The average American has about $90,000 in debt, according to CNBC.com at the time of publishing, whether that is consumer debt, mortgage, or student loans – that’s a lot of burden. I recently paid off all my debt and student loans and gained financial freedom. I worked my butt off to do it and definitely made mistakes along the way. I’ve put together a list of how I finally made it out of debt and what I would have done sooner looking back.
My loan background is I went to college for 5 years and I had to take student loans each year, then I took a personal loan, and I got into credit card debt. I had all of my loans from school bought out by different lenders time after time. I was so scattered trying to keep up with payments and logins to the online portals in order to manage the loans. I wish I had someone to warn me that all this would happen and unfortunately it’s normal. It sucks being poor LOL. Below are my 5 biggest tips on paying down debt faster and gaining financial freedom to your entire paycheck. My list includes things to do and things to NOT do, please learn from my mistakes.
Disclosure: some of the links below are affiliate links. If you purchase a linked item, I will make a commission, at no extra charge to you. Updated February, 2021
1. First Things First - Get Organized
Before you can make a plan to pay off your debt, you need to understand what you’re dealing with. Here are some tips to get organized:
- Build your monthly budget based on your income.
- Know which of your loans has the highest interest rate, which you can consolidate, and which have payoff early fees (these exist and they are 👿).
- Find out if you can write off your student loan interest on your taxes. Use services like H&R block because they guide you through the process so you don’t forget anything.
2. Consolidate and Prioritize Your Loans
I was lucky enough to come across a company called SoFi, a San Francisco based financial disrupter. They offer a lot of perks and good interest rates. I combined all my student loans with SoFi and took all of my payments with up to 24% interest to 1 payment at approximately 6% interest rate. This made it manageable to live and afford food, which I appreciated. I liked SoFi so much that now I do ALL my money matters through them: Debit (no ATM fees), credit, savings, invest, and anything else they offer. They also offer free financial and career planning for members, check them out.
In general, you can’t consolidate different types of debt. For example, you can’t combine student loans with credit card debt. That means, after you consolidation, you may still have multiple loans.
Prioritize Highest Interest Loans First
When the dust settles after consolidation, set up your payoff schedule to prioritize paying the highest interest rate loan first, then the next highest, etc.
Let’s take a simple example and say you have two loans:
- Loan 1 = $5,000 (24% interest)
- Loan 2 = $8,000 (6% interest)
RIGHT WAY – Prioritize paying off the highest interest rate loan first, to minimize the amount of total interest you pay:
- Loan 1 Payment: $250/month over 26 months
- Loan 1 Interest Total: $1,500
- Loan 2 Payment: $150/month over 63 months
- Loan 2 Interest Total: $1,300
- Total Interest Paid on Both Loans: $2,800
WRONG WAY – Many people think it’s smarter to pay down the largest loan first because you make less payments. That may be true in some cases, but ignoring smaller loans with high interest rates generally results in paying more total interest:
- Loan 1 Payment: $150/month over 56 months
- Loan 1 Interest Total: $3,300
- Loan 2 Payment: $250/month over 35 months
- Loan 2 Interest Total: $700
- Total Interest Paid on Both Loans: $4,100
Check out the CreditKarma Debt Repayment Calculator for other examples and to help you prioritize.
Don’t Increase Expenses After you Pay Off a Loan
Once you pay off the highest rate loan, don’t just start spending money because you can. Instead, add that amount to the next highest interest rate loan and pay that off even faster! This way gives you an exponential payoff plan. It’s like a snowball effect: once you get that first large one paid off, the debt will fall off that much faster as you allocate more resources to the remaining debt!
I swear when I paid off my first largest and highest rated loan, I put that loan payment amount toward my next largest and highest rated loan and it was paid off in less than 5 months. I was then able to put what would have been those 2 payments toward my last loan, and it was paid off in 4 months. I am still in shock.
3. Max Out Your Monthly Payment
You will (it feels like) NEVER be able to pay off your loans if you only pay the minimum payments. If you really want to get out of debt and improve your lifestyle, you need to make the largest monthly payments you possibly can. That may mean making sacrifices, but better to make larger sacrifices for a shorter period of time than constant sacrifices for years, right?
Of course if the minimum payment IS your maximum payment then just work on not missing a payment. You will build up your credit and be able to get better rates down the road. #priorities am I right?
4. Make Smart Money Decisions
Get a roommate or down size your living arrangement. For most people housing costs are the most expensive part of the monthly budget. Do whatever you can to reduce your housing costs so you have more resources to pay down debt. You can do this by taking on a roommate, living with family, or renting a smaller apartment.
Only have 2 credit cards and pay them off Every Month. If you need credit cards to help you manage your budget, limit yourself to two: 1 for essentials and 1 for other stuff you were going to be buying anyways. I had one credit card with a rewards system where I earned money based on the stuff that I had to buy like groceries and gas. Then I needed clothes for an office job and learned that I really liked Banana Republic Factory. I got their credit card so I get 10% off all my purchases and access to special deals early. The point is that I liked those clothes and found a way to get them cheaper while building up my credit at the same time. Just make sure you are able to pay off your credit cards every month to not incur any extra interest costs.
Limit non-essential purchases. It sounds like a no-brainer, but you’d be surprised how much you spend on non-essentials if you just sat down and looked at your statement. Here are some common every day expenses you can avoid or reduce to lower your monthly budget:
- Eating at restaurants & bars
- Entertainment (movies, shows, etc.)
- Snacks when out and about
- Non-essential Amazon purchases (Toys, gadgets, clothes etc.)
- Subscription services (Netflix, Prime, Hulu, etc.)
By following just a few of these tips, you will soon be able to keep your entire paycheck sooner and be happy!
5. Do NOT Get The Dog!
You’ve put in your time with school and you deserve a little companionship, right? 🐶 NO! If you really want to be around animals but can’t afford it, go volunteer at shelters until you are financially stable. Animals cost SO much! I love my dog, but jeez he’s cost me a lot of time to get back on track financially. There’s good that comes with him, I really needed him at times and since he was a rescue, I guess he needed me too. But if you’re really just on the fence, don’t do it, he has anal glands that vet techs quit the business over, he needs his claws trimmed a lot, he has grass allergies of all things, needs special food, and veterinarian appointments are expensive and he goes at least twice a year for a full check up. Don’t even get me started about the medications he takes just because he’s a dog. He’s almost 9 now and the costs keep adding up.
The first year you could look at $1,200 to $1,800 depending on the shots, surgeries, food, etc then you can expect the annual costs to level out a bit, but the figures can still range between $600 to $1,800 per year depending on the services, medications, and emergencies. For our medium-large breed dog, we spend about $1,500 per year. If you are going to get the dog or the cat, look into the mobile pet clinics for responsible preventative care in your area or look into getting pet insurance – these options will save you money. Also please please please adopt and don’t shop – visit the ASPCA near you. Mutts are the best anyways.
YOU CAN DO IT! I know as well as anyone that has been in debt due to different circumstances, bad decisions, and just life happening – it’s so hard sometimes. I’ve found myself in some pretty dark places and felt that I would never come up to get out of my debt, but I’ve done it and so can you.
What other tips have helped you on your journey to get out of debt?
Do you think any of these can help you?