So, you have debt. Don’t feel too bad about it – most people living in North America are riddled with debt. Whether you accrued this debt buying consumer items, overpriced items, medical bills, or just trying to keep up with inflation and the ever-increasing bills and taxes, these steps will help you get your debt under control.
How Much Do I Owe?
First of all (and also something that most of us avoid doing) – is to figure out exactly how much you owe. This involves getting out a pen and paper and writing down all your debts. While you are at it, looking up all those credit card statements, note the percentage of the interest that you are paying. Once you are done, it should look something like this:
| debt | amount | % interest |
| National bank CC | 5,500 | 19.20 |
| Bank of America CC | 4200 | 24.50 |
| Student loan | 20,000 | 3.50 |
| Amazon CC | 3,500 | 28.50 |
| Store CC | 850 | 18.50 |
Of course, yours may be longer. Many people may have as many as 10 credit cards each, so if you are a couple trying to figure out how to pay off your debt, you may have 20 lines in your list.
How Much Are My Minimum Payments?
Next, figure out the minimum payment for each one and add them up to get your total minimum payments.
| debt | amount | % interest | Min Payment |
| National bank CC | 5,500 | 19.20 | 145 |
| Bank of America CC | 4,200 | 24.50 | 112 |
| Student loan | 20,000 | 3.50 | 200 |
| Amazon CC | 3,500 | 28.50 | 105 |
| Store CC | 850 | 18.50 | 14 |
| Total CC | 14,050 | 376 | |
| Total SL | 20,000 | 200 | |
| Total | 34,050 | 576 |
What’s My Income, Bills, and Expenses
Then, you need to figure out how much money is coming in (your after-tax income or your take-home pay) and what your monthly expenses really are. Again, this is something most people avoid doing, because, well, we tend to spend more or don’t like to really admit we have certain expenses, and of course, don’t want to cut those out. However, if you want to become debt-free, it is really important to know how much money you are bleeding out for all expenses. Very often, things like house taxes, school taxes, subscriptions, and insurance are places where we don’t realize how much is going out.
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Once you are done, you should have something like this. In essence, you are doing a part of the budget: writing down the actual figures, or the “Actual.”
| Bill Name | Bill Type | Bill Amount | Bill Frequency | Average monthly |
| Electrical | non-negotiable | 350 | 2 months | 175 |
| Internet | negotiable | 50 | 1 month | 50 |
| Rent | non-negotiable | 850 | 1 month | 850 |
| Cell phone | negotiable | 65 | 1 once | 65 |
| Personal insurance | non-negotiable | 50 | 1 month | 50 |
| Car insurance | negotiable | 650 | 1 year | 65 |
| Total | 1,255 |
If you find it easier to track your bills in a spreadsheet, we have a wonderful Google Sheets template available. It allows you to track all your fixed and variable bills and expenses in one place for the entire year, and see each bill in a monthly calendar.
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Calculate the Variable Expenses
Next, figure out all your other variable expenses: food, going out, clothing, entertainment, subscriptions, etcetera.
| Expense | Amount |
| Food | 450 |
| Subscription 1 Amazon | 18 |
| Subscription 2 | 25 |
| Clothing | 20 |
| Total | 513 |
Let’s say you bring home 3,500 a month.
| Income | 3500 | |
| Less Bills | 1255 | |
| Less Expenses | 513 | 1768 |
| 1732 | ||
| Less min debt payment | 576 | |
| 1,156 |
So, $1,156 is the amount left over after you pay your bills, expenses, and minimum payments on all your debt.
Now, if you were to put this $1,156 towards paying off your credit card debt, you could eliminate the credit card debt in less than one year. This is where many people go wrong, because, let’s face it, it’s easy to spend money and much harder not to.
This is where I’d sit down for a while and contemplate what other things you could introduce into your life to replace doing the things that got you into debt in the first place. Read some articles on free things to do, make a list with free or low-cost activities, or otherwise try to replace expensive activities with inexpensive or free ones. Figure out where the biggest leaks were, and come up with solutions for your situation.
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If you follow a very strict financial diet with your current income, you could be debt-free in less than 2 years. If you want to become debt-free sooner, see if you would consider taking on another job or activity to help create another stream of income, or check if you can reduce your expenses even more.
Decide What To Pay Off First
There are two approaches to paying off debt: the snowball method and the avalanche method. With the snowball method, you pay off the smallest balance first, then roll that into the second-smallest, and so on, until the debt is paid off. With the avalanche method, you pay off the debt with the highest interest rate first. Can you guess what Dave Ramsey would do?
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Before you decide which method to use, log in to your online credit cards or call them, and check if you qualify for a low-interest-rate credit card transfer. Say that your National Bank credit card, on which you owe 5,500, has a limit of 9,000, and they are offering you a low-interest credit card balance transfer of 2% for 1 year. In this case, of course, you want to accept that. However, before you transfer your other credit card balance (starting with the highest interest), you want to transfer the 5,500 to another card first, so that when you transfer the money back on, you would also get 2% interest on the initial 5,500. Otherwise, you’ll be paying 19.20% on the 5,500, and then 2% on whatever new amount you transfer from the other cards.
You have now transferred the highest interest credit card (Amazon CC) to the National Bank CC. So let’s say that you’ve done all that, and now your sheet looks like this:
| debt | amount | % interest | Min Payment | Credit Limit |
| National bank CC | 9,000 | 2 | 220 | 9,000 |
| Bank of America CC | 4,200 | 24.50 | 112 | |
| Student loan | 20,000 | 6.00 | 200 | |
| Amazon CC | 0 | 28.50 | 0 | |
| Store CC | 850 | 18.50 | 14 | |
| Total CC | 14,050 | 346 | ||
| Total SL | 20,000 | 200 | ||
| Total | 34,050 | 546 |
You have just reduced your minimum payments from $576 to $546 by juggling your credit cards, taking advantage of lower interest offers, and making a balance transfer.
You now have to decide whether to pay off the Bank of America card or the Store CC first. This is your choice and depends on your personality type. Financially, it makes more sense to pay off the Bank of America card first because it has a higher interest rate. However, if you are the type who’s motivated by quick wins, I’d pay off the Store CC card for $850 and have that balance crossed off the list entirely.
After that, I’d focus on paying off the Bank of America CC for $4,200.
Then, which one would you pay off first? The National Bank CC of $9,000 at 2% interest, or the student loan of $20,000 at 6%?
Personally, I think paying off the credit card first is more important, because the low interest rate is for a fixed term, and it’s totally possible to pay that off within 1 year. One year goes by very quickly. It is also the smaller amount, and getting that knocked out would be a great win.
Stick To The Plan and Repeat
The biggest challenge, as with many things in life, is self-discipline. Find balance in life so that you can continue to stick to your financial goals. Every once in a while, treat yourself to something inexpensive that feels special, so you feel encouraged to keep going on.
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