According to BankRate, the average American consumer debt is now up to $93 thousand dollars.
75% of Americans carry credit balance from month to month.
Nearly a quarter of U.S. adults have personal loans against their names.
And 12 percent of adults in the US have a HELOC (Home Equity Lines Of Credit) with an average debt of $42 thousand dollars.
I don’t know about you, but reading these numbers makes me anxious.
Unlike a fixed mortgage loan with low interest rates, these types of loans can get individuals into trouble very quickly, if not handled well.
But, because you are a responsible individual – taking care of your children as supporting your aging parents.
You want to pay these off as quickly and efficiently as possible. So let me show you how.
In this post, I’m going to walk you through five simple steps you can take to pay off high interest personal debt as quickly and efficiently as possible.
1 – Step One, Understand What You Owe And How Much You Owe
I have a suspicion that most people swamped by consumer debt don’t have the full picture of what they owe and how much they owe.
Unless you know what the problem is, you can’t work to fix it.
So start by collecting all the documents related to all the money you owe and make a list.
List out all the debt you owe, with the balance and interest rate next to it.
I like to use a simple spreadsheet. Either excel or google sheets are both good options.
The primary objective here is to be able to see all the money you owe in one simple document.
This will be painful.
You will see in one place the source of all your debt related stress.
However it’s something you have to face if you want to pay off your debt quickly and efficiently.
You have family members that are relying on you, and you want to get yourself into a better financial position as soon as possible.
Remember. If you are serious about paying down your debt, today will be the worst day as regards to how much you owe.
Going forward, you will be knocking this list down little by little.
So things will only get better as regards to your debt problem.
2 – Step Two, Track Your Expenses
Whenever people ask me for personal finance advice. The first thing I tell them is to track their expenses for 1 to 3 months.
People get caught up on sexy personal finance topics like investing and real estate, but unless you can understand your expenses and manage it effectively, you are operating your household like you have a big hole in your pocket.
It doesn’t matter how fancy your investment vehicle is or how well you restructure your debt – if you can’t manage your expenses, you will always be playing catch up.
Most people unfortunately have no idea where their money goes every month.
If you asked them how much they spend on food, they would have no idea.
Unless you track your spending, we don’t realize that we just spent over a thousand dollars eat out or five hundred dollars per month on random Amazon shopping.
So by tracking your spending for at least 1 to 3 months, you will have a very eye-opening experience.
You will actually see how much you spend on food or random shopping and this will give you a starting place to start managing your spending.
Now, when it comes to the mechanics of tracking your spending I have few software recommendations.
One is Mint. Once you connect all your accounts – bank account, credit cards, you can see all your transactions real time in one place.
It also automatically groups your spending by category, so you can see right away where you are overspending and figure out a way to optimize.
Another option is Personal Capital. It’s similar to mint.com with additional investment related features. If you are just starting out tracking your expenses, I’d recommend mint.com – but you can’t go wrong with either of them.
The primary objective of this step is to track your spending so you have an understanding of exactly where your money is going.
This way you can optimize your spending and use the extra money towards paying down your debt.
3 – Step Three: Cut Back To Your Minimal Living Expense
This is going to be the most important and the hardest step to execute.
However, if you are really serious about paying down debt, you cannot ignore this step.
And I mean serious, you have to be really serious.
When my wife and I were saddled with $105,000 of student debt 10 years ago – we got gazelle intense about paying down our debt that we wanted nothing more than being free of this debt.
You have to be willing to face this uphill battle.
If you have the desire to watch this video and determination to take care of your family, I know you can. I’m rooting for you.
After you have tracked your expenses and you have a good understanding of where you money is going, you need to go back now and cut out all the wants from your list.
Your needs are the basics you need to live – basic rent, basic transportation cost, insurance payment, basic food budget.
Your wants are everything on top of that – eating out, extra uber rides, vacations, extra shopping.
Like I mentioned earlier, this is going to be hard. But in the long run you will thank your past self for making this sacrifice.
The primary goal of this step is to cut back. And cut back some more, so you can find the extra money to apply towards paying down your debt.
4 – Step Four: Pay Off Debt
Now to the fun part. The actual debt paydown.
There are two strategies that I like to recommend.
The first is called the Debt Snowball Method – made famous by our friend Dave Ramsey.
The basic premise is that you pay off your smallest balances first, then slowly work your way up to the largest balance until that’s paid off.
The assumption behind this method is that it is much more motivating to pay off the small balances first, then work your way towards the larger balance.
People are emotional beings, so unless we see progress early on, we are more likely to give up.
My wife and I actually used this method and I highly recommend it to people who are just starting out in their personal finance journey.
I kept a whiteboard with a list of all of our debt and it was quite satisfying seeing all the crossed off amounts.
The second method is called the Avalanche Method.
This method advocates for arranging your debt by interest rates rather than amounts.
With the Snowball Method, if the interest rate on the larger loans are higher, you are technically paying more via interest.
So from a mathematical perspective, the Avalanche method is actually more optimal.
However, you can’t go wrong with either method.
See what would best work for you to pay off your debt quickly and efficiently.
In the big scheme of things, whether you use the snowball method or the avalanche method, it won’t make much of a difference once all your debt is paid off.
5 – Step Five: Make More Money
Now to the final step.
If you’ve cut back as much as you can, you are living off the bare minimum and there are still not enough money to pay off your debt – there is just no way around it.
You need to make more money.
If you are in a traditional job, see if there is a way to work more hours. Taking on additional shifts or going overtime.
You aren’t committing yourself to doing this forever. Just until you can get yourself back to zero.
If there are no opportunities to make more money at your day job, look at taking up a second job or even doing some side hustles.
Today, with apps like Uber, Doordash and Instacart, as long as you are willing to hustle for it, there are opportunities to make extra cash.
It will be hard in the short run – your friends are out living life and you are sitting here living on minimum overhead and working extra hours.
However, in the long run you and your family will thank you for it.
Get serious about making a change and start paying down your debt today.