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The last debt payoff plan you’ll ever need

Dawn Papandrea

May 20, 2016

If you’re carrying a large balance on one or more credit cards, you know the pain of trying to make a dent, especially if you’re living paycheck to paycheck.

Seriously — who has a few hundred or thousand dollars in disposable income hanging around to put toward debt? Believe it or not, with a few financial tweaks, you can take charge of your overcharging indiscretions and become debt-free.

Make no mistake: It won’t happen overnight, but seeing those balances go down is addictive and can keep you on the payoff path. This guide aims to give you all the tools and advice you need to not just move the needle on your debt, but to eradicate it for good.

Here’s the short version — the quick list of steps you’ll need to take (click on the icon to go directly to that chapter):





Raise money

Raise money

Follow through

Follow through

      • Assess your financial situation.
      • Prioritize your obligations.
      • Raise money to fast track toward your goal.
      • Follow through and stay committed to a zero-balance life.

Before you get started, one more thing. To keep your eye on the prize, you should be aware of all of the benefits you’ll reap by becoming free of debt, because the truth is, it won’t be easy. Here are some motivators to help you stay the course:

No debt means more cash flow. With no debt obligations weighing on your income, you can put that extra money toward your retirement, build up a rainy day fund or save up to do or acquire something amazing.

No debt means better credit. A big factor in your credit score is your debt utilization — how much of your available credit limits you are using. Being debt-free means you’ll have a zero percent utilization, and that’s the best possible position to be in. Better credit standing means you’ll have access to the most favorable terms and rates should you wish to finance a car or home loan, even find the perfect job.

No debt means peace of mind. Worrying about bills is not great for your health or your mood. Just think of the mental health benefits you’ll get when you no longer have to struggle with the paycheck shuffle. 

OK, now your debt payoff mission is ready for takeoff:

Step 1: Assess


Know where you stand.
There’s no point in trying to tackle your debts if you don’t have an accurate picture of your financial situation. Some of things you need to know include how much you owe in total, the interest rates you’re paying and what habits you need to break in avoid getting into more debt.

The first two are easy. Just list all of your credit accounts, along with each one’s principal balance and interest rate. When you see it all mapped out on paper, it could be eye opening. As for how you got there, well, that requires a more complex self-evaluation, but a necessary one. Here’s why: Before you can successfully turn the credit ship around, you have to consider what behaviors took you off course in the first place.

If you are carrying debt due to a hardship such as a job loss or an unexpected health crisis, then the answer is straightforward. However, if you accrued debt over time because you spent beyond your means, that’s a mindset that you’ll have to modify as you forge ahead. A careful look at past credit statements can clue you in as to what you’ve spent money on that you probably shouldn’t have. Entertainment, eating out, vacations or pricey gym memberships could signal that a lifestyle reality check is in order.

Take a good look at your budget.
From there, you’ll want to evaluate your budget (both income and spending) so you can find ways to reduce your monthly expenses and apply the savings toward your debt. We’re not going to lie — this is the part that hurts, because if you haven’t been living frugally all along, it’s a transition that takes some getting used to. It could mean packing lunches for work, couponing, living without cable or giving up luxuries such as a weekly manicure. That’s not to say you have to , but the more sacrificing you do, the faster you’ll reach that zero balance.

If you’ve scrimped and saved and reduced your bills but are still coming up short at the end of the month to make any significant impact on your debt, you might be in need of some professional help to deal with your situation. Just remember, though, that every bit of progress will put you closer to your goal, even if it doesn’t happen as quickly as you’d like.

Step 2: Prioritize


Fight multiple debt monsters
After analyzing your spending, you should be able to come up with a figure that represents how much can be put toward debt repayment each month. With that money, you’ll pay the minimum on all your credit accounts, and put the rest toward the balance that you choose to tackle first.

After that first one is paid off, the next card on your list will become your main target and so on. So how do you know which one to go after first? It really depends on your debt battle strategy preference.

Option 1: Knock out the smaller opponents
Some consumers are motivated by small victories, and the psychological boost that comes each time a debt obligation gets crossed off the list. If that sounds like you, prioritize your list in the order of smallest balance to the largest. You might have heard this strategy referred to as “the snowball method,” made famous by financial author Dave Ramsey.

Option 2: Slay the giant interest beast
If you’re more mathematically inclined, you probably realize that the highest interest account balance is the one that’s costing you the most. Therefore, you can save more money — and maybe get out of debt faster — if you focus on paying off the debt with the highest interest rate first. On paper, this approach — sometimes referred to as the “avalanche method” — makes the most financial sense. Keep in mind that going this route takes more discipline so you don’t fall victim to debt battle fatigue.

If you’re totally overwhelmed and are not sure where to start, it might be worth a small investment of time and money to get some advice from a financial expert. This is especially true if you honestly can’t come up with any extra money to put your plan in motion.

Nonprofit credit counseling agencies, for example, offer budget counseling, debt counseling, debt management plans and other services. Look for an agency that is a member of the or one that the U.S. Department of Justice recommends. 

Step 3: Raise money

Raise money

More cash equals quicker payoff.
We’ve talked about cutting expenses and reducing your spending, but there’s another way to get ahead of your debt payoff plan, and that’s to raise some extra cash.

Start at home.
You could have a goldmine in your very own house, and that’s not including the spare change that’s hiding in your couch cushions. You’ve no doubt heard the term turning trash into treasure, and that’s exactly what we’re getting at. Look around and see what you can sell on eBay, in a virtual or real-life garage sale or to a consignment shop.

Craigslist or Facebook groups are good outlets for unloading appliances, big-screen TVs, furniture and other items locally. EBay is better suited for items that have no value to you, but might be highly coveted to someone else, such as your old toy collection, pieces of china or gifts you never used. Consignment shops work well for selling stylish, gently used clothing, bags and jewelry, although it will take longer to get cash in hand.

Because the whole point is to chip away at your debt faster, be sure you avoid the temptation to spend your proceeds — instead, make extra credit card payments each time you sell something.

Work it.
If you can handle a few extra hours of work, consider taking on a part-time gig or freelance projects. You could get really creative by seeking opportunities like becoming a mystery shopper or being in a focus group. If you have a talent or hobby that can be monetized — think knitting or designing birthday invitations — that’s another route to consider.

Hit up your rich uncle.
Borrowing from family or friends really should be a last resort because you don’t want to jeopardize your personal relationships. However, if someone close to you has the means and is willing to help, you could pay off a chunk of debt and then pay your relative back with less interest than the credit card company was charging. If you do decide to ask for a loan, make sure you pick the right person — one who can comfortably afford to help you — and you need to put the agreement in writing. It might sound a bit formal for family, but trust us — it’s the smart move. A written contract provides proof that you’re serious about repayment, documentation to refer back to in case of a dispute over terms, and proof of the loan for the lender’s income taxes if you don’t repay the money. 

Step 4: Follow through

Follow through

Life after debt.
If you’ve gotten through the steps above, congratulations — you’re debt free! But don’t celebrate just yet. You could be a few misguided decisions away from building those balances right back up. To ensure that all of your hard work wasn’t for nothing, you’ll need to continue the smart spending habits that helped you achieve your goal.

That means having those internal conversations to differentiate between needs and wants, and listening to your gut if it tells you that you’re getting in over your head with plastic. It also means keeping your credit credit utilization ratio under 30 percent, but really, as close to zero as possible at all times.

Perhaps most important is establishing an emergency fund if you don’t already have one. With the extra cash you have on hand now that you’re not dealing with huge credit card payments, put that money into a savings account and don’t touch it. This will help you be prepared for financial emergencies that inevitably arise so you’re not forced to pull out the plastic and start the debt cycle all over again. Even if your past debt taught you a lesson, unemployment or a serious injury could put you right back in the red if you don’t have a rainy day fund to keep you afloat. Even $1,000 is a great cushion to start with, but six months of living expenses should be your aim.

There you have it — a foolproof plan to tackling your debt and living the debt-free life. Although it can be challenging and even frustrating at times, it’s not complicated. Stick with the plan, and your future self will thank you for it.

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