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Are you looking for useful and actionable tips on how to pay off your debt fast? Regardless of whether you have credit card debt or you are trying to pay off your student loan, car loan or mortgage loan, the strategy to pay off debt fast is the same.
First of all, I want to say that many people choose to live in self-denial and choose to ignore the deep debt they are in, as if their debt will magically go away if they just ignore it.
The fact that you are researching ways to reduce debt means you are taking a good first step towards getting your finances in order.
Know Exactly How Much Debt You Have
So, to get rid of your debt as soon as possible, you need to first know exactly how much debt you have currently.
What debt do you have now?
Credit card debt?
Or mortgage loan?
Whether you have just one or all of these loans, it’s time to sit down and grab paper and pen to write down exactly the following for each outstanding loan you have:
- How much is your current balance (i.e. the amount you still owe on the loan excluding the interest)
- What is the interest rate you are paying for the loan?
- What is your monthly repayment for the loan?
- How long does it take to pay off the loan with your current repayment plan?
Let’s say you have an outstanding credit card debt of $5,000 with an annual interest rate of 19%.
If you only make a minimum monthly payment of 3% of your balance, your monthly payment will be $150 and it takes you 48 months (i.e. 4 years) to pay off your credit card debt.
What’s more, the total payment will be about $7,164 which consists of your original credit card debt (i.e. $5,000) and the interest (i.e. $2,164).
Did you see that the amount of interest you will have to pay is about half of the loan principle?
By the way, that’s how banks make money off your unwise financial decisions.
If you have credit card debt, you can use the credit card minimum payment calculator to see how long it takes to pay off your debt and how much interest you will end up paying.
Now, let’s also assume that you have two other types of loans – study loans and home mortgage loans.
Let’s say you have a study loan of $20,000 with an annual interest rate of 5% and a 30-year fixed-rate mortgage loan of $250,000 with an annual interest rate of 3.8%.
For your study loan, if you make a monthly repayment of $200, it takes you 10 years and 10 months to pay off your study loan.
Your total payment will be $25,925 with a total interest payment of $5,925 at the end of your loan term.
Here’s a student loan repayment calculator for you to run some numbers on your own student loan.
For your home mortgage loan, you need to make a monthly repayment of $1,164 for the next 30 years to pay off your mortgage.
Your total payment will be $419,361 with an interest payment of $169,361 at the end of 30 years.
Here’s a mortgage repayment calculator for you to run some numbers on your own student loan.
Once you have gotten your numbers, here’s what you should list down on your piece of paper:
|Current Monthly Repayment
|Current Loan Term
|10 years 10 months
Just like in a war, you need to find out as much information as possible about your enemy if you want to come up with a plan to defeat your enemy.
Your debt is your enemy now.
Getting a clear picture of exactly how much money you owe and what the loan terms are is a very important step in creating a debt payoff plan.
Best Strategy To Pay Off Debt Fast
No matter what loan you have or how many loans you have, the best strategy to help you pay off your debt fast comes down to doing these two things:
- Save more money
- Earn more money
When you do this, you can use all the saved money and earned money towards paying down your debt.
Let’s first take a look at how much faster you can clear your debt if you make an extra monthly loan repayment of $350 towards your credit card debt.
With an extra monthly repayment of just $350, you can pay off your entire credit card debt in 11 months instead of 48 months with a total savings of about $1600 in interest payment.
If you increase your repayment, you can further shorten the amount of time it takes to clear your debt.
Now, let’s take a look at how much faster you can pay off your house mortgage loan if you make an extra monthly repayment of $500.
With an extra repayment of $500, you can pay off your mortgage in 17 years instead of 30 years with a total savings of $79,543.11 in interest payment.
By paying down your total debt with extra repayments every month, you not only can clear your debt much faster, but you can also save a lot of money in interest payment.
So, how do you start saving more and earning more?
To save more money, you need to start tracking your monthly expenses and create a budget for yourself.
Now, what I want you to do is take out your credit card statements and bank statements and go through all the expenses for the previous month.
Among all your expenses, what are essential expenses, and what are non-essential expenses?
Essential expenses are expenses that you spend on things that you need.
For example, food and electricity are essential expenses.
Non-essential expenses are expenses that you spend on things that you don’t need but want.
For example, movies, dining out and designer clothes are all non-essential expenses.
For all your non-essential expenses, how much would you save if you were to cut down all of them?
If you are serious about getting rid of all your debt as soon as possible, then changing your spending habits and your lifestyle will help you achieve your goal much faster.
Let’s say you earn a monthly income of $3000, you can save an extra $500 if you can keep your monthly spending under $2,500.
Of course, the more you can cut down on your spending, the more you can save and the more you can use towards paying down your debt.
But, there is a limit on how much you can save every month.
So, to really help you pay off your debt faster, what you should do is to find ways to increase your income.
Here are some proven ways that you can earn more money:
- Ask for a pay increase
- Get a flexible second job or weekend job
- Start a side hustle
- Start An Online Business
To ask your boss for a pay raise, you need to find out how to do it the right way.
Okay, your boss is not going to give everyone who asks for a pay raise what they ask for.
So, you first need to be a valuable asset to the company you are working for.
If you are not hard-working and not adding value to the company, no boss will ever agree to your salary increment request.
Also, there are proven strategies and word-for-word scripts you can use to make it harder for your boss to say no to you.
Here is the Script: How To Ask For A Raise.
If you are making $40,000 a year, a 10% pay increase will give you an extra income of $4,000 a year.
That can easily help you pay off your smallest loan (e.g. car loan or credit card debt) more quickly.
Apart from asking for a salary increase, you can also try looking for a flexible second job or weekend jobs outside your full-time job.
Here are some examples of flexible jobs that you can do in your free time:
- Teach English Online
- Become A Tutor Online
- Weekend Event Promoter
If you don’t like the idea of getting a second job, you can always start a side hustle and work on your own terms.
Here are some good side hustle ideas:
- Drive for Uber & Lyft
- Become A Tasker With TaskRabbit
- Offer Freelance Services On Upwork or Fiverr
- Service Arbitrage
- Freelance Photographer
- Freelance Makeup Artist
Here’s what happens if you can make an extra $1,000 per month.
Again, let’s use the same example mentioned above.
For a 30-year mortgage loan of $250,000, you will be able to fully pay off your mortgage in 12 years instead of 30 years.
That’s cutting short your repayment schedule by more than half!
You can use this mortgage payoff calculator to find out how much faster you can pay off your loan.
For your $20,000 student loan, you will be able to fully pay off in 1 year 6 months instead of 10 years 10 months.
Now, that’s what I meant by paying off your debt fast.
You can use this student loan repayment calculator to find out how much faster you can pay off your loan.
A Beginner’s Guide: How To Start Your Side Hustle NOW (2020)
How To Create Your Debt Payoff Plan
If you have been reading online about how to create a debt payoff plan, you might have come across these two methods:
- Debt Snowball Method
- Debt Avalanche Method
So, what is debt snowball method and debt avalanche method?
What is the difference between them?
Which one is better?
For both methods, you are asked to make minimum repayments on all debts but one.
In the debt snowball method, you are asked to use your extra money to pay down your smallest debt amount first and then work your way up, regardless of the interest rate.
On the other hand, in the debt avalanche method, you are asked to use your extra money to pay off the debt with the highest interest first.
The sole purpose of the debt snowball method is to help keep you motivated in your debt-elimination journey.
Because it has been said that small and quick wins can help you keep your momentum in your fight against debt.
However, it ignores the fact that you might end up having to pay much more in the long term.
If you are determined enough and serious enough to tackle your debt problem, then you MUST make the decision to stick to your debt repayment plan.
So, I recommend that you should always pay off the debt with the highest interest first because this makes the most financial sense and save you a lot of money in interest payment in the long term.
Now, let’s go back to our example again.
Credit card debt has the highest interest rate among all the loans, followed by student loan and house mortgage loan.
So, that should be the first one to tackle.
Once you have paid off your credit card debt, then you should move on to the next one with the second-highest interest rate.
And you do this until you are completely debt-free.
If you are to write your plan down, it should look something like this:
Step 1: Make minimum repayments on all the debts except the one with the highest interest rate
Step 2: Start budgeting and cut your spending by (INSERT YOUR NUMBER HERE) every month
Step 3: Start earning an extra income of (INSERT YOUR NUMBER HERE) every month
Step 4: Use all the money you’ve saved and all the extra money you’ve earned (INSERT YOUR NUMBER) towards paying down the loan with the highest interest rate
Step 5: Once you have paid off the loan with the highest interest rate, repeat steps 1 and 2 until you are completely debt-free.