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Debt

How to Pay Off Debt

Total household debt in America is at $16.15 trillion.1 So, if you’re feeling the weight of credit cards, car loans, student loans and more, well—you aren’t alone. Debt is normal.

But this normal is holding you back. When you’re constantly paying for the past, it keeps you from saving for the future. And right now, with inflation at an all-time high, debt is making every month way too tight.

Well, we’ve got good news: You don’t have to be normal anymore. And you don’t have to be part of that $16.15 trillion statistic. You can learn how to pay off debt so you stop spending this month’s paycheck on last month’s (or last year’s) purchases. You can make your money yours again!

Let’s talk about how to do just that and dig into:

How to Pay Off Debt
How the Debt Snowball Works
Types of Debt
Ways to Pay Off Debt
Tips for How to Pay Off Debt Faster

How to Pay Off Debt

First off, what is debt? Here’s your basic definition: If you owe any money to anyone for any reason—that’s debt. Now that we’ve got that foundation, let’s talk about what you can do to get debt out of your life. Forever and ever.

Find Out How Much Debt You Have.

Think of it like this: You can’t climb a mountain if you don’t know how big it is. And you can’t knock down giants if you don’t face them. Didn’t Socrates say something like that? No? Well, it’s solid wisdom anyway.

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Pay off debt fast and save more money with Financial Peace University.

Go ahead and plug your numbers into our debt payoff calculator below to get an idea of your payoff timeline.

If you want to pay off your debt, you’ve got to face the truth of your total debt amount. But listen, this isn’t a moment of defeat—it’s the first step to victory! You can defeat your debt. And you will.

But first, you’ve got to know how much debt you have to fight. Look up all your debt balances and write them down.

Get on a Budget.

A budget is simply a plan for your money. It’s how you tell every single dollar where to go so you don’t wonder where they all went. And right now, you have no time for lost dollars. You’ve got work lined up for that money: You’re paying off debt.

So, create a budget. Right now! Cover all the essentials, cut out some extras (just for a season, so you can throw more at your debt!), and make sure you’re budgeting for your debt-payoff goal.

Check out our EveryDollar Complete Guide to Budgeting if you want to learn more.

Use the Debt Snowball Method.

Now that you’ve got your budget set, it’s time to start paying off debt! And the best way to do just that is with the debt snowball method. It’s how you build momentum, because you’re paying off your debts in order from smallest to largest.

Yup, that’s right. Start with the lowest debt.

Okay, we know there are a lot of people out there who say you should pay off your largest debt or the one with the highest interest rate first. That math makes sense on the surface—but if we were doing math, we wouldn’t have gone into debt in the first place. Plus, paying off debt is about more than just the numbers. It’s about behavior change.

If you’re going to get rid of your debt once and for all, you need to see quick wins and feel like you’re making progress—that’s where the debt snowball comes in.

How the Debt Snowball Works

  • Remember the list of debts you wrote out? Put them in order from smallest to largest, ignoring the interest rates.
  • Make minimum payments on all debts—except for the smallest one. Attack that one with all the extra money you can get. This includes the money you freed up when you were budgeting. (We’ll dive deeper into this in the Tips for How to Pay Off Debt Faster section.)
  • Once the smallest debt is gone, pack that payment (and the extra money) onto the next-smallest debt and pay it off.
  • Repeat until every single debt is gone.

Like a snowball rolling down a hill, the amount you’re paying on your debt grows in size and gains momentum with every debt you pay off.

Stop Using Debt

You’ll never climb out of a hole if don’t stop digging. When you decide to pay off debt, that means you’re breaking up with debt. For good. No more swiping the credit card. No more same-as-cash scams. No more financing fancy cars.

It does you no good to bust your butt paying off debt just so you can get back in debt. Get out of the hole. Breathe the fresh air of freedom. And never go back.

Types of Debt

Okay, just to create some clarity around this topic, we want to touch on the four main types of debt:

  • Secured debt is when you borrow money that’s backed by collateral, like a car loan.
  • Unsecured debt has no collateral, like credit cards.
  • Revolving debt is an open line of credit, like a HELOC or credit card.
  • Nonrevolving debt is a loan of one lump sum (like taking out a mortgage, financing a car, or getting a student loan).

Also, there are all sorts of ways to go in debt:

And don’t forget about sneaky things that are also debt, like buy now, pay later installment plans. These seem like a great idea in the moment, but they’re a surefire way to add to that $16.15 trillion American debt total we mentioned in the beginning.

Ways to Pay Off Debt

So yeah, there are a lot of ways to get into debt. And there are a lot of ways to get out of debt. Some actually work and some suck. Just being honest.

Here’s a quick rundown of some of the most popular strategies—and whether or not they’ll lead you to debt freedom.

Debt Consolidation

Debt consolidation is a way to combine multiple debts into one single payment. It sounds like a good idea at first . . . until you find out the life-span of your loans increases, meaning you’ll stay in debt even longer.

And the low interest rate that looks so appealing right now—guess what? It usually goes up over time too.

To sum up: Stretching out the amount of time you’re paying off debt, plus adding interest, equals a bad deal. So, this method is a no-go.

Debt Avalanche

The debt avalanche, aka debt stacking, is when you pay off your debts in order from the highest interest rate to the lowest, no matter the balance. At first, the math sounds flawless. But the problem isn’t with the math, it’s with how we’re wired as humans.

Paying off debt is hard. A quick win is motivating and keeps you going. With the debt avalanche, the first payoff takes so long to get to, your motivation can die out quicker than a campfire in the rain.

Debt Settlement

Debt settlement companies are the seedy underbelly of the financial world. Run from this option. Companies will charge you a fee and then promise to negotiate with your creditors to reduce what you owe. Usually, they just take your money and leave you responsible for your debt. Uh, hard pass.

401(k) Early Withdrawals

Nope. Not good. Never cash out or withdraw money from your 401(k) to pay off debt—unless you’re trying to avoid bankruptcy or foreclosure. You’ll get hit with penalties, fees and taxes on your withdrawal. By the time you add all that up, it’s not worth it. Plus, you want to keep that money invested for your retirement—not use it to pay for the mistakes of the past.

Taking on a Loan to Pay Off Debt

When you read that title on its own, it seems crazy. Why would you take on more debt to pay off your debt?

That goes right back to what we said earlier about trying to dig yourself out of a hole. It. Doesn’t. Work. And the deeper you go, the harder it is to get the dirt out. Eventually, you’re completely buried under.   

Still, there are plenty of schemes out there trying to talk you into it. They try to sell themselves by telling you you’re a clever consumer, using the equity in your home (for a HELOC) or what you’ve saved up in your retirement (for a 401(k) loan) to your “advantage.” Or they encourage you to take out a new credit card to pay off your other credit cards.

Some of these methods create some temporary debt relief. Emphasis on the word temporary. The problem just gets bigger, really. You’re setting yourself up for a deep debt pileup—not debt payoff.

And at the end of the day, these types of debt reduction options can’t help you address the root issue of why you landed here in the first place.

You don’t need to consolidate, settle or borrow to deal with your debt. Plain and simple: You need to change how you handle your money. You need to get down to it and pay off your debt.

The Best Way to Pay Off Debt: The Debt Snowball

We already covered the steps to the debt snowball method, but we have to add it to this list of ways to pay off debt—because it’s the way that actually works.

With the debt snowball method, you aren’t adding to the length of your loans, increasing your interest rates, decreasing your motivation, borrowing against your future or your assets, or growing your debt—and you aren’t grabbing at a temporary fix that makes a bigger mess in the long run.

You’re making the changes you need to make with your money to finally get ahead. You’re focusing in on and paying off your debts, one at a time. You’re building motivation and getting that extra oomph to keep going.

You’re taking control of your income by kicking the debt payments to the curb. For. Good.

Tips for How to Pay Off Debt Faster

So, you’re ready to pay off debt. (Bravo! This is huge.) Now you need some tips to help you get there faster.

Pay Off Debt Before Investing in Retirement

We’ll go ahead and hit you with the two big blockers in any debt-payoff journey. The first is trying to focus your energy on too many money goals at once. And this happens most often when people want to chuck money into retirement and at their debt at the same time.

For one, this slows down progress. And it means you aren’t giving your full energy to your debt-payoff plan.

The thing is, your income is your greatest wealth-building tool. And your debt is stealing from you. Robbing from your future to pay your past. Get. It. Gone.

Attack it with a vengeance. Once it’s gone, save up a fully-funded emergency fund so debt will never be a temptation or an excuse ever again.

Then start saving for retirement. Trust us. This plan works. Paying off your debt before you save for the future is your best option. Once you’ve got your full income back in your control, you can really go after your investment goals.

Stop Using Credit Cards

Credit cards are the second huge blocker to being debt-free. Okay, you might be thinking that credit cards aren’t always debt, though, right? Because you always pay them off, right?

But listen, if you really want to get out of debt forever—why would you keep the option to go back to it right there in your wallet? Or saved in your Amazon account?

If you were trying to kick your sugar habit, would you keep a candy bar in your backpack? Debt is a habit too. Remember, you’ve got to change your behavior to get out and stay out of debt. And having quick options at hand that make it easier to slide back into your old ways is a bad idea.

Don’t just pay off your credit card debt. Get rid of the temptation. Start living without credit cards.

Lower Your Expenses

In the second step to working the debt snowball method, we mentioned throwing all the extra money you can get at the smallest debt. There are two great ways to rustle up that “extra money.”

The first is to lower your expenses.

This can look like lowering any budget lines you’re able to. If you’re used to buying new clothes every month, lower that budget line to just the essentials—like new pants for the kid who keeps shooting up two inches.

Another way to lower expenses is to cut spending by taking some things out of your budget completely. Be your own barista. Stop paying for the ad-free version of your music streaming service. Start meal planning and quit restaurants. For now.

That’s the key. For now. This is a season of giving up some things so you can gain something awesome—freedom from the suffocating weight of debt. 

Increase Your Income

The other way you can get your hands on extra money is to increase your income. Start a side hustle, work overtime, ask for a raise, switch jobs, freelance or sell stuff.

You know you’ve got things lying around the house you aren’t using anymore. Is any of it worth cash? You might be surprised! You can declutter your life and get extra money to throw at your debt. That’s a win-win for sure.

And yes, all these suggestions take time and effort—but the more of them you use now, the quicker you can get out of debt!

Don’t Give Up 

You might have a ton of reasons for why now isn’t the time to attack your debt. The thing is, there will always be reasons to put this off. So, don’t. Also, when you get rolling, be ready for life to show up—random blockers that make it harder to stick to your plan.

But hear this: It’s still possible. If something knocks you off the debt-payoff path, get up, get your footing, and get right back at it.

Let’s talk about a couple practical problems you might be facing now or down the road.

Income: If you’ve got a low income or you’re living on a single income, you can still pay off your debt. Use those tips on lowering expenses and increasing your income and stay patient. Your journey might take a little longer—but you will be debt-free. You. Will.

Inflation: Inflation is another thing sucking the life out of people’s budgets right now. You may feel like you’re running out of money, but even rising costs can’t hold you back from ditching your debt. Get in that budget and start making adjustments. Again, it won’t be easy. But you can do this.

Motivation: And what do you do when your motivation drops? First, know you aren’t alone. It’s incredibly common to start any goal feeling super hyped but lose steam as you go.

But don’t give up! You’re in control of this money goal. Remind yourself of your why. What’s on the other side of this hard work that makes it worth it?

  • Feeling comfortable, confident and in control of your money?
  • Ending the comparison game and finding contentment?
  • Setting up your kids for a financial future that’s about owning, not owing?

All of that comes with debt-free living. And all of that is waiting for you on the other side of this journey.

You can learn even more about how to get there and get motivation to keep fighting this good fight against debt by signing up for Financial Peace University (FPU).This nine-lesson course walks you step by step through the plan to save money, ditch debt, budget well, and invest in your future.

Plus, the average household pays off $5,300 in debt within the first 90 days of working the plan in FPU. That’s $5,300 off your debt snowball. That’s $5,300 forward in this journey.

Yeah, debt is the norm. Buck the norm. Pay off your debt. Every last dollar.

No matter your income. No matter your past.

You can own your future.

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You can pay off your debt. All. Of. It. Learn the step-by-step plan to make it happen fast.

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Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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