Complete Guide to Paying Off Debt

Need help getting out of debt?

Debt is no stranger to many people. According to Nerdwallet, average US household debt is $131,431 (as of September 2017). This is how some of the other statistics stack up according to their analysis.

Average US Household Balances Who Hold Each Particular Debt

  • Mortgages: $173,995
  • Student Loans: $46,597
  • Auto Loans: $27,669
  • Credit Cards: $15,654
  • Any Debt: $131,431

When it comes down to it, debt is a very common issue among US households. We want to help you get your debt under control and ultimately destroy it.

There are 3 common questions about paying off debt:

  1. How do I pay off my debt?
  2. What debt should I pay off first?
  3. Should I pay off debt or invest?

I will cover all 3 of these questions, starting with a simple step-by-step plan to paying off debt.

1. How Do I Pay Off My (Non-Mortgage) Debt?

Before I get into this, I want to be real with you, while this is a “simple” plan, it’s not necessarily easy. It requires discipline and dedication. However, I can tell you, the release of stress you feel from becoming debt free is well worth the sacrifice and effort. You will sleep better, feel better, and live better.

1. List all your debts including balances, minimum payment, and interest rates. We will reference what to do with this information more in detail later. However, you have to start with listing all of your debt.

2. Find your cash inflows and outflows. Find out how much you make each month after taxes. Then find out exactly where you are spending your money each month.

To find your inflows (after tax income):

If you are paid hourly: you will have to estimate based on average pay you receive each month. If your pay varies month to month, it is best to estimate conservatively based on your lower earnings. In the months that you earn more, you can use that extra to put even more toward paying down your debt.

If you are paid salary: you will need to determine if you are paid weekly, every other week, or semi-monthly on set dates (example: 1st and 15th).

If you are paid every other week, or semi-monthly: multiply your after tax check amount by 2 to get your approximate monthly income. This method will estimate a monthly income of 48 weeks. which means there are 4 more weeks of pay that will act as a “bonus” to your estimate. Again, when you actually take home more than your estimate, put that extra toward your debt.

If you are paid weekly: estimate based on 4 pay periods a month. That will give you 48 pay periods. Some months will be more depending on how many Fridays fall within the month. Again, use the extra to pay even more toward your debt.

Note: If you don’t get paid time off, you will need to account for that in your income calculations.

The reason you want to estimate your monthly pay on the conservative side is that it can be difficult to stick to the plan when a particular month is below your budgeted amount. While you do make up for it in the months that pay more, it is best to set your budget based on your conservative earning months and count anything extra as a bonus. Apply any extra as additional payment toward your debt.

To find your outflows (expenses):

The easiest place to start are your monthly bills – car note, cell phone, rent/mortgage, insurance, gym memberships, subscriptions, etc.

Then look through your spending to find how much you spend on variable costs like food, gas, tolls, entertainment, etc.

Using an app like is a great way to track expenses.

Don’t forget to include ‘seasonal’ or periodic expenses like haircuts, oil changes, etc. These can add up to a significant amount if you leave them out, but they are easy to forget about when you are calculating your monthly expenses.

2. Develop a budget. Once you figure out your income and expenses, develop a budget based on those numbers. This is also a good time to analyze where you can cut back. If you find that you spend more than you make, you will have to make immediate cuts or find ways to make extra income.

You can find some saving tips on our article 10 ways to save $100 a week, but some common places to cut include cable, gym memberships, and spending on restaurants and alcohol, just to name a few.

While you attack your debt, every sacrifice you make will allow you to pay your debt down faster and allow you start to add luxuries back into your budget.

3. Cut expenses. Even if your budget seems fairly in line. While you are in debt, cut every dime you can and devote it to debt. As we mentioned before, it may mean cutting cable, ending your gym membership, stop eating out, stop drinking alcohol, and many other things you currently may not be able to imagine living without, but if you are carrying debt, you are living beyond your means and you need to sacrifice now for a much brighter financial future.

4. Sell your junk stuff. Look around your home and find items you don’t use or you can’t justify keeping. Don’t sell things that you would simply buy again once you were out of debt (things you actually use), that won’t really get you ahead. However, there are plenty of online marketplaces that allow you to quickly get rid of unused stuff. Apply all of that toward your debt!

Your selling spree may also include things you bought with debt. Do you have a boat, motorcycle, or even a car you can’t really afford? Seriously consider selling those items to pay your debt down, even if you owe more than it’s worth. This is about living within your means. You will thank yourself later.

5. Make as much as you can! Take on a second job or start a side hustle to bring in some extra income. Server jobs at restaurants are a great second job that can be flexible around a regular 9-5, or you may want to consider sites like upwork, fivr, and other freelance sites to see if the skills you have can bring in some extra income each month.

6. Devote as much you possibly can to paying off your (non-mortgage) debt. While you have debt, you are paying for someone else to build their own nest egg, eat nice dinners, and treat themselves to vacations. The sooner you pay off your debt the sooner you can begin to make sure the money you make works for you, instead of someone else.

7. Last Step in Paying Off Your Debt – CELEBRATE! Now that you are debt free, don’t take this as a license to go spend crazy. However, definitely reward yourself with something reasonable. In fact, as each debt is paid off, come up with a small reward for yourself, but if you are debt free, take it all in and enjoy the feeling of freedom.

2. What Debt Should I Pay Off First – Highest Interest or Lowest Balance?

Now that you have a plan to devoting as much money as possible to paying down your debt, the next question is what strategy to use when paying it off. Use the information from Step 1 to come up with your repayment strategy.

Let’s say you have these 5 (non-mortgage) debts.

TypeInterest RateBalance
Student Loan6.5%$20,000
Auto Loan3.5%$8,000
Visa Card18%$3,000
Medical Debt12%$400

Highest Interest

Conventional wisdom is that you should pay off your debts in order of highest interest rate to lowest. The reasoning is that by paying off your highest cost debt first, you are saving yourself the most in terms of interest expense.

Under this plan, you would pay off the Visa Card first (18%), followed by Medical Debt (12%), Student Loan (6.5%), then the Auto Loan (3.5%). As you pay off each debt you will be knocking out the minimum payment along with it, use the additional money each month to pay down the remaining debt (which is a good idea no matter which plan you choose).

It is technically the “smart money” move, but there is another strategy that you may want to consider, the “Debt Snowball”.

Lowest Balance

This plan is recommended by personal finance guru, Dave Ramsey. He calls it the “Debt Snowball“, where you pay off your loans in order of lowest balance to highest.

The idea is that paying off your lowest balance first will break up any mountain of debt into something that appears more manageable and will give you victories faster that will incentivize you to keep going. Again, along with the plan is the idea that as you pay off each debt, you take the extra money you are saving and put it toward your remaining debt.

Under this strategy, you would pay off the Medical Debt ($400) first, then Visa Card ($3,000), Auto Loan ($8,000), Student Loan ($20,000).

Which debt repayment strategy is best?

Technically, paying off your highest interest loans first is the best in terms of reducing your interest expense, but it’s only smart if you can stick with the plan.

For most situations, I would consider the “Debt Snowball” strategy.

You may get worn down paying off the $3,000 credit card, when you could have reached a small victory by paying off the medical debt of $400, then applied what you were paying toward the medical payment toward your next highest balance which creates that “snow ball” effect faster.

Additionally, each debt that you knock off is one less payment you have to arrange for and manage. It helps to simplify your debt management, especially if you have a lot of smaller debts and one large one.

At the end of the day, any plan to pay off your debt is better than doing nothing.

A Note on Payday Loans (High Interest Loans)

High interest loans like “Payday Loans” can exceed 300% in annual percentage rate (APR) are a huge exception to Debt Snowball strategy. These are loans you should absolutely pay first without question. You should also avoid them as much as you possibly can.

Alternatives to Payday Lenders:

  • Delay the expense
  • Borrow from a friend or family member
  • Negotiate with the utility provider, bill collector, or whoever you are trying to pay with the loan
  • Use a credit card or cash advance from your credit card
  • Pick up extra hours at work.

I’m not judging you if you use them as a lender of last resort, I understand there are situations for these kinds of loans, but it is best to pursue all other options first. However, pay them back AS SOON AS POSSIBLE.

3. Should I Pay Off Debt or Invest?

Most personal finance experts will tell you to consider your interest rate first before you decide whether or not to pay off debt or invest. It is very difficult to disagree with this advice given long term historical returns of market indexes (indices) like the S&P 500.

However, it’s important to recognize that paying off debt is similar to a RISK FREE investment. Unless you can renegotiate your debt, or default on it (which is a last resort), you will be responsible for the interest on that debt.

If you pay off your debt, you can count that as a risk free return equal to the interest rate. So, if you have debt with a 5% interest rate, every dollar you put toward principle it is similar to earning a risk free return of 5%.

The primary exceptions to paying off debt first are:

  1. Mortgage debt: This tends to be a high balance, long term loan that you can likely beat over 20 to 30 years by investing in market index funds.
  2. Employer match programs: If your employer will match your contribution to your savings, take it. That is a 100% return on its own. It is nearly impossible to beat other than really high interest loans like “pay day loans” I mentioned above.

The answer to this question of paying off debt or investing (beyond the above 2 exceptions) depends on the debt, the interest rate, your level of risk tolerance, and your financial goals. In other words, it depends.

However, I favor staying out of debt. So paying off debt and benefiting from the “risk free” return, particularly on higher interest loans tends to be my favored plan. Of course, follow that up with aggressive saving by following our ideal budget.

Q: Have you had any success with paying off debt? Tell us your story below.