Getting Out of Debt

A Beginners Guide to Creating a Debt Payoff Plan

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Money may not buy happiness, but debt sure can make you miserable.

A new car here, a few swipes of the credit card there – you’re in debt, and you had no clue how it happened so quickly.

But here’s the deal:

If you don’t have a debt payoff plan in place, you’re liable to be stuck with it for years.

So if debt is something you struggle with, then you should know you’re not alone.

The Consumer Financial Protection Bureau found that one in three people were contacted by a creditor or debt collector in the past year.

That’s over 70 million people.

And the latest numbers from the Federal Reserve show that the total national household debt is over 13 trillion.

That’s trillion with a T.

You see, the concept of credit stretches all the way back to ancient times. Back then, people used things like tally sticks to record debt.


Fast forward to the late 1800s, when charge coins came into style. Made of aluminum or steel, these charge coins got issued by department stores.

From there, the first “charge card” got introduced in 1946.

Decades later, credit cards and debt are as American as apple pie, but you’ve probably learned it isn’t as sweet.

But here’s the good news:

Committing yourself to getting out of debt will change your life.

But it means more than just paying off some credit cards and cutting expenses. It means changing your spending habits, learning to budget, and having strong financial goals in place.

People who are debt free will tell you it’s more of a mental change than anything else.

Or as Dave Ramsey says:

Personal finance is 20% head knowledge and 80% behavior.

You can make all the money in the world, but if you’re not disciplined enough to spend it wisely…

Well you know what happens.


So what is debt?

Different types of debt

Non-mortgage debt includes:

  • Student loans
  • Credit Cards
  • Car Loans
  • Medical Bills
  • Home equity loans
  • Payday loans
  • Personal loans
  • IRS and government debt

Anything owed to someone else is considered debt—yep, that even includes 0% financing.

So let’s get a debt payoff plan in place:

Step 1: Know what you owe

woman calculating bills

Sounds simple enough, right?

…but for most people, this is the most intimidating step of all. It’s easy to shove the credit card bills in the drawer and promise we’ll “do it another day.”

But not you, and not this time.

If you can make it past this first step, you’re much more likely to become debt free.

So let’s do this.

Grab a piece of paper, a spreadsheet, or open a Notepad on your computer. Go to each website of every financial institution to which you owe money. Write down these three things:

  1. The Total Amount Owed
  2. Interest Rate (APR)
  3. The Minimum Monthly Payment

Here’s an example:

Chart showing debt and interest rates

Let it sink it, then take a deep breath because it’s time to go to work.


Step 2: Create your budget

couple looking at computer

Want to know the first step towards financial success?

Knowing where you’re starting from. Knowledge is power, and you have to know your numbers.

It’s time to start seeing your budget as your road map towards financial success.

So here’s the deal:

Budgeting takes practice. It’s a skill just like everything else. Trust me, it gets easier with time. 

So if you’ve found yourself failing at your budget, don’t give up. Mistakes are a part of everyone’s financial story.


If your budget isn’t working for you, then I suggest starting over.

Create a new budget.

And if you haven’t budgeted before, then there’s no better time than now.

So start by answering these questions:

How much do you earn monthly? How much do you spend monthly?

Add up all the money that comes in, and how much money absolutely has to go out.

Focus on the necessities first:

  • Groceries
  • Housing
  • Utilities
  • Transportation
  • Clothing
  • Medical 

Basic Budgeting Necessities

Cover your needs before you worry about anything else.

We recommend a zero-based budget because it gives every dollar a job. And actually, people who use zero-based budgets pay off 19% more debt and save 18% more money.

So this is the perfect budgeting method for your debt payoff plan.

The zero-based concept is simple:

Instead of having money left over, you’d assign it to a category. Have $50 left over? Great, allocate it somewhere. Fun money, savings, retirement – it doesn’t matter. Assign it to a category.

Here’s what that looks like:

Example of a zero based budget

Zero-based budgeting is powerful. It helps keep you accountable for every last penny.

And what does that mean for you?

It means you’re more likely to stay on track with paying off debt.


Step 3: Identify your necessities

woman budgeting

Remember that wants and needs aren’t the same thing.

You may owe $40 to Amazon each month, but that’s not a part of your six necessities:

  • Housing
  • Food (Groceries only – not eating out)
  • Utilities
  • Clothing
  • Transportation
  • Health Care

For each category, come up with an average number and round up to the nearest 10th.

So if you typically spend an average of $344 a month on groceries, then round up to $350.

Or $123/month on gas = $130

Write these numbers down.


Step 4: Identify your wants

dollar bills

This is everything you didn’t include in your necessity category.

Here’s an example of non-necessities:

  • Credit Card – $573.93
  • iPhone – $423.04
  • Student Loan – $4,306.03
  • Internet & Cable – $125

Yes, non-necessities include things like credit cards and student loans.

Here’s the deal:

We often see people making the mistake of putting things like student loans in the necessity category.

But if you can’t afford to put food on the table, do you think you’ll be making your student loan payments?

Definitely not.

So your necessities include only the things you need to survive.


Step 5: Examine your expenses

man cutting up credit cards

Before you focus on smaller expenses like cable or Starbucks, you should start by looking at your largest expenses.

So I’m not talking about canceling your Netflix subscription or using coupons.  I’m talking about getting serious about your debt payoff plan.

Judge your expenses based on how they line up with recommended budget percentages.

For most of us, our home and car are our biggest expenses.

But when you’re buying a home, what the bank says you can afford may not actually be what you can afford.

Wait, what?

Yep, and it was one of the reasons behind the ’08 housing crash.



In 1960, the typical home was 1,289 square feet. This was the baby boomer generation and families were larger. 

Today, the average home is 2,641 square feet. 

Average Household in 1960 vs 2019

We all want more and more, until “more” becomes something we can’t afford.

So your housing cost shouldn’t be more than 30% of your income.

Spending too much on your house is risky – and it’s a terrible idea.

Research shows the average person can pay 30% or less on their housing expense and still enjoy a reasonable standard of living.

And when you’re deciding how much house you can afford, make sure to factor in other important expenses besides bills.

(Think: savings, your emergency fund, and retirement)

Give your budget room to grow.

Do you want more kids?

Will you go back to school?

Are you planning on changing careers?

Do you want to open a college fund for your kids?

Are you planning a wedding?

Don’t forget about things like this!

And don’t forget about your car, either. Here’s what you should remember:

The total value of your cars should not be more than half of your annual income.

If you make $50,000 a year, then you shouldn’t be driving a $30,000 vehicle.

Why? Because cars lose 50% of their value in the first four years.

So spending money on something that loses 11% of its value the minute you drive it off the lot, and then sits idle most of the time – isn’t the best money move.

The realization for most of us is that cars are one of our most underutilized– but yet most expensive – assets.

And when you’re getting out of debt, it can be humbling to realize you’re living a life you can’t afford.

But again, don’t beat yourself up. Acknowledge the financial mistakes you’ve made – big or small – and commit yourself to your debt payoff plan.

You can do this.


Step 6: Identify low-value purchases

woman drinking coffee and using laptop

If you haven’t been budgeting, then you’re making more low-value purchases than you realize.

A low-value purchase is a purchase that doesn’t make your life any better.

I know, it’s easy to go buy that overpriced salad from Panera Bread…but is that salad making your life any better? Did you really need that new phone?

Probably not.

I want you to start seeing every dollar you spend as a trade-off.

You could be giving up the ability to get out of debt, save money, or invest.

opportunity cost

Little by little, small things add up.

So get money savvy about the things you like (like brew coffee at home or bring your lunch to work).

And give yourself 48 hours to think about purchases before you buy.


Step 7: Save $1,000 as a buffer against new debt

debt payoff plan

We call this goal a starter emergency fund.

You should do everything you can to quickly save $1,000 in the bank for unexpected expenses.

Set aside bonuses, tax refunds, raises, work overtime, or sell old stuff to make this happen.

Once you’ve completed steps two through six, then saving $1,000 will be easier.


So here’s why this is important:

When you’re paying off debt you want to remain focused on paying off debt. So even though you can’t prevent emergencies from happening, you can certainly prepare for it.

This is where your emergency fund comes in.

That fund will let you fix the car or cover the unexpected medical bill without having to take on new debt.

So you’re avoiding new debt while paying off old debt. Win-win.

Step 8: Choose a debt payoff plan

man using laptop

To pay off debt fast you’ll need a strong and easy-to-follow strategy. I recommend either the debt snowball or the debt avalanche.

So which one should you pick?

Here’s what you need to know:

The Debt Snowball and Debt Avalanche are similar in that you focus on one debt and pay minimum payments on the others.

Once you’ve cleared the first debt, you move your focus to the second debt. 

In other words, when the first debt is paid off, you take the money you were paying on it and put it towards the next debt.

Debt snowball or debt avalanche?

This creates momentum. But let’s break them both down:

The Debt Snowball

With the debt snowball, you focus on the smallest debt first. Here’s why the debt snowball works:

People tend to have several small debts lying around.

$300 owed to Amazon here or $175 to Walmart there.

So it’s several small bills coming in monthly. This can be frustrating and confusing.

But the debt snowball allows you to pay off the small debts quickly. For some, this could mean you’re able to get rid of a small debt each month for the first few months.

This builds momentum – which is what you need when you’re getting out of debt. 

Because once you start making a dent in your debt, you tell yourself, “I’m doing this!”

This motivates you to push forward.

So here’s an example of the debt snowball:

Debt snowball or debt avalanche?

To keep it simple, let’s say you have three debts. A Target card, MasterCard, and a car loan.

Your first step is to list them from the smallest amount to the largest amount.

Once that’s done:

  • Pay off the Target card first by throwing AS MUCH money as possible at it
  • Pay the minimum ($75) on your Mastercard
  • Pay the minimum ($200) on your car loan

See how this debt payoff plan works?

In this example, you had enough money to get rid of the Target card in the first month.

Next, you’d take the $535 and add it to the minimum payment of the MasterCard.

And this is what you’d eventually end up with:

Debt snowball or debt avalanche?

Once it’s time to focus on the car loan, you’re paying $810 monthly on it.

This is why it’s called the snowball. The payments increase as you go along. 

Dave Ramsey and his book The Total Money Makeover has popularized this method. Thanks to him, thousands of people have used it to become debt free. 

Now let’s talk about the debt avalanche.


The Debt Avalanche

This method is concerned with interest rates.

So the debt with the highest interest rate gets top priority.

Mathematically this makes sense.

Why? Because you’ll end up paying less in interest. And as a result, you’ll become debt-free faster than if you used the debt snowball. 

Let’s take a look:

Debt snowball or debt avalanche?

List your debts from the largest interest rate to the smallest interest rate.

Then, you would:

  • Focus on your MasterCard – pay it off
  • Next, focus on the Target card – pay it off
  • Finally, you’d focus on the car loan

And this is what you’d end up with:

Debt snowball or debt avalanche?

So which method should you choose?
As it turns out, research has a lot to say about which method is more effective.
You can read more about it in our debt snowball vs. debt avalanche guide. 
In short, the debt snowball was the clear winner.
Why? Because the small wins serve as big motivators.
Even though the avalanche method makes more sense logically, one of my readers pointed out:
If we were logical creatures, we wouldn’t have gotten into debt in the first place.
But here’s the thing:
Both of these methods get the job done. As long as you’re focused, your debt payoff plan will lead you towards financial freedom.

3 Bonus Tips for Paying Off Debt

dollar bills

So now you should have an idea of where to start, but I wanted to give you some extra tips you might find useful:

Use the Biweekly Method

Here’s one of my easiest tips for reducing debt: switch to the biweekly payment method.

When you make biweekly payments, you’ll have an extra payment go towards your debt each year.

Why? Because the biweekly method equals out to 26 half payments – or 13 full payments made each year, compared to 12 payments made on a monthly payment plan.

That one extra payment will lower the amount of interest you pay. As a result, you’ll decrease the repayment time.


So here’s what you do:

Divide your bills in half and pay every other week. 

For example, if you’re paying $500 per month, pay $250 biweekly instead.

If you get paid every two weeks, then this makes this method very easy.

But here are some things to remember:

1 ) Make sure your payments make it before your due date.

2 ) Then make sure your lender implements your payments correctly.

In other words, ensure that second payment goes towards your balance – not forwarded to the next month.

You can check by logging into your online account or by calling your loan provider directly.

To show you the bi-weekly payment method in action, let’s use this example:

Balance = $70,000

Interest Rate = 6.00%

Time Left on Repayment = 120 Months

I used the Calcxml Calculator to create a graph.

Here’s how it looks:

biweekly payment method

The green bars represent the traditional payment method and the orange bars represent the biweekly method.

Notice that the orange bars decrease faster? That’s the goal. 

Get a Better Interest Rate

jar full of coins

Ah, interest rates.

They’re what costs us a ton of money in the long run.

So I want you to know your options when it comes to your debt payoff plan.

Here’s the deal:

If you only make minimum payments on your loans it can take forever to get rid of them.

For example, let’s say you made minimum payments on a $6,000 credit card with an 18% APR. How long do you think it’d take to get rid of it?

13 years with $9,517 worth of interest.

So what do you do instead?


First, say no to new debt. Get rid of the credit cards.

Secondly, transfer the balance to a lower-rate card or use a company like SoFi to lower your interest rate for you.

I first heard about SoFi in college when someone was telling me about student loan refinancing.

Here’s how student loan refinancing works:

They take your loans and consolidate them into a single loan with a lower interest rate. As a result, you’ll have a single student loan servicer and a lower APR.

Having a single loan servicer is nice because it allows you to keep better track of your bills. 

Plus, just by lowering your interest rate, you’ll end up saving yourself a lot of money. Depending on the size of your loan, this could save you thousands in interest.

SoFi also offers personal loans to help you consolidate other debt like credit cards.

So even if you can’t pay off the debt right away, don’t get stuck with a high-interest rate.

Know your options.

Note: The SoFi link above gives you a $100 welcome bonus.

Supplement Your Income

couple using laptop

Babysitting, cleaning houses, plasma donations, and selling old stuff– means that bringing in extra cash is sometimes about thinking outside of the box.

Even if you pick up a second job, or put in overtime at work – every little bit helps.

And when you get extra money you weren’t expecting (tax refunds, raises, bonuses) you’ll want to apply it to your debt. 

These steps will kick your debt payoff plan into overdrive.


Final Thoughts

As the saying goes, “It’s a slow process, but quitting won’t speed it up.”

You can do this. Don’t lose sight of why you started your debt free journey in the first place.

So before you let your money drift away to the never-ending payments, wake up to the real purpose of your life. 

There will always be a million reasons as to why you should wait, put off, or try something else.

But time is limited. You don’t have forever to do this stuff.

Success means progress. Take the first step here, now, today. 

Acknowledge the doubts and fears you might have but keep pushing forward anyway. 

Are you ready?

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