How to Pay Off Debt in 5 Steps

How to Pay Off Debt in 5 Steps

One of my money mantras is the Albert Einstein quote; “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” It so succinctly sums up why – if you are interested in being financially free – one of your goals should be to earn interest. Implicit in this is being free of debt, because debt puts you in a position of paying compound interest; a losing game if I ever saw one!

Here is an efficient, straightforward and practical way to go about paying off debt:

1. Allocate an amount of money to debt repayment

At the very least, allocate half of the funds that you have decided to save to paying off debt. This is very easy to do if you manage your money using the money jars system. For example; if you decided that after investing, paying for necessities and giving, you will allocate 10% of your income to savings, allocate at least half of that (5%) to paying off debt.

It is vital that you still allocate money to investment, giving and saving for both expected and unexpected expenses. While this is somewhat countercultural; you must pay yourself first. It is how you will safeguard against creating more debt when expenses pop up, and also how you will continue to build wealth by buying passive income producing assets.

2. Open the bills

Know how much you owe. Open the bills and write down; who your creditors are, how much you owe each of them, how much the minimum payment on each account is and how much the interest rate on each debt is. Ignorance is not bliss here.

Deal with any shame, fear, helplessness or anger head on. You simply have to face the debt that you created. You must know what you are working on and approach it very logically. If your emotions of anxiety, fear, anger, shame, hopelessness and so forth are in the way of you paying it off, try this;

• Adopt an attitude of gratitude for what you were able to do with the money that you borrowed.
• Accept responsibility for the decisions that you made that led you to create the debt.
• Give yourself a boost of motivation and perseverance by visualizing what your life will be like when it is all paid off and you can use your money in other ways.

3. Snowball it

Once you have listed all the details of the debt, it is time to follow the snowball method:

• Automate the minimum payment due to each outstanding account
• Calculate how much of your debt repayment allocation (calculated in step 1) is left over after you make all the minimum payments
• Allocate that left over amount to pay the principal on your smallest debt. Make sure it is going to the principal and not just future interest.
• When that smallest account is paid off, celebrate! And then rollover the amount that you were paying towards it to the smallest of the remaining outstanding accounts
• Repeat until all the accounts are paid off
• Celebrate paying them off!

This snowball method may not make the most mathematical sense because it does not pay off the highest interest rate debt first. However, it works by giving you momentum. By focusing on the smallest account first, you will see debt being paid off more quickly and feel more encouraged. This will improve your morale and your chances of sticking to the plan.

4. Automate

Now that you have your repayment plan in place, automate the transactions and move on. Automation removes your focus from the debt and allows you to focus on other things, like earning more income. What you focus on expands, and debt is not what you want to expand.

5. Re-evaluate

When your income increases or you receive lump sums; first celebrate the extra money and then pay yourself first. After that, decide how much of that money you are using to pay off the debt. When you have decided that, add the amount to the principal repayment of the account that you are currently working on (as per step 3 above). Automate the payment in the new amount.

Repeat steps 3 to 5 until all accounts have been paid off. Make sure to celebrate when that day arrives!

If you struggle with releasing debt, allow me offer you this: Metaphysically, debt is a function of un-forgiveness; of feeling that someone owes you something. Search your heart for where you may feel that someone – your parents, the government, your spouse, your ex-partner – owes you. Work on resolving that because when you feel owed, you will owe. It is an energy field of un-forgiveness.

Here is a way to resolve it; first accept the situation as it is, and then forgive both whoever you feel owes you and yourself for believing that things should have been any different from what they are.

When you realize that you and you alone are in fact wholly responsible for and in charge of your life, you will begin to make financial choices that reflect that knowledge. Releasing debt from your experience will be one of them.

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