Key takeaways
- To pay off debt, you need to know how much you owe, how much you’re spending and where you can cut costs.
- The debt avalanche and snowball methods are popular debt repayment strategies.
- A debt consolidation loan can combine your debts into one loan with one interest rate and payment.
Paying off debt requires commitment and patience. You’ll need to carefully review your current debts, spending and budget and understand the available options you have at your disposal. With this information, you can create and implement a successful debt repayment strategy to help you pay debt off faster and build healthy financial habits along the way.
How to pay off debt fast: Steps to take now
There’s an old, oft-repeated Chinese adage that “a journey of 1,000 miles begins with a single step.” When it comes to a “pay-down-debt journey,” that initial single step is a three-part process:
- Figure out what you owe
- Pinpoint spending habits
- Build a budget to meet all expenses
1. Figure out how much you owe
Before anything else, you need to determine the exact amount of your debt. This could seem overwhelming. However, that knowledge can be empowering, giving you a starting point to plan your way out.
In addition to focusing on the dollars owed on each account, pay attention to:
- Loan interest rates
- Minimum monthly payment requirements
- Payment due dates
You’ll need all of this to determine the next steps in debt payments.
2. Inspect your spending
Once you know your debt to the dollar, the next focus should be your expenses other than debt. Go through and group your purchases into specific categories. Such categories include: groceries, gas or transportation, clothing, entertainment and pet needs.
Review your spending for the last three months to get an idea of what you spend, on average, in each category. This will tell you how much you need to budget for those categories — or where you’re overspending.
3. Build your budget
A biweekly or monthly budget plan is one of the best strategies to get out of debt fast and the best way to pay off debt on a low income. It makes you more intentional with how you spend your money and shows you places you could cut back on spending to provide more money to put toward your debt.
Your budget will prioritize your required expenses, including your mortgage, utilities, basic living needs and minimum debt payments. The money left over can go to your discretionary spending, like entertainment and clothing.
Review your budget and see where you can make changes to cut back on your spending. While most of the cuts will take place in discretionary spending, there are things you can do to decrease your mandatory spending as well. Examples include:
- Buying generic brands
- Dining out less frequently
- Canceling unused subscriptions and memberships
- Reducing your electricity or water use
- Changing providers, including cable and cell phone carriers
- Carpooling or taking public transportation to reduce fuel use
You can budget on paper or with a budgeting app. If you want to develop a budget planner, templates are available in Excel, Microsoft Office, Google Sheets and others.
How to pick a debt paydown method
Once you organize your finances, have a plan for your spending and make room in your budget, it’s time to determine how to apply that extra money toward your debt. Two common debt repayment strategies are the snowball and avalanche methods.
Debt snowball: Starting small
The debt snowball strategy involves making minimum payments to all creditors and focusing all extra dollars on the account with the smallest outstanding balance. Once that balance hits zero, turn your attention — and the extra money — to the next-smallest balance and work on that. Repeat the process until all balances are down to zero. As you pay down debt, the available amount to apply to the next debt grows, or “snowballs,” with each remaining account.
The snowball strategy’s main benefit is that it gives you quick wins. And focusing efforts on paying off one account (while making minimum payments on others) can make the process more manageable.
However, the debt snowball strategy can also be costlier because balances on higher-interest accounts continue growing. When you get to that high-rate balance, you could owe a great deal based on compounding interest.
Debt avalanche: Getting rid of the large headaches first
Like the snowball method, the debt avalanche strategy requires you to make minimum payments to all creditors and lenders and put extra money toward just one debt. Rather than focus on smaller account balances, your attention is on the debt with the highest interest rate. When that account is paid off, the debt with the next-highest interest rate is the focus and so on.
The debt avalanche approach removes the most expensive debts first, meaning you save on interest. It can be an ideal way to go if you have multiple debt accounts with varying interest rates.
This method requires patience, especially if that high-interest-rate account represents one of your largest debts. Higher interest rates mean you owe more, which could slow down the process. While the debt avalanche strategy can reduce your costs, this works only if you’re motivated to stick with it.
Other strategies to get out of debt fast
Changing spending habits and implementing a payoff method are two ways to help you pay down debt — but by no means the only ones. You may want to take additional steps to get rid of debt.
Consider a part-time job
Increasing your household income through part-time work could help pay your debt more quickly, especially if you put all or a significant amount of that extra income toward it.
If you can’t take on more hours or get a raise from your primary employer, the gig economy offers multiple opportunities to earn more. Check out apps for food and grocery delivery, ride-sharing services, dog-walking and babysitting to see what’s available.
Consider this route only if it fits your schedule and doesn’t add unreasonable stress to your life. Also, be sure your primary employer is on board with you taking on part-time work. Some companies have restrictions on moonlighting.
Sell things you don’t want
You might not need that unused end table that’s been sitting in your garage for years, but it could be worth $25 to someone furnishing their first apartment from scratch. Facebook Marketplace, OfferUp and eBay can help you find the right buyers for your extra stuff.
Consider a garage sale if you don’t like the anonymity of online selling platforms. Neighborhoods often organize community-wide garage sales, which could attract even more people and allow you to sell items you don’t need or want.
Consider debt consolidation
Debt consolidation combines multiple debts into one new combined loan with one interest rate and one payment. There are several debt consolidation options to choose from.
Balance transfer card
A balance transfer credit card lets you move multiple balances from other cards to a single one that offers a 0 percent introductory APR period. You then have a set period — generally six to 21 months — to pay the amount without accruing interest.
Consider what happens when that 0 percent introductory period is over, as they may carry a higher interest rate than your original card. Make sure to also be aware of the fees associated with balance transfers. These credit cards typically require applicants to have a good to excellent credit score.
Debt consolidation loan
With a debt consolidation loan, you obtain a lump sum of money in the form of a personal loan from a bank, credit union or online lender, then make monthly payments on that loan. This allows you to consolidate various loans into one debt with one payment and interest rate, helping you save money and better manage your debt.
The interest rates for debt consolidation loans are typically fixed and lower than credit card rates. However, if the monthly estimated payment on a debt consolidation loan is more than you can afford, there might be better options. Furthermore, like balance transfer cards, such loans are usually available to those with good or excellent credit scores.
Bottom line
Paying off your debt requires preparation, patience and perseverance, but it can be done. Take the time to understand your finances and the requirements of the creditors and lenders you owe. Select the paydown methods that work with your situation and stay dedicated to get closer to being debt-free.
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