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How to Pay Off Debt

If you owe money on student loans, car loans and credit cards, you’re not alone. The latest numbers from the Federal Reserve show that the total national household debt stands at a whopping $14.56 trillion.1 That’s trillion with a “T.” At this point, you could say that worrying about debt is a national epidemic.

But even though debt is a national epidemic, people still believe it’s just a normal part of life. You have a car payment? Sure do. What about an upside-down car payment? Yup—got one of those too.

So, when you talk about the possibility of living a debt-free life, people are naturally going to look at you like you’ve lost a few bolts and screws.

Debt keeps you stuck in your past and robs from your future. Remember that dumb spring break trip you paid for with that high-interest credit card? (Yup—we just went there.) By now, you’ve probably paid for that trip three times over.

But here’s the good news: You don’t have to be stuck making payments to your past any longer. Stick with us and we’ll show you how to send your debt packing—for good.

What Is Debt?

Anytime you owe money to someone else—that’s debt. Yep, we’re talking about credit cards (even if you pay them off every month!), student loans, the mortgage, payday loans, personal loans and even car loans.

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Nonmortgage debt includes:

  • Student loans
  • Car loans
  • Credit cards
  • Medical debt
  • Home equity loans
  • Payday loans
  • Personal loans
  • IRS and government debt

Your bills such as electricity, water and utilities aren’t considered debt—those are just your normal monthly expenses. The same goes for things like home or car insurance, taxes, groceries and childcare. But how you pay for these routine expenses can easily turn into debt. That means if you choose to pay for groceries, utilities and electricity with a credit card, you’re flirting with danger. Miss just one credit card payment and you’re on your way to sitting on a pile of debt.

So what about your house? Yup, your mortgage is technically a type of debt, but it’s the only one we won’t give you a hard time about. That is—as long as your payments aren’t more than 25% of your monthly take-home pay and you stick to a 15-year, fixed-rate mortgage. But that’s a different rant for a different day.

If you owe a balance and make payments to someone or something, you’re in debt. But you don’t have to stay there—give your debt the boot as quickly as you possibly can. Get angry at it and then tackle it with all you’ve got! But first, you’ve got to take inventory of how much you actually owe.

How Much Debt Do You Have?

No more hiding your head in the sand—it’s time to face the truth so you can start doing something about it! Listen, adding up the grand total of your debt isn’t going to be pretty. Let’s rip the Band-Aid off. Ready? Take a deep breath and open up those envelopes and account pages. Look at the number, and no matter how small or large it is, tell yourself, I can do this.

Now that you’ve got a total, you can figure out how soon you can pay it off. Use this super easy debt snowball calculator tool to add up all your debt and find out how fast you can get it out of your life for good. We’ll show you the proven plan that will not only help you pay off debt but kick debt to the curb for good.

Debt Reduction Strategies That Don’t Work

Paying off debt is never easy. We’re fully aware of the buzz surrounding all the “quick” ways to clean up your debt, but if it sounds too good to be true, then it probably is. Let’s look at some of the options out there and why you should steer clear:

Debt Consolidation

This is basically a loan that combines all your debts into one single payment. It sounds like a good idea at first . . . until you find out that the lifespan of your loans increases, meaning that 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.

Quick recap: Stretching out the amount of time you’re paying off debt, plus adding interest, equals a bad deal. Don’t do it.

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) Loans

Nope. Not good. Never borrow from your 401(k) to pay off your debt! You could 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 toward your retirement—not pay for the mistakes of the past.

Home Equity Line of Credit (HELOC)

It’s never a good idea to borrow money against your home. You risk losing your house if you can’t pay back the loan on time. No thanks! It’s not worth a risk like that. Forget it, and just don’t do it.

At the end of the day, these types of debt reduction options are dicey at best, only treating the symptoms of your money problems. They’ll never 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. It will never change until you do!

How to Pay Off Debt (the Smart Way)

1. Never use debt again.

No, seriously. Never again. It will do you no good to put out all of this effort if you’re just going to wind up back in debt again. If this is going to work, you have to commit to the mindset that debt is dumb (because it is).

2. Live on a budget.

You can dodge it all you want, but you won’t ever get ahead if you’re spending more than you’re making each month. If you want to start winning with money, you have to make a plan with a zero-based budget and tell every single dollar where to go. EveryDollar, our free budgeting app, makes creating your first budget super simple.

Your first budget might be a little wonky, but don’t give up! It takes about three months to get into a regular rhythm and get all the kinks worked out. But we promise, it’s worth the effort. The budget is what helps to keep you on track as you work toward paying off debt. And despite what you may have heard, having a budget doesn’t put an end to fun, it actually gives you freedom to spend—without guilt. Not only that but it gives you peace of mind knowing exactly where your hard-earned money is going.

3. 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 pay off your debt is with the debt snowball method. This is the way to gain momentum as you pay off your debts in order from smallest to largest.

We know there are a lot of people out there who will tell you to pay off your largest debt or the one with the highest interest rate first. Sure, the math makes sense, but paying off debt is more than just the numbers. If you’re going to stick with it, you need to see quick wins and feel like you’re making progress—that’s where the debt snowball comes in.

Let’s look at how the debt snowball works:

  • List your nonmortgage debts from the smallest to largest balance. And remember, don’t pay attention to the interest rates.
  • Make minimum payments on all debts—except for that little guy (we’re attacking him). Toss whatever extra money you can find at the smallest debt. Whether your smallest debt is $100 or $5,000, get serious about clearing that debt as fast as you can!
  • Now take the money you were paying on that small debt and add it to what you were paying on the next-smallest debt. So, if you were chucking $150 at your smallest debt, you now have that money freed up to go toward the next debt on your list. You can add that $150 to the $88 minimum payment you were already making. Now you’ve got $238 to put toward that next debt. See? It’s a debt snowball!
  • Now, keep doing this same method until you cross off the very last (and largest) debt on your list. This could take you 18 months, or it might take you six years. The point is—you’re doing it! No matter how long it takes, you’ve made the commitment to become debt-free, and you’re going to see it through. We believe in you!

4. Get on the proven plan for your money.

It’s time to crush your debt, take control of your money, and start living for your future instead of your past. Whether you’re just starting to pay off your debt or you’re a few years in (and ready to kick it into high gear), sign up for your free trial of Ramsey+.

Your Ramsey+ membership will help you knock out debt even faster with tools like Financial Peace University, the BabySteps app that will help you track your progress, and the premium version of EveryDollar, plus a ton of other exclusive content. And get this—the average family who finishes the lessons in Ramsey+ pays off $5,300 in debt and saves $2,700 within the first 90 days alone! Nearly 6 million people have used this plan to budget, save money, and get out of debt once and for all. Now it’s your turn!

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.

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