Slay Your Debt, Not a Dragon
Have faith in yourself. You can do this.
The Psychological Impact of Debt
As you can guess, we don’t slay dragons around here, but debt is fair game. The weight of debt can cause emotional and psychological stress, with monthly payments always keeping you stuck in the paycheck-to-paycheck cycle. It has an impact on our daily lives and stops us from taking advantage of important opportunities. Paying off debt can lead to an enhanced quality of life and better financial stability and security. In this article, I’ll help you go from barely treading water on interest payments to learning how to truly swim to debt-free shores.
Assessing Your Existing Debt
The most difficult part of slaying your debt is working up the courage to face it. After I graduated college, I spent an afternoon adding up all my student loans and realized how deep a hole I had dug. It did not feel good. In fact, I was sick to my stomach.
This step is painful but necessary. You will need to know how much you owe and make a list in no particular order like this:
1. Credit Card: $2000, 25%
2. Car Loan: $12000, 10%
3. Student Loan 1: $5000, 2%
4. Student loan 2: $2000, 5%
5. Student Loan 3: $3000, 3%
Pause here if you haven't done this and work on this step. Don't worry, your debt isn't Medusa, looking at it won’t turn you to stone. Just the opposite, it’s going to spur you into action to take this into your own hands.
Now that you know what sort of beast you are facing, you are ready to pick the best strategy to pay off that debt and regain your freedom.
Snowball Vs Avalanche: Choosing Your Debt Repayment Strategy
It’s important to know that nothing here will happen overnight. You are going to be chipping away at this little by little. No debt was slayed with a single arc of a sword, but rather by memorizing the attack pattern of Sallie Mae.
Two popular approaches to paying off debt are the Debt Snowball and Debt Avalanche methods. They are both good methods, and it really comes down to personal preference with which route you take. I’ll break them both down for you.
Debt Snowball Method
Debt Snowball
Paying off the smallest loans first to gain momentum.
The snowball method takes that list you made and orders them from smallest to largest by the amount of each loan. As you pay off the smaller loans you create more momentum and feel better along the way.
As soon as you finish paying off a loan, you take the money that you were putting towards the loan that was paid off and put it towards the new smallest loan. The snowball method gets you started with the quickest wins and can get you excited about debt payoff.
Here is how you would reorder the debt from earlier if you chose the snowball method.
1. Credit Card: $2000, 25%
4. Student loan 2: $2000, 5%
5. Student Loan 3: $3000, 3%
3. Student Loan 1: $5000, 2%
2. Car Loan: $12000, 10%
This is a great method because it is so motivating and easy to understand. However, the avalanche method will get you out of debt faster.
Debt Avalanche Method
Debt Avalanche: Paying off the highest interest loans first.
The debt avalanche takes your list and orders them from highest APR to lowest APR (interest rate.) This method gets you out of debt faster and you end up paying the least in interest. It’s known to be a favorite spell of the math wizards.
When you finish paying off your loan with the highest interest, then you will take that monthly payment and apply it to the loan with the next highest interest rate. Here is how you would reorder those loans with the debt avalanche method.
1. Credit Card: $2000, 25%
2. Car Loan: $12000, 10%
4. Student loan 2: $2000, 5%
5. Student Loan 3: $3000, 3%
3. Student Loan 1: $5000, 2%
This method does not always come with the quickest win, but now that you are learning to pay off your debt I am confident you can use this strategy successfully. Whichever method you choose, it will be important to consider how to keep your credit score healthy along the way and refinance any debt you can.
Refinancing High-Interest Debt
You should also consider refinancing your high-interest loans to slay your debt faster. It’s important to maintain a healthy credit score, so read my article on building credit if you haven't. Moving your credit card debt to a personal loan can have the added bonus of improving your score as well by lowering your overall utilization.
Anytime you refinance debt you should look first for balance transfer promos. Some credit cards will offer a promotion where you pay 0% interest for a period of time. After that promotion is up, you should look at using a home or a vehicle to refinance the rest of the debt. Secured debt is always cheaper than debt that has nothing backing it up. So consider doing a cash-out refi on your vehicle or a second mortgage on your home.
Creating A Budget
A budget is your shining claymore in slaying debt. You need this to avoid missing any payments and hurting your credit score. It will also help you free up more money to throw at your debt.
A good rule of thumb is to use the 50/30/20 rule. That is broken down as needs/ wants/ savings & debt. A budget will help you ensure that you are also saving for unexpected expenses. Saving an emergency fund really is the trick to getting out of debt, it allows you to break the debt cycle and pay in cash when your car breaks down instead of taking out another loan. Avoiding taking on more debt is more important than a fast payoff.
There are a lot of budgeting apps out there, and they are easier to get a hang of than you would think. There are lots of apps out there, but I only recommend the one that I use… YNAB, which is aptly named You Need a Budget. Warning, this will change your life for the better!
A Gentle Reminder
Along the way, it is important to be compassionate to yourself and celebrate your wins! This quote from Maya Angelou helps put things in perspective,
“I did then what I knew how to do. Now that I know better, I do better.”
If you find yourself in a hard situation, just be kind to yourself because you deserve some sweetness.
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