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Financial Security Step 7: pay off debt - Balanced FI

Financial Security Step 7: Pay off Debt

Pay off debt to free up money every month and feel financially free. A strategic debt payoff plan will help you stay focused long-term.

If you’re new to the Financial Security Steps, start here: Welcome!

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Plan to pay off debt

If you haven’t already, go back to Financial Security Step 5 and create your debt payoff plan. Make sure to download the Debt Payoff Planner – it’s going to be essential to figuring out how much to pay each month. You’ll need to refer to it every time you pay off a debt because the rolling payment amount will change. 

The rolling payment adds the minimum payment of the first debt paid off to the minimum payment of the next debt. Pay the rolling payment amount on your focus debt, as well as minimums on the others. As you pay off multiple debts, your rolling payment will grow and you’ll make faster progress on your payoff. 

You need to decide which debt payoff order you want to use. Choose a method that keeps you motivated and engaged in this process… because it’s going to be a long one. 

  • Debt snowball method pays debts off in order of smallest balance to highest
  • Debt avalanche method pays off your debt in order of interest rates, highest to lowest
  • The hybrid method is a combination of the two. You can choose the order that makes the most sense to you and helps you remain focused

Your minimum debt payments should also be factored into your monthly budget. Build your budget around minimum payments and other fixed expenses. Put any extra in your budget toward additional payments on your focus debt. When you get unexpected money (tax refund, bonus, etc), put it toward additional payments. 

As you get more comfortable with your finances and budgeting, you’ll find areas you can cut costs in or look for ways to make more money. This will let you redo your budget and put more towards debt payments. 

Save money where you can, to pay off debt

Finding new ways to be frugal is going to be the easiest way to pay off debt. You can definitely work to make more money, but that isn’t always an option and it’s probably harder to get started. Saving money can start today and you’ll see results sooner.

Save in little ways

There are some really easy areas to cut spending – eating out, convenience food (lattes, snacks, gas station sodas on the way home from work), gas, groceries, clothing, kids’ activities, and toys. Easy is a relative term, but it is simpler to save on groceries than it is to move to a cheaper home. 

Tracking your spending and following a budget are the best ways to start saving money. You need to know where you’re wasting money to be able to change your habits and redirect those funds. Challenge yourselves to spend less in the grocery category than you did last month, or to not one weekend day each week, to save on gas. 

COVID can be the perfect time to start saving and being intentional with your finances. Most people are spending more time at home and engaging in fewer social activities, so it’s easier to save on entertainment costs and dining out. 

I recommend budgeting some fun money for each adult, so you can still have some indulgences in your life. This has helped my husband & I both cut down on the amount we spend (as a family) on snacks while driving or at work. It also allows us to each save for larger purchases that aren’t really family-oriented or aligned with our overall financial goals. 

Save in big ways

There are more radical ways to save money too. You can sell a big asset to pay down debt – a second car, a recreational vehicle, or even many small items from around the house. If your housing costs are too high, consider moving. Obviously, these solutions aren’t for everyone, but if it makes sense and you’re committed to debt payoff, they can really help you make progress. 

When mortgage interest rates are low, you can refinance your mortgage. It’s important to consider the associated fees and how long you plan to live in the home, but if you can shave 1% off your interest rate it may be a good idea. You can also refinance vehicle loans to reduce the interest rate or monthly payment (it’s important to keep paying the old amount toward debt though). 

Save all year

And finally, a plug for my Frugal Year Challenge – a deep-dive into 12 different money-saving areas throughout the year. This free program focuses on one area each month so you don’t get overwhelmed and you’ll have time to implement the strategies shared. Topics covered include insurance, groceries, travel, and more. 

earn more

There comes a time when you can’t save more money. It becomes literally impossible. You can, however, earn more money.

There are many ways to make more money, you just have to find a way that works for you:

  • work overtime
  • get a second job
  • work a gig job, like Uber driver, DoorDash, etc.
  • sell things you have lying around the house
  • buy & resell items, like specialty clothing
  • start your own business
  • babysit or housesit

Make saving money fun through challenges

You can save surprising amounts of money by doing a challenge for a specific time period. It’s going to be really super hard to not eat out or buy new clothes for a year… but you can do those things for a week or a month. 

I created the 30 Day Challenge Tracker to make staying on track easier. My husband and I used the tracker for two no-eating-out challenges at the end of 2020. Between those two challenges, we saved at least $200. We had already cut back on dining out significantly due to COVID and having a toddler who prefers running around grazing to sitting at a table like a civilized person, so it’s hard to know exactly how much we saved.

Another way to use the 30 Day Challenge Tracker is a No Spend Month. You can make the rules for your family, but there are many ways to do this:

  • Spend only on essentials, including groceries (no entertainment, clothing, dining out, etc).
  • Spend only on essentials, not including groceries. You would eat the food in your pantry and freezer. 
  • Spend on essentials, groceries, and a limited defined amount of “other” spending.

On the back of the 30 Day Challenge Tracker sheet, you can also write down all the things you wanted to buy but didn’t. It could be interesting to see how much you saved by just not spending. 

The point of a No Spend Month is to save money. That means that you do not stock up before the month or go off-budget in anticipation of being frugal next month. 

Communicate with your partner while you pay off debt

I asked my husband if he had any suggestions for this post, and communication was his answer. If you met him 10 years ago, that answer would absolutely shock you, but he is 100% correct. 

If you are in a partnership where you share finances or financial goals, you need to discuss WHY it is important for you to pay off debt. Then you need to LISTEN to your partner’s responses. To be truly successful, it’s important to be on the same page because both of your actions should move you toward a common goal. Having opposite goals is going to lead to disagreements, at the least. 

A resistant spouse may be hard to convert, but it’s important to not bully or pressure. I think it’s essential for both partners to come to this process willingly and with determination. Paying off debt is hard and typically a long process; no one wants to be miserable for years. 

Tell your partner:

  • Why debt freedom is important to you
  • What you/your family could do without debt payments
    • Travel
    • Pay for kids’ college or activities now
    • A more comfortable retirement
    • Save for big purchases that mean a lot to you
  • How much you’re spending on interest each year
  • How much you pay toward debt each month now
  • Your feelings about having this debt
    • Stressed
    • Anxious
    • Living paycheck to paycheck
    • Fearful 
    • Losing sleep

Accept that debt payoff is a long process

Don’t feel discouraged if you are looking at 2-3 years of debt payoff (or even longer). Everyone’s situation is different and complex. Do your best to keep moving forward.

The Smart Dollar program has a Debt Snowball tool to monitor your debt payoff journey. You can input how much extra you are able to pay (beyond minimum payments) each month. The program then estimates when you’ll have everything paid off. At first, the timeline may seem forever long, but it is very satisfying to see the deadline move closer after making an unexpected payment. 

I’m not going to sugarcoat the reality – it can be discouraging and hard to stay focused. The length of the process makes it even more important to discuss your dreams with your partner, to make sure your why is enough to keep you going, day after day. 

How do you stay motivated to pay off debt?

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