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The ultimate guide to paying off debt

By March 20, 2019 May 3rd, 2019 No Comments

When I left college, I had about $40,000 in debt that felt like a huge burden. I wanted to get rid of it as soon as possible so I made myself a plan. The loan ended up being paid off in 9 months. Time to share all of my tips and tricks with you all. Here is Saanya’s guide to paying off debt:

Step 1: choose the debt to attack

There are two schools of thought on this. The first is Dave Ramsey’s idea of a debt snowball. This is where you pay off the smallest debt you have and build momentum to eventually pay off your largest debt. The other idea is to pay off the largest loan you have to get it out of the way first. I was fortunate enough to only have one loan to pay after college so all of my attention was focused on that. However, if you have multiple loans, I urge you to analyze the interest rates first. You can use either ideology, but think about it. If you have a house mortgage that is only 3% interest and a smaller credit card loan that is 10% interest, I would knock out the credit card loan first. Interest is the part that gets everyone when it comes to debt. It’s how the banks get you trapped in an endless cycle of debt.

Step 2: Make a Budget

The next step may seem obvious but I know so many people who don’t have a budget. They wait for their paycheck and then just use their money as needed. Terrible idea. If there ever was a time to plan, planning with money is it. A budget helps you forecast your income but also helps you see where you spend every dollar. I am a strong advocate for the zero based budget where you account for every dollar of your income.

There are so many ways to keep track of you money these days. If you don’t want a traditional budget, then you can use an app. There are so many apps to choose from once you do a quick Google search. Whichever way works for you is fine, just make sure to have a budget and then track your actual amount of spending. This way, it is easy for you to figure out how you can comfortably make your loan payments each month. Here is what my process looked like:

  1. I made a budget and forecasted numbers with my expected income
  2. I first made sure I made my loan minimum payment (this is never something to miss)
  3. For one month, I only used this bare bones budget and tracked my actuals
  4. After one month, I figured out where I could save money and where I had money leftover to pay off more of my loan each month.

Another technique to help you make sure you stick to your budget is cash envelopes. Make an envelope for each category of your budget. When you get your income, get it in all cash from the bank. Start allocating cash to each envelope. When you run out of cash in the envelope that means you have reached your maximum amount of spend. If you have cash leftover, you carry that over to the next pay period. I really like this idea and it helped me control my spending.

Step 3: Save Wherever You Can

This next step is the one that really pushed me over the finish line for paying off my loan. I became very cautious with where I spent my money. By God’s grace, I was making a very good starting salary out of college. If I wanted, I could have kept making minimum payments and spent my money on frivolous 20 year old things. However, this is where will power kicks in. Keep your end goal in sight and it will be so worth it in the end. Below is a list of how I decided to save anywhere I could:

  • Live at home if possible or share a room with someone to save on rent
  • Stop eating out. Meal prep at home if you are lazy. It’s healthier and saves major cash
  • Every time you want to buy something, write it down. Come back to it in two days and if you still think you absolutely need it then purchase it. I did this frequently with clothing and makeup items I thought I needed.
  • Use coupons. There is no shame in using store coupons to get the best deal for an item you need.
  • Save your tax returns and Christmas bonuses. It can be tempting to take the extra money coming in an blow it, but make sure you save at least 20% of it. You can reward yourself with the rest if you feel like you need the motivation.
  • Start doing free activities. Check online for nearby parks, free events and concerts to spend your time.

Step 4: Increase your income

Everyone knows there are two ways to have more money. Either you save where you can or you increase your income. Once you have reached the limit in cutting your expenses, think about doing a side hustle for more income. Here are some of the ideas my friends and I have used:

  • Become a dog walker
  • Uber/Lyft on the weekends
  • Pick up weekend shifts at a job
  • Take surveys online
  • Become a beta tester
  • Become a virtual assistant
  • Sell your unused items on Poshmark, Ebay or Craigslist
  • Start a YouTube channel or blog
  • Transcribe medical data
  • Teach English online on the weekends
  • Post your skills on TaskRabbit or Fiverr

A simple google search can reveal hundreds of other side hustle ideas. The key here is to use your extra time to make money on the side. Yes, it will take effort outside of your full time job and it might not be a huge payout, but every little bit helps.

Step 5: Reward Yourself

This is a step that most people forget to do. You are working so hard to pay off your debt, it is very important to reward yourself once every few months. This is the only way you will stay motivated. Go buy that new piece of clothing or get that manicure because you deserve it. Make sure that this reward does not put you off track too much. You should set little rewards for yourself that are less than $30 to keep on track.

Step 6: understand Your Priorities

Most of paying off debt in time has to do with your mindset. Some people are so accustomed to a lifestyle that they will not budge. This is only going to set you back on your debt journey. Starting to be more financially responsible is a big change. Yes, you deserve to enjoy your money but you also need to take care of your responsibilities. If you do not pay your debt, your balance grows and there can be a severely negative effect on your credit. That $100 dinner in the long run won’t be worth it when you can’t go buy a house because you have terrible credit. I have a family friend who now has two kids and really wants to buy her own house. However, her past terrible spending habits have made her and her husband have awful credit. Their poor debt payment decisions in the past are now haunting the family life they always dreamed of.

Understand that debt should be a priority. It shouldn’t be something that takes over your life and consumes you, but yes it is important. I missed out on a lot of dinners and activities for those 9 months, but that day I made my last payment, it was all worth it. I finally felt free and no fancy food or concert could have given me that feeling. You don’t have to get as extreme as I did, that is your choice. But, please make sure that you are giving enough importance to paying off your debt.

Step 7: Make the final push

When I got my Christmas bonus last year, I used every single penny to make my final debt payment. I made that final push, that final sacrifice, to be done with my debt forever. Sometimes that final push is the one that will make you feel the most liberated. If you get a chunk of change from somewhere, push through. Don’t give in to the temptation to spend it. Save it and make the final push to pay off your own debt. I have total faith in you. You can do this, hang in there.

Step 8: Repeat

Now that you have paid off one of your debts, its time to repeat the cycle. The good money habits discussed above will be key for you to maintain a healthy relationship with money. Debt is a part of life, but keeping it under control and managed is the key. Next time you spend your credit card on items you don’t need, just stop to think for a second about how much you will have to give up later to pay off your debt. Interest is what keeps banks running, so do not feed into their conspiracy. Make your payments on time. But, more importantly avoid loans any time you can. If a big fancy car is too expensive and you have to take a crazy loan to get it, chances are you shouldn’t be getting it. It’s hard in our materialistic society to take a step back and really decide if you need something, especially on loan. I genuinely want the best for you so I encourage you to avoid loans where possible and if you can’t, take control of your debt. Do not ever let it control you.

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