Want to know how to create a debt repayment plan that you can stick to? We share our best strategies in this step-by-step guide to paying off debt.

Back in March, Joseph and I sat down and actually tallied up our debts. Between our mortgage and student loans, we knew we had to owe well into the six-figures. Well it turned out that we were one million dollars in debt. We weren’t as bothered by the sheer size of the debt as we were about how tight our budget had become because of those debts thanks to the $20,000 pay cut I had taken in January.

We decided that we weren’t comfortable with having that much debt, even if the interest rates were extremely low. So we came up with a plan to pay some of it off by the end of the year. Here are the exact steps we took.

STEP 0: Know your why.
STEP 0.5: Try not to amass anymore debt.
STEP 1: Get to know your debts.
STEP 2: Create a realistic budget.
STEP 3: Figure out how much you have available to pay off debt.
STEP 4: Decide how quickly you want to pay off your debt.
STEP 5: Choose which debts to pay off first.
STEP 6: Automate your finances.
STEP 7: Find a no/low cost passion project to focus on while you are in debt payoff mode.

Though this post approaches these steps from a debt payoff perspective, you can follow these steps to achieve ANY financial goal. Because at it’s core, a debt payoff strategy is just a way of harnessing your financial resources to accomplish a goal. That’s it.

STEP 0: KNOW YOUR WHY

To me, this is the absolute most important step in, well, pretty much anything you do in life. Steven Covey talks about this in his 7 Habits of Highly Effective People. Habit #2 is to begin with the end in mind.  

Our life goals list helps keep our priorities straight. Taking the time to define why you are doing something makes it that much easier to stick to. Particularly something that requires a lot of self-control, like paying off debt. Keeping your why in mind helps get you through the rough patches when all you want to do is go out and blow your budget. And knowing your why from the very beginning will help you create a debt payoff plan that is consistent with your overall life goals.

Knowing your why, having an image of who you want to become and the life you want to live, is an essential part of creating new habits and sticking with them.

Based on your why, it might make sense to pay down some debt quickly while leaving others to natural expire verses paying everything down as quickly as possible. That is what Joseph and I decided to do. We picked two debts to prioritize for this year. This left enough wiggle room in our budget for us to meet other financial and life goals we had this year, like continuing to save for retirement and taking a family trip to Singapore.

STEP 0.5: TRY NOT TO AMASS ANY MORE DEBT

This kind of goes without saying but I’m going to say it anyway–you cannot get out of debt if you keep overspending.

STEP 1: GET TO KNOW YOUR DEBTS

Before you can put together a debt payoff strategy, you have to know what you are working with. Start by making a list of all of the debts that you have. That includes all of your credit cards, personal loans, student loans, everything. Next to each item, write out the current balance, interest rate, minimum payment due, and estimated payoff date.

I like to include the estimated payoff date because it is important to know just how much longer you have before the debt expires on its own. One of the biggest debt myths I tend to see out there is this idea that if someone isn’t aggressively paying off debt, then they will always be in debt. This is just not true in the vast majority of cases.

For most debts, if you just pay the minimum payment for long enough you will eventually pay the thing off. Not it may cost you a whole bunch in interest (or maybe not) but it will get paid off.

Now that you have an handle on what your debts are, you can make a well-informed decision about what you want to do about it. Depending on your other goals, you may decide that you are willing to slow pay some of your debts in order to have more flexibility or do other things like beefing up your emergency fund, checking off another item on your bucket list, or doing some DIY projects around the house.

STEP 2: CREATE A REALISTIC BUDGET

Now that you know what your debts are, it’s time to look at what you are currently spending to maintain your lifestyle. In other words, you need a budget. Hopefully you already have one. If not, you can read our soups to nuts post on how to create a budget.

Your budget should include all of your current living expenses, including things like groceries, clothing, and car maintenance. Include gifts, dog food, and your semi-monthly $25 Starbucks app reload (because, yes, that counts and spending money too).

The more realistic you make your budget now, the more likely you are to stick to it and your debt repayment plan. Think of it like this. If you know how much you usually spend and you decide not to spend in those categories for the next six months, it’s like ripping a band aid off all at once. It sucks, but the pain will die down pretty quickly. Plus you can take steps early on to make the spending ban less painful, like having your friends meet up at your place for a game night potluck instead of eating out at a restaurant.

When you leave things off of your initial budget, the debt payoff becomes like a bandaid with the strongest glue ever on the hairiest part of your arm. Every time you encounter something new that you forgot to include, you will have to tell yourself no all over again. Not only is this likely to make you start to resent paying off your debt, but it makes it more likely that you will bust your budget.

STEP 3: FIGURE OUT HOW MUCH YOU HAVE AVAILABLE TO PAY OFF DEBT

Alright, at this point you know what your debts look like, and you know how much surplus you have at the end of the month because you made that realistic budget. Now it’s time to do some simple math.

First, add up your minimum debt payments and your monthly surplus. That number is how much you currently have available to put towards paying off debt if you don’t change anything about your current lifestyle. Next, divide the total amount of debt by the total amount available for debt payoff. That number shows approximately how long in months until your debts will be paid off.

Here’s an example:

                            Balance        Minimum Payment          Remaining Term
Debt 1                   1,000                       150                               12 months
Car   1                  10,000                     300                               36 months
Loan 1                  14,000                     250                               60 months

Total 25,000 700
Monthly Surplus after expenses: $1,300

In this scenario, if you slow payed the debt it would take five years to be completely debt free. Now let’s find out how quickly it could be paid off. When we add the minimum payments ($700) to the monthly budget surplus we get $2,000. Now divide the total debt balance, $25,000, by $2,000 and you get 12.5. So this debt could, in theory, be paid of in 13 months or so instead of five years.

STEP 4: DECIDE HOW QUICKLY YOU WANT TO PAY OFF YOUR DEBT

At this point, you have all the information you need to help you choose how quickly you actually want to pay your debt off. You could choose to not change a thing about your current lifestyle and just pay it off as quickly as your budget surplus allows. On the other hand, you might want that debt gone yesterday and so are willing to slash your budget and/or pick up some side hustles so you can pile extra money into paying off that debt.

This all goes back to your why (so I hope you didn’t skip Step 0).

I have found that it is far easier to stick to my goals when I am doing them because I want to and not because I think that someone else expects it of me. When it comes to personal finance there is often a push to do whatever it takes to get rid of your debt ASAP. Live in a tiny apartment, drive a well-used car, quit buying clothes, no vacations, etc. You can pay down debt without having to make those kinds of drastic changes. But being frugal will supercharge your efforts.

The real answer to the question of how fast you should pay down your debt is: as fast as you need to to meet your financial and life goals.

STEP 5: CHOOSE WHICH DEBTS TO PAY OFF FIRST

There are two common debt repayment order strategies.The first is called the debt snowball, where you pay off your debts from smallest to largest. The idea is that the small wins will help keep you motivated. (But if you started with Step 0, you know that your why will give you plenty of motivation. So does watching your debt go down every month).

The second method is the debt avalanche. This method has you pay off your debts starting with the highest interest debts then down to the lowest. The benefit of this method is that you end up paying less in interest over time.

A third method, and the one that we used recently, is to pay off the debts with the largest payments. Because our interest rates were all fairly low and the balances were almost the same, it made the most sense to us to tackle the debts with the largest payments. Also, this fit in the best with our “why”, which was to increase our monthly budget surplus.

STEP 6: AUTOMATE YOUR FINANCES

Now that you have your debt payoff plan in place, you want to make it as easy on yourself as you can. One of the best ways to do that is to automate your finances as much as possible.  When I am in debt payoff mode, I don’t like to spend a lot of time thinking about being in debt payoff mode.

I recommend having two different checking accounts: one for expenses and one for purchases. Your expenses account should include just enough money to cover your monthly bills, including any extra amount you are putting towards debt. Your purchase account should be linked to the debit card that you use for your discretionary purchases like food and gas.

If possible, have your employer split up your paycheck before it is even direct deposited into your account. If your employer doesn’t offer that option, set up an automatic transfer through your bank.

By taking a hands off approach to your debt payoff plan, it starts to feel effortless. Your goals are just happening in the background of your life while your focus is elsewhere day-to-day. You will still have to check your bills and budget to make sure you are stay on track, but barring an emergency, you can put your debt payoff on autopilot while you focus on Step 7.

STEP 7: FIND A NO/LOW COST PASSION PROJECT WHILE YOU ARE IN DEBT PAYOFF MODE

Alright, this step is purely optional, but I highly recommend it. You are on your debt payoff journey, working towards your why, towards becoming the you that you want to be. With your plan in place and the day to day stuff on auto-pilot, you can focus on accomplishing some other goal you have been wanting to do.

Write that book.

Lose those extra 10 pounds.

Train for that 10K.

I want you to take your mind off of debt repayment as much as possible. And I have two main reasons for this. The first is that paying off debt is not fun. There are tons of things we’d rather be doing with that money. It’s all too easy to start feeling restricted, like this portion of your life will never end and so why bother? Your passion project will make that negative spiral less likely.

The second reason is that we tend to get so bogged down in achieving a goal that we forget that life is that thing that happens between the mile markers. Though debt payoff is a worthwhile goal, it can feel restrictive. Focusing on a passion project allows you to expand in other areas of your life, which will make your financial restrictions feel like less of a burden.