Start Tackling Your Debt
You’ve completed Step Three. You should have the future budget all laid out. You know every dollar that comes into your possession every month. You’ve got at least 20% dedicated to eliminating your debt.
Now what?
Now You Tackle
There are mixed opinions on how you should begin your journey to pay off debt.
Some “experts” say to start with the highest interest rate. Others say to start with the lowest balance. From experience, you should go with a hybrid. If there are some super small balances on here, knock those out quickly. Credit Card debt or medical bills are probably your lowest balances. This isn’t a “one size fits all” kind of step. Your debt and expenses will not look the same as anyone else’s.
Your plan begins now. You need put your debts in the order that you plan to pay them off. Obviously a 25% interest rate credit card with a balance of $5,000 should be paid off before a $5,000 student loan with 5% interest. However, if that student loan balance is $750 and the credit card is $5,000, I would knock out the $750 first regardless of interest rate. This would give me a sense of accomplishment. It would keep me focused on the goal and I would get an immediately thrill from knocking something quickly off the list.
Rolling
We’re starting with at least 20% of your take home pay as a rolling number, right?
The great thing is that when you pay something off completely, you get to roll those payments into the next debt on your list.
Say you previously paid $50 per month for a medical bill of $1,200. This medical bill is the first item on your list that you are going to knock out. Using your 20%, you pay the $1,200 relatively quickly. Now you have the 20% money you were putting towards the medical bill plus the original $50 your medical bill was to roll towards the next debt.
The amount you can put towards your debts will keep growing with each debt you pay off.
Your motivation to get this done quickly will only increase as you pay off more.
Take the total debt that you had on your Step 2 (The Whole Picture). Leave your mortgage out for now. Maybe your total number minus your mortgage is $55,000. This includes your student loans, credit cards, everything except your home. Using our original scenario of having $1,200 as your 20% if you bring home $6,000 per month…..
$1,200 x 12 months a year = $14,400 per year. It would take you no more than 3.8 years to become debt free outside of your mortgage. This does not include some rolling benefits. Does that seem to long? This also doesn’t factor in any side hustles or raises in the future. Can you start increasing your 20% little by little and cut that down to 2 years? I bet you can!
Two years of sacrifice to be debt free other than your home mortgage sounds pretty amazing. I’d love your feedback on how the steps worked for you and hearing about any situations that come up along the way!
If you would like feedback on your budget, earnings, or anything money/career related, feel free to head to the discussion forum!
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