Got a lot of debt? Don’t worry—the path to paying it off expediently and getting onto a solid financial footing is simple. Crush it in these 6 steps!
1. If you’re living paycheck-to-paycheck, scrape together a $1,000 starter emergency fund (after paying your bills and minimum payments, of course). Put your money where it will work for you by keeping it in a high-yielding savings account.
2. Take inventory of your money outflows and commit to prioritizing your debt: cancel or pause your subscriptions, stop buying junk food, stop going out to restaurants, stop going to the salon, and so forth. Take on the No-Spend ’til Debt-Free Challenge. Don’t let frivolous expenses bleed you dry! Plus, get a checking account that has does not charge monthly or overdraft fees, such as Simple, and use it for all of your automatic withdrawals, e.g., for your cell phone bill and rent payments.
3. Put all of your extra money toward paying down all debts with a 4% interest rate or higher as quickly as possible, prioritizing the debt with the highest interest rate first (the avalanche method). If you have student loans, you can also probably get a 0.25% interest rate reduction by setting up automatic monthly payments, and you can potentially lower your interest rates by refinancing.
4. Meanwhile, get savvy: Find ways to make additional income. For instance, if you don’t have credit card debt and pay off your balance every month, take advantage of sign-up bonuses offered by banks, and exclusively make purchases using rewards cards that offer cash back rewards, such as the Amazon Visa Signature credit card, Chase Freedom Unlimited credit card, Discover It credit card, and Target Red Card (a debit card that hooks up to your main account). Use rebate apps, cash back shopping portals, and automatic price protection technology such as Earny for your necessary expenses. Sell off unneeded items on eBay and Craig’s List. Got a skill? Market it through a freelance gig site such as Fiverr. Make $15–$20 per hour by housecleaning through Handy.
5. Once you have your debts with 4% or higher interest rate paid off, you’ll want to build up a complete emergency fund with enough money to support you for 3 to 6 months (ish).
6. Next, I’d suggest you start investing for retirement,primarily in the stock market, through index mutual funds and/or exchange-traded funds with the lowest fees you can find, with a well-diversified portfolio (up to three funds will probably suffice. You’ll want to read up on the best portfolio allocation, but something along the lines of a U.S. stock fund, U.S. bond fund, and international stock fund should do the trick). Once your interest rates on your debts are under 4%, I’d suggest putting $1 toward investing for every $1 you put toward your remaining debts. Or, if you just want to rid yourself of the debt, just pay it all off before getting your retirement savings rolling. If you have student loans, see Should I Pay off Student Loans or Invest?
What are your thoughts on this plan? Where are you in your debt payoff journey?