Shortly after I graduated from college, I was invited to a happy hour with a friend who was in medical school. We met at our favorite bar and immediately started to catch up as we waited for our server.
“So how much longer will you be in medical school?” I asked.
“Another three years, and then I’ll start my residency. It feels like I’ve been in school forever. You don’t want to know how much student debt I have.”
The last sentence was made almost as a joke, but I didn’t have time to respond as our server had just arrived at our table. We ordered our drinks — which were admittedly overpriced — and handed our cards to the server.
“With six figures in student loan debt, what’s another $17 for a cocktail, right?”
That exchange always stuck with me; it was the first time I heard someone joke about how much debt they had, almost as if it was a rite of passage. It was shocking to me then, but now years later I’ve found that this mindset is not uncommon. The way that many of us think about debt has changed over the last decade; what was once seen as something that should be avoided if possible is now almost considered to be something that shouldn’t be taken too seriously — after all, everyone has debt, right?
It’s true — carrying debt has become more normalized than ever, with 80% of the American population carrying some sort of debt. And we aren’t talking about the occasional credit card charge here and there. According to a 2021 study, the average American carries $90,460 in debt.
But while carrying a large amount of debt may be common, that certainly does not mean that it is good. Anyone who has ever carried a substantial amount of debt knows that it’s not something to be joked about: from struggling to make monthly payments to watching your credit score go down to avoiding phone calls from debt collectors — the experience of carrying debt is a stressful one that can suck the joy from our lives and limit our opportunities.
The solution? Well, ideally, paying off debt and living debt free. Sounds too good to be true? I get it — paying off debt is far easier said than done, especially when you don’t have a solid debt payoff strategy. But that’s where I come in.
Today I’m sharing my expert tips to help you develop a sustainable debt payoff strategy and reduce your debt so that you can reach your financial goals, increase your opportunities, and discover the peace and freedom that comes with debt-free living.
Let’s change the narrative around debt once and for all, starting with these six steps.
Start an Emergency Fund
First things first, do not pass GO and do not collect $200 until you have started an emergency fund. Your emergency fund should have 3 to 6 months of essential living expenses saved up in case of, you guessed it, an emergency.
I know what you’re thinking: “But, Tori, shouldn’t I throw all my available income at my debt so that I can pay it off faster? Won’t saving for an emergency fund just keep me in debt longer?” I hear you — it’s a totally valid question.
But I assure you that building up an emergency fund should be your top financial priority, even before you start tackling your debt.
You see, life has a way of throwing curve balls our way when we are the least prepared for them or just when we feel like we are making progress on our goals. From unexpected car repairs to unplanned medical expenses to suddenly losing a job, the last thing that we want to happen as we focus on paying off our debt is running into an emergency that we aren’t financially prepared for and then being forced to reach for the credit cards and land ourselves even deeper in debt.
So if you haven’t started one already, make sure you start one today. My personal pro tip? Put your emergency fund into a high-yield savings account so that it can continue to earn as much interest as possible, even while it’s just sitting there waiting for a rainy day. Even if you don’t use your emergency fund, it will still work hard for you and earn extra income!
Get a Thorough Understanding of Your Debt
If you have ever set out to try and pay off your debt on your own, then you know that it is much easier said than done. Even when you are making regular payments, it can feel like you’re not making any progress. This is because paying off debt needs to be done strategically, which means that you need a personalized plan that is specific to your unique debt.
And how do you create that plan, you ask? By getting to know the nitty-gritty of your debt.
Take some time to get up close and personal with your debt. Identify everywhere that you owe money (student loans, car payments, medical debt, etc.), then figure out the balances on each of your debts and the interest rates. Whether you want to pop this information into a spreadsheet, jot it down on a scrap piece of paper, or just type it into a note on your phone, use this information to gain total clarity on your debt and start to figure out exactly what steps you need to take to start paying it off.
If your palms are sweating at the thought of seeing your debt all laid out, don’t panic. I know how intimidating it can be to sit down and review all of your credit card bills, loan statements, and account balances, but it will be nearly impossible to effectively pay off your debt if you don’t first have a thorough understanding of your debt. Plus, knowledge is power, and I assure you that just by seeing your debt all laid out, you will start to feel more in control of your debt and some of your debt-related stress will start to melt away.
Always Make the Monthly Minimum Payments
I cannot stress this enough — it is so, so important that you always make your monthly minimum payments. Even if it feels like these payments are doing little to actually reduce your overall debt, they are extremely valuable in making sure that you don’t default on your loans, damage your credit score, accrue more interest than you absolutely have to, or get charged late fees.
My best advice? Set as many of your loans and payments on autopay so that you never have to worry about missing a payment.
Pay on the Principal Rather Than the Interest
If you have ever made payments on a debt only to watch the balance grow larger and larger, it’s likely due to the fact that you are making payments on the interest of your loans rather than the principal. Did I just lose you? Don’t worry, let me break it down.
If you take out a $5,000 loan, your principal amount is $5,000. But of course, you can’t borrow from a formal institution for free, which is why lenders charge interest on your principal loan amount. Think of interest as essentially being the fee that you pay in order to borrow your principal.
What many people don’t realize, though, is that interest doesn’t just accrue on your principal loan amount. Rather, the principal accrues interest, and any interest accrued by that principal also accrues interest. That’s right — you are not only paying interest on your loan, but also on your loan’s interest.
So how does this affect your debt payoff journey? Well, in addition to having to pay off more than you actually borrow, depending on your rate of interest, your balance can actually increase even while you are making consistent payments.
Here’s why: In most cases, when you send in a monthly payment, that payment will be put towards paying off the interest that your debt has accrued first, and then the principal amount. That means that you haven’t actually made as much progress toward paying off your principal balance as you may have thought. That principal balance will continue to accrue interest and that interest will accrue interest, and you will continue to feel like you are spinning your wheels and going absolutely nowhere.
So if you want to pay down your debt as quickly as possible, you will need to make sure that your payments are going directly towards your principal balance rather than the interest.
This can be a little difficult and time-consuming, but I assure you that it will make a huge difference in your debt payoff journey. Call your lender and tell them that you want your payments to go specifically towards your principal balance. They may make you jump through some hoops (after all, it’s in their best interest to keep you paying on your loan as long as possible), but with some persistence, you will be able to restructure your payments to go directly towards your principal balance.
Repeat this process for all of your loans, and you will be shocked to see how quickly your balances begin to decrease.
Tackle High-Interest Debt First
The average American has multiple sources of debt. From credit cards to student loans to car payments to medical bills, it can be difficult to figure out which payments you should prioritize in order to pay off your debt as quickly as possible.
There are several methods for prioritizing and paying off debt, but my personal recommendation is the debt avalanche method.
This method teaches you to pay off the debt that is costing you the most money, AKA the one with the highest interest rate while you are continuing to make the monthly minimum payments on all of your balances.
For example: imagine you have two credit cards. One has a balance of $3,000 and an interest rate of 15%, while the other has a balance of $8,000 and an interest rate of 22%. While making monthly minimum payments on the first card, you will allocate any extra money you can towards paying down the card with the higher balance and higher interest rate, as this balance will ultimately cost you more money the longer it is allowed to accrue interest.
Then, once you have paid off the card with the higher interest rate, you will redirect any money you were using to pay off that card to now paying off the card with the lower interest rate. You will continue this process, gradually paying off all of your debts from largest to smallest until – like an avalanche – they are completely wiped out and paid off, and done in a way that allows you to pay as little in interest as possible.
Be Patient and Realistic with Your Goals
Finally, it is so important to be patient and give yourself grace as you navigate your debt payoff journey.
There are some voices within the personal finance industry that seem to think that you need to be miserable while paying off your debt; they encourage you to pay off your debt as quickly as possible and at any cost — even at the cost of your joy or sense of fulfillment — as if to say that you deserve to be punished for getting into debt in the first place. But anyone who says “you shouldn’t see the inside of a restaurant until you’re debt free unless you’re working in one” is not someone I trust, especially with my financial advice.
Chances are, you didn’t accumulate all your debt overnight. In the same vein, you won’t pay it off overnight either. Becoming debt free is often a years-long journey, so while we want your debt payoff approach to be effective, we also need it to be sustainable and enjoyable.
Sure, your debt payoff journey may require you to make certain sacrifices in order to pay off that credit card, but it should also allow you to partake in things that you love and that bring you joy. You will keep yourself from burning out by allowing yourself to find moments of enjoyment throughout your debt payoff process. This will be key in making consistent progress on your payoff journey until you ultimately become debt free.
Remember, you are not a bad person for accumulating debt. Our society often doesn’t provide us with the education and resources we need to make educated decisions about debt and credit until it’s too late, and sometimes we find ourselves in situations where taking on debt is the best — or only — option available. But now that you have the actionable steps you need to break the debt cycle, you can start to free yourself from the limitations and stress of debt and embrace the life of financial freedom that you have always deserved.