Posted December 13, 2021, 10:00 - Elisabeth in Debt Management

How to Pay Off Debt Quickly

The first principle of personal finance is to earn more than you spend and build a $1,000 emergency fund. The second principle is to pay off your debt.

Whether you have $500 in debt or $100K+, debt can feel like an ever-present rain cloud, stopping you from achieving financial freedom. But luckily, it is possible to eliminate your debt! Here’s how to get out of debt as quickly as you can, step-by-step.

Key Takeaways:

Pay off debt to lower how much interest you pay over time (and so you can invest your money in other things!).
Pay off high-interest debt like credit cards first. This is typically debt with interest rates of 15% or higher.
Use the debt avalanche method (i.e., paying off high-interest debt while making minimum payments on your other debt) to pay less interest and get out of debt faster.
Make your payments automatic. This means that your payments are automatically applied to your debt every month, instead of you having to do it manually.
Once your high-interest debt is paid off, pay off other debt like lower-interest student loans or house loans.

Why you should pay off debt

Getting out of high-interest debt isn’t just helpful for your stress levels (debt has proven to negatively impact your health!) — it helps you reach long-term financial goals.

Why? Debt builds up because of interest (the price you pay to borrow money). The higher your debt’s interest rate, the more your debt will grow, even if you’re making minimum payments. Interest loses you money while you sleep. It also takes money away from your future self as you continually make payments.

Here’s an example. Say that you have $10,000 in credit card debt with a 20% interest rate. Your minimum payment is $200 per month. At this rate, it will take you 109 months or over nine years to get out of debt!

Even worse, you’ll pay back the $10,000 you originally borrowed, but also $11,680 in interest. That large chunk of money spent on interest could have helped you

Build up your savings
Invest in the stock market
Spend more on things you enjoy

In short, debt robs your future self of money. Here’s how to free yourself from debt once and for all.

1. Pay off high-interest debt first.

High-interest debt is debt like credit cards or payday loans. It is typically any debt with an interest rate of 15% and up. You want to get out of high-interest debt to save hundreds to thousands of dollars on interest.

What counts as high-interest debt for you really depends on your debt tolerance (aka how much debt you feel comfortable with), but as Mark Cuban says, “…recognize that the 18 percent or 20 percent or 30 percent you’re paying in credit card debt is going to cost you a lot more than you could ever earn anywhere else.”

That’s why we recommend using the avalanche method to pay off your high-interest debt.

The avalanche method means that you pay off your high-interest debt before your low-interest debt to save money on interest. Here’s how you can get started with the debt avalanche method.

STEP 1: TALLY UP ALL YOUR DEBT

First, write down all the debt you have — from credit cards to student loans. Write down the name of the debt, interest rate, amount owed, and monthly minimum payment. It helps to use a spreadsheet for this step.

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Next, rank your debt by the highest interest rate to the lowest interest rate.

STEP 2: PAY MORE ON THE DEBT WITH THE HIGHEST INTEREST RATE

Pay extra on your high-interest debt. For example, start by paying extra on your credit card with the 27.24% interest rate.

Throw as much money as you can at it to pay it off as quickly as possible. Make minimum payments on all your other debt. Keep going until the first high-interest debt is paid off.

STEP 3: RINSE AND REPEAT

Once your first high-interest debt is paid off, start making extra payments on the debt with the next highest interest rate. Keep making minimum payments on your other debt. Repeat this process until all your debt is completely paid off!

This method is the opposite of the debt snowball method, where you start by paying off the smallest debt first, no matter the interest rate.

Granted, the avalanche method isn’t as motivating since you don’t see wins as quickly. BUT this approach is great for getting out of debt faster and paying less in interest.

2. Make your payments automatic.

Want to make debt pay-off even easier? As you’re following the debt avalanche method, make your payments automatic. This means that your payments are automatically applied to your debt every month, instead of you having to do it manually.

The top benefits?

You make progress on your debt without even thinking about it!
You also never forget to make a payment.

Go through the creditor or company you owe to set up these payments. You might also go through your bank. Confirm how long it will take for payments to go through to avoid late fees.

Again, make automatic extra payments toward your high-interest rate debt. For example, if your minimum payment is $200 for your debt with the highest interest rate, make a $400 automatic payment.

At the end of the month, you can pay more than this amount manually if you have extra money. Make the minimum payments automatic on your other debts.

And don’t worry if you can’t do too much extra each month. Every little bit helps! We recommend taking on a side hustle such as selling stuff online or freelancing. An extra job gives you the opportunity to earn extra money and pay off your debt even faster.

3. Pay off low-interest debt last.

Once your high-interest debt is paid off, pay off other debt like lower-interest student loans or house loans.

You can continue with the debt avalanche method (i.e., paying off the highest low-interest debt first). Or you could pay off the smallest debt first through the debt snowball method. It’s up to you!

The great thing about low-interest debt is that you can also invest at the same time as you’re paying it off. Why? Because you’re not racking up piles in interest anymore. Yes, you still want to make debt progress, but the returns you could earn investing might outweigh the interest you pay over time.

Here’s a good rule of thumb if you can’t decide whether to invest or get out of debt:

Prioritize investing if your low-interest debt has an interest rate lower than 6%: Focus on investing (including in retirement accounts) and making minimum debt payments (or putting a little extra if you really want to get out of debt faster).
Prioritize debt pay-off if your low-interest debt has an interest rate higher than 6%: Maybe you have a mix of federal and private loans, and interest rates are high. Private loan interest rates can also increase over time. In this case, focus on eliminating your debt, but still contribute to your company’s 401K.

Of course, this advice doesn’t factor in how debt makes you feel. If you’ve crunched the numbers, but having low-interest debt still feels like an overwhelming weight, you might want to finish paying off your debt.

When you become debt-free is a personal choice!

Hint: Not all debt is bad debt.

Debt freedom = consistent progress.

Paying off debt can feel overwhelming — especially if the amount and interest are high. But by taking these steps and being consistent with payments, you can achieve debt freedom! This allows you to make progress in other areas like saving and investing.

Want to learn more about personal finance and paying off debt? Take the Core Four of Personal Finance including Recession Basics course on Udemy. This course teaches you how to effectively manage your money — even during tough economic times! Check out the course here.