it will go to paying that down. If not, we can go ahead and make large payments or even just take the amount out of savings.

    As for the mortgage, like Julie, I’m a big fan of spreadsheets. I put our mortgage into one and calculated various outcomes. If we increase our monthly payments by $100 a month each year, we can have the place paid off after having lived here for under 13 years. If we can start paying more, great. Otherwise, at least we’re inching our way toward debt freedom.

    But we have $20,000-30,000 of bills on the horizon as Tim needs dental implants for his entire mouth. We have less than three years before it becomes urgent, plus things like double pane windows so we can stop paying $400/month in the summer for cooling. I don’t think we’ll be able to avoid going into debt entirely, but hopefully we can get into debt that we can quickly and reasonably pay off. Which is the next best thing for us.

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