So many people have debt. According to the latest report in 2020, US Consumer Debt reached $4.21 trillion. Whether it’s student loans, car payments, a mortgage, or credit card debt, you’re not alone. Unfortunately, so many people feel shame about their debts. So the first thing I want to say is — don’t feel ashamed. You may feel guilt or regret for getting in a bad situation, but you’re not a bad person for getting in the situation.
The first step to getting out of debt is budgeting, which I wrote about yesterday. There are many ways to budget, so choose whichever works for you. Everyone is going to be different.
The second step may sound counterintuitive, but it makes complete sense when you really stop to think about it. SAVE FOR AN EMERGENCY before you start paying off your debt in full. That way, when you’re paying off your debt, if you have a situation like a broken-down car or a medical crisis, you won’t have to put that money onto your credit card! Some people say you need to be able to save between three to six months’ salary, but for the purposes of this, $1-3k should be enough.
Third, stop using your credit cards. Only spend what you can afford. You can use them again once you’re out of debt. Are your expenses more than what you’re bringing in? If so, how can you remedy that? Sometimes, giving up dining out often or getting Starbucks will only fix so much. Can you move to a cheaper place? Are you able you get by with public transportation? Can you pick up a job for nights and weekends or start a side hustle?
Then, there are some simple things to plan before getting started. First, figure out your ultimate why and write it down. Put it somewhere that you’ll see it — like your wallet. For example, “I want to get out of debt so that ____.” Personally, I want to pay off my small amount of debt to start saving for a wedding, upgrade my house in the future, and for any future children. But since that’s quite a lengthy statement, I wrote down,” I want to get out of debt so that I can start a future with my future husband.”
You also need to set your goals, and the SMART Criteria is the most well-known.
- Specific: A goal should be clear and simple
- Measurable: You should be able to track your progress.
- Achievable: It should be possible within the timeframe you choose.
- Relevant: It should play a part in getting you closer to paying off your debt.
- Time-Bound: You should have a deadline.
Let’s say I want to pay off my $4,000 debt within 10 months. I’ve estimated that I’ll have $400 interest max, so $4,400. That means I need to set aside $440 a month to pay towards my debt. That goal is specific, measurable, achievable, relevant, and time-bound.
So once you’ve figured this out, how are you going to pay off your debt? There are two popular strategies, and whichever one you choose depends more on your personality. One will give you more victories in the short run, but one will save you money on interest.
The Snowball Method
Make a list of all of your debts, from the smallest to the largest.
- Visa — $1,000
- Mastercard — $2,000
- American Express — $3,000
(Of course, likely there will be car payments, a mortgage, or some student loans, but I’m using credit cards just for ease.)
You’ll pay the minimums on the Mastercard and American Express each month while paying all you can on the smallest amount — the Visa card. You’ll pay it off first and have a quick success, which will motivate you more in the long run! Then you’ll attack the Mastercard, then the American Express. This is a good strategy because you’ll be encouraged quickly as you go along. However, it may cost you more in interest.
The Avalanche Method
Make a list of your debts with the interest rates from highest to lowest.
- Mastercard — 24%
- American Express — 20%
- Visa — 18%
You’ll continue to make minimum payments on the cards (or mortgage, student loans, car payments, etc.) with the lowest interest rates and tackle the debt with the highest interest rate first, paying as much as you can. This method won’t give you victories as quickly as the Snowball Method, but it will save you money in interest, which is quite important!
It depends on your personality and what will keep you going the most to choose between these two methods. Will you be more motivated if you have success quickly? Or will you be more motivated if you know you’re saving money in interest? I prefer the Avalanche Method, but that’s just my personal preference. (Besides, I also only have one small debt to pay off, so it doesn’t really apply to me.)
The moral of the story is that you can pay off your debts. You’re not destined to walk the earth owing money forever. And you shouldn’t feel ashamed of yourself for having debt. Most people do, in some form or another. You are not a bad person for having debt. There is nothing wrong with you, so do not look down on yourself. I know I don’t. Sure, I got myself into my situation, and I feel guilty for that, but I don’t feel guilty for being the person I am. I made a mistake, like millions of others out there. I’m just lucky mine was small. But there’s nothing inherently flawed about me for making this blunder. And there’s nothing wrong with you, either. So give yourself a break — especially if your debts aren’t on credit cards, but are student loans, a mortgage, or car payments. You’re doing all you can do! And I promise you that you can pay off your debts. You can do it! It just may take some time.