Getting out of debt is a concern for many of us. Whether you accumulated debt during College, during a tough time in your life, or simply due to bad choices, you have to pay off debt to improve your finances. These 10 tips to pay off debt fast are a great place to start.
There are many strategies to pay off debt.
However, some tips are key and should be considered no matter your situation. After reading this post, you should put a strategy in place to get out of debt and start accumulating wealth.
Are you ready to change your mindset towards money? If so, enjoy the reading!
Pin for Later 📍
1. Know your numbers
This first step is often the most difficult psychologically. Indeed, some people are so indebted that they prefer to ignore the situation, so they don’t have to face it.
They don’t know the exact amount of debt they have, which is a huge mistake!
Burying your head in the sand is not an effective strategy for dealing with your problems. It is also true when it comes to money.
Be courageous. Accept that you are in a difficult situation and that (maybe) it is nobody’s fault but your own. Accepting to face a problem is always the first step to solving it.
When I discuss this point with people in serious debt, they often tell me they don’t know how much they owe. They don’t think they can fix the situation shortly (and sometimes they can’t), so they think they are saving themselves a lot of stress by not facing the numbers. And guess what … This is a mistake!
Firstly, it will be difficult to dispute mistakes or excessive fees (and these happen often). Secondly, to deal with a problem and solve it, one must first understand its magnitude.
That’s why, whether your goal is to pay off your debt now or in a few months/years, you should know exactly how much you owe at the beginning of each month.
You need to track where you’re at to ensure your strategy remains valid.
I keep track of my debt and progress using Excel, but you can also keep it on paper. The important part is to know exactly how much you owe, and to whom and update these figures at the beginning of every month.
2. Have a Budget
I think this step is included in every single post about paying off debt, and there is a reason. If you want to pay off debt, you need to spend less than what you earn.
To do so, you need first to know exactly how much you make and what your expenses cost you.
First, the idea is to list your income and then your fixed expenses such as your rent/mortgage, phone bill, health insurance, budgeted groceries, etc. At this point, do not include your debt (except your mortgage).
It will give you an overview of your monthly income and expenses before short and mid-term debt.
Afterward, I usually recommend people list their debt, starting with the smallest balance in a second section. In my case, this section includes my loan and 2 credit cards.
Finally, in the last section, I include very short-term debt due in 30 days or less.
This quick process will give you an overview of your income/expenses ratio. You will have to work on this ratio to pay off debt and build wealth. If you need tips on how to create a budget you can live by, you can read this step-by-step guide.
3. Renegotiate expenses included in the first section
Expenses included in this section are expenses you will have to pay every month for a long time. Saving a few bucks here and there can have a big long-term impact! Are you sure you cannot get a better offer by changing your health insurance of phone operator?
I could renegotiate many of my contracts by doing quick research on the internet and giving companies a call. So take a few minutes to check offers from other providers online. It is worth a try.
Be aware that some companies such as BillFixers can do this for you and negotiate a price reduction for some of your expenses. In their case, the company charges 50% of the saved amount during the first year. The savings negotiated after the first year are all yours. Isn’t that great?
Other companies and websites like MoneysavingExperts give great advice on how to negotiate discounts and great deals. They also list the companies that usually accept negotiations. The companies listed are mostly from the UK, but they also give lots of tips on saving money, which apply wherever you live.
4. Choose between the Snowball or the Avalanche
You need to define exactly how much money you can allocate monthly to pay off debt.
The idea here is to define a realistic amount to make sure you can respect your budget and avoid accumulating additional debt. After defining the total amount, pay attention to the minimum payments for each debt.
You will have to focus on one debt first to pay it off as quickly as possible. The method you choose will have an impact on the first debt to pay. If all your debts have about the same interest rate, the recommended method is the snowball.
Under the snowball method, you will need to list all of your debts (excluding your mortgage) in ascending order.
The goal is to pay off the smallest debt first and end with the largest one. You should pay the minimum amount on all of your debt except the smallest one, as it is the one you want to pay as quickly as possible.
On the other hand, if one of your debt has a much higher interest rate than the others, then the avalanche method may be more effective as it might allow you to save money on interest.
To make things clearer, let’s have a look at the second section…
Here is a quick example :
Let’s say that based on your budget, you have defined that you can use 1,200$ per month to paying off debt. Here is what your payment plan should look like with the Snowball method :
As a reminder, the avalanche method will require you to list your debts, starting with the highest interest rate and ending with the lowest one.
This method is particularly recommended when some of the rates charged are much higher than the average. You will save money by focusing on the higher interest rates.
This being said, the method that applies in most cases is the snowball method. This method is also very effective because it is more motivating.
You will see your debts decrease by paying off your smallest debts first, but you will also see the number of creditors decrease quickly. You will feel like you are making rapid progress, which is an important source of motivation.
Unless your income or some of your expenses from section 1 change, the total allocated to paying off debt should not change from one month to another. Only the allocation of the money between the debt within the section will change.
Again, the idea is to put the maximum on the lowest balance to close it as fast as possible while making minimum payments on all other positions.
5. Limit unnecessary expenses
Limiting expenses in the last section is key to paying off debt faster. Some authors recommend completely avoiding this kind of debt as it is not answering any basic needs. It often represents futile and compulsive spending.
Nevertheless, I do not recommend eliminating this so-called “futile” spending if you plan to pay off your debt in more than 1 year.
This is a personal choice, and I may antagonize some people by saying this. However, be aware that keeping a budget to reach your goals is important in this process. Respecting your budget will have to become a long-term habit to then be able to build wealth.
If your budget and goals are too restrictive, you won’t be able to keep them for too long. It increases the risk of failure because you will accumulate small deviations over time, and you will no longer be able to stick to your budget.
Have you ever said to yourself, “I’ll pay with my credit card. It’s just $150”? Did you use your credit card several times after that? This kind of pattern happens quite often. We think that a small expense can’t hurt us and that we will pay it back quickly.
The problem is that this expense will often lead to additional expenses This is why I suggest allocating a reasonable amount for these little indulgences every month. Your mindset toward money will be healthier, and you will keep these good habits for the rest of your life.
6. Automate your payments
Consistency is key to defining new habits, which is also true when it comes to money management.
Automating my payments made my life much easier. The first advantage of automated payments is that you will no longer have to think about preparing your payments every single month. This trick will save you a lot of time.
Another important aspect is that it will significantly decrease the risk of forgetting about some bills and paying penalty fees.
We saved several hundred dollars in fees since we have automated our payments! I have since then automated all payments from the first section of my budget. Preparing my payments now only takes me 15-20 minutes per month!
Unfortunately, you cannot automate payments from the other sections as the amounts may vary from one month to another. In my case, I prepare these payments as soon as I receive the bills because they all have different due dates. Again, this saves me lots of money in penalty fees.
7. Automate your savings
There is an important debate about saving while paying down debt.
For some people, the priority should be to pay off debts as quickly as possible. To do this, one should cut back on all unnecessary expenses and put as much money as possible into paying off debts every month. This method does not allow you to save money.
Accumulating new debts while paying off others is counterproductive and can also be demotivating.
That’s why, in my opinion, paying off debt as quickly as possible without having any savings is very risky. You will have to use your credit cards if you have unexpected expenses.
And you already know that continuing to use credit cards while trying to pay them off is a huge no-no.
To change our relationship with money, we also need to realize that credit cards carry many risks, although they are a great invention.
One in ten Americans will never pay off their credit card debt in their lifetime! Not saving because you have a credit card and plan to use it in an emergency is not a sound strategy. This is why I have automated my payments but also my savings.
Another way to ensure that you will not be tempted to use your savings is to have a separate bank account.
8. Ask for a raise or look for new income streams
Many people have debt not because they are bad at Personal Finance but because they don’t make enough money. According to Columbia University, in 2020, 55 million Americans were living in poverty. Between May and September 2020 only, 8 million people entered poverty in the US.
These figures are terrible, and they represent a general trend. In Switzerland, the poverty rate is 6.6%, which may not seem like much. However, 13.5% of the population is also considered at risk of poverty!
This is surprising since Switzerland is often considered a rich country (and it is). Adding up these figures, over 20% of the Swiss population is at risk.
This shows how real the risk of poverty is and how it can be independent of a country’s economy.
Another interesting fact is that, in Switzerland, 4.2% of the working population is considered poor. In the United States, 10.5% of the population is in this situation.
Unfortunately, not everyone can change jobs or ask for a raise. Nevertheless, it is important to look for solutions and ask for help.
When did you ask for a raise last time? If you can’t get a raise at your current job, can you consider changing jobs to earn more? Or maybe starting a side-hustle?
A lot of people have unhealthy finances not because they don’t make enough but because they don’t know how to keep their money.
However, if you know that you are being severely underpaid and can’t make ends meet no matter how hard you try, you need to start thinking seriously about improving your financial health.
9. Never pay full price!
One thing that made me save a lot of money was realizing that you can get discounts on almost everything!
As I moved into a new apartment, I started looking for discounted products and realized that many websites are authorized resellers and offer up to 80% discounts on brand-new items. I was able to save thousands just by buying things at the right time on the right website.
This has now become a habit. I have created a specific email address and subscribed to the newsletters of my favorite brands and stores. Whenever I need to buy something, I connect to this email address and look at the offers. I can now say that, except for food, I never pay full price!
10. Start Investing
Once you have your debt under control and enough money in your saving accounts (believe me, you will get there!!), you will be able to start investing your money. Starting to invest was an important step in my Finance journey. I started investing in a 3rd pillar as well as in life insurance.
Not only do these investments offer interesting returns thanks to the long duration of the contracts, but they also have the advantage of being tax-deductible. Yaay!
It is estimated that you need to have at least 1 million to retire with peace of mind. This amount depends, of course, on your lifestyle, age, and health. Since these are major contracts that commit you for life, it is strongly recommended that you consult an advisor.
Investing for your retirement should be a priority as soon as you have your debt under control. But you can also invest in a short- or medium-term perspective.
I do it using the app Yuh! It is a Swiss app created by Swissquote.
Many other apps offer the same services. No matter what platform you use to invest, keep in mind that you need to pay attention to a few elements :
- Have a plan: You need first to define what you want to invest in, how much you can invest, and if it will be a short or long-term investment
- Know your tolerance of risk
- Only invest money you can take the risk to lose
- Know how your investments will impact your taxes
- Know the reward/risk ratio of your investments
- Understand how supply and demand can impact your investments
- Understand how pre-set stops work. This simple mechanism will prevent important losses and should be used by any investors
Getting out of debt is key to improving your finances. It will be a slow process, but it is definitely worth it considering the opportunities better finances will offer you.
Start working on your finances asap, implementing one personal finance tip at a time.
This process should also motivate you to improve your financial literacy, which is the secret to financial freedom.
Are you ready to improve your finances? If so, start today using the free resources below!