It's no question that debt managed incorrectly can destroy your finances faster than anything else. The best practice is to learn from the get-go how to manage debt and never get into a position where it causes a problem in the first place. Hindsight is 20/20 though, of course.
However, I've created an easy to follow four step process on how to pay off debt quickly. Next, I've included multiple tips to help accelerate the process of getting rid of all that bad debt.
A 4 Step Process to Pay Off Debt Fast
First and foremost, looking at debt from a “return on investment” (ROI) point of view helps you see the big picture of your finances a bit differently. How do I mean?
Every dollar you earn today can be used to save, spend, invest, or pay off debt. If you save your money in a savings account, you will probably get an ROI of 1% per year, give or take, and in some cases much lower than that!
If you spend that money, your return is the value of the product or service you purchased. If you invest that money, you'll likely get an average return of 10%, which is what the average return of the stock market is.
And finally, if you use that money to pay off debt, your return is equal to the interest rate of that debt. How? If you pay on a credit card whose interest rate is 24.99%, you are paying down a balance that would have otherwise been charged a fee of 24.99%.
In other words, the amount you pay towards that debt is no longer subject to that interest rate fee, and you're saving yourself the same amount by not having to pay that interest rate. Make sense?
Keeping this mindset helps you keep a proper outlook on how to manage your money in almost every aspect of finances.
With that said, here is the 4-step process that will teach you how to pay off debt fast.
1. Add Up All Your Debt
If you're in a debt crisis, chances are it's been a while since you've gathered all your debt balances, put it on paper and looked at it all in one place. You need to know what you're dealing with so you can plan accordingly.
This list should show your debt payments, the interest rates, and the minimum payments for each account.
2. Review Your Budget
If you haven't created a budget yet, stop right here and go follow my 5-step process to build a budget.
By this point, you have all your debt in one place, and now you can compare it to your overall budget to adjust your finances accordingly to attack the debt.
This step means reviewing all the areas that you are overspending, reviewing subscriptions, monthly bills and even entertainment and food budgets to see where you can tighten things up a little.
Remember, any dollar you can squeeze out of your budget will be getting a return on investment equal to the interest rate on the loan you're paying off.
3. Plan and Prioritize
Now that you have a strong grasp on your debt situation, your budget, and your extra money available to pay down that debt, it's time to create a plan of attack.
Which debts do you want to pay off first? Some prefer to pay off the smallest balances first to help motivate them with quick “wins.” Others prefer to pay on the balances with the highest interest rate.
If you ask me, I think in terms of return on investment as discussed above, so pay down the balances charging higher interest rates.
Your plan of attack should ensure that you are at least paying the minimum payments on all of your debt balances, and using the discretionary money squeezed out of your budget in step two to pay down the balances of the highest interest debt.
4. Earn Extra Income
If you want to get out of debt fast, then you'll have to expect a little “elbow grease” will be required. This means looking for ways to earn extra money on the side of your primary source of income (aka a side-hustle).
Easy ways to earn extra money fast that will help pay down your debt quicker are:
- Selling products online with eBay or Amazon
- Spend a few hours per week earning extra money as a freelancer
- Make extra money completing online tasks with Swagbucks
- Do your grocery shopping with apps like ibotta that pay you cashback for free
For a full list of extra ways to make money, take a look at: 20 Ways To Make $1,000 As Fast As Possible.
Tips to Pay Off Debt Faster
You've got a budget, you've followed the 4-step process listed above, now you just need to shift into overdrive to plow through your debt. When using the 4-step process to pay off debt faster, consider implementing a few tips that will help accelerate the process.
Different Plans of Attack
We briefly discussed these two options to paying off debt above, namely paying down the small balances first (aka the debt snowball) or paying down the highest interest rate debts first.
Both of these are great debt repayment plans that work great. Here is an explanation of them in greater detail.
The Debt Snowball Method
Take a look at the process of building a big snowball. First you have to create a snowball with your hands, then you start rolling that ball in the snow to pack on more layers of snow. As you roll the snowball, it gets bigger and bigger. This same process is used in the debt snowball method.
First you start by paying the minimum payments on each debt balance. Then, you pay down the smallest debt balance first.
When that balance is paid off, you take the money that was going towards the first debt balance and apply it to the second smallest debt balance. You complete this process until you've paid off all your debt, and the result is paying off debt faster than normal!
Pay Off Highest Interest Rates First
This method is pretty straight forward. Simply select the debt with the highest interest rate and focus on paying down that balance as fast as possible.
This way, you are actually saving yourself money by not having to pay high interest-bearing debts for a long period of time, because you're paying the highest interest debts off first.
Keep in mind that you can follow the debt snowball method, but rather than paying the lowest debt balance first, just pay off your debts in order of highest interest rates.
Lower Your Monthly Bills Automatically
Technology driven companies have made it easy for you to automatically lower your monthly bills. By linking your bank account to a data driven financial tech company (like the ones listed below), they will automatically notify you when you're paying too much for certain bills. Next, they will actually call the service provider for you and negotiate a lower bill to pay!
- Bill Shark: Bill Shark will negotiate with popular service providers like internet and cell phone providers to lower your bills. They also help monitor your subscriptions and cancel them at your request, as well as ensure you're getting the best rates on home and auto insurance.
- Truebill: Truebill gives you a quick snapshot of all your accounts in one place, as well as negotiates lower bills on your behalf. They help you monitor your subscriptions as well as help you put savings on autopilot based on your spending habits.
- Trim: Trim (aka Trim Financial Manager) is similar to Truebill and Bill Shark in that it will help you lower bills by negotiating with your service providers. They help manage and cancel unwanted subscriptions, as well as negotiate bank fees and interest rates for you.
Consolidate Your Credit Card Debt
A debt consolidation loan is a loan given to you buy a financial institution used to pay off higher interest-bearing debt or to combine multiple debts into one lower monthly payment. The result is saving money, paying less in interest rates, and often times even improving your credit score.
Consider a debt consolidation loan for credit cards or high interest personal loans. A couple places to consider getting a loan at are:
- OppLoans: OppLoans provides non-prime borrowers access to multiple options for personal loans at competitive rates up to $10,000.
- Prosper: Prosper is a peer to peer lending company where investors contribute money to fund loans needed by borrowers. When getting a loan with Prosper, you are essentially getting a lump sum of money from potentially hundreds of Prosper investors. This makes no difference on the loan from the borrower point of view. Prosper has competitive loan options and competitive rates to consider.
Consolidate Your Student Loans
Student loans seem to be the major debt crisis of the century! If you've got student loans, then you know the burden of those payments creeping up on you each month and the ever growing interest rates and fees.
Companies like Credible specialize in helping you find solutions to solve your student loan problems. Solutions include refinancing your student loans, debt consolidation loans for your student loans, and even better options if you're searching for places to take out a student loan.
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