Eliminate Debt

Eliminate DebtNow that you are on a monthly budget and you have $1,000 saved, it is time for you to start working on eliminating all your debt except for your primary mortgage.

Pay Off Your Debt

Some people will want to keep adding to their emergency fund at this point, but your debt is an emergency! Some of you are paying 30% interest on some of your debt! The average credit card interest rate right now is around 17%. For every $1,000 you eliminate, each year you can save $170 a year in interest.

The average credit card balance for those who have credit card balances is more than $6,000, and that doesn’t include the store credit cards, which have a lower average balance. Over the course of the year you’re looking at paying $1,000 in interest! You don’t think that is an emergency? So for those of you who want to increase your emergency fund right now because you aren’t comfortable without having more than $1,000 in it, you’re losing money each year in interest and you’re comfortable with that? Before you had no savings and were ok with that, and now that you’re on a plan to save and eliminate debt, you’re worried about not having enough in your savings?

That’s good that you are wanting to save, but you need to know that when you’re paying extra on debt each month, you can use that money for an emergency each month instead of using it for debt. If you are paying $1000 extra to your debt, then each month you have your $1000 in your savings, and you have another $1000 that you can use for an emergency instead of paying off debt with it. You really have $2,000 each month for an emergency that comes up.

Debt Snowball

What’s the best way to eliminate debt? You have two options: Debt Snowball and Debt Avalanche. The snowball method is where you list your debts from smallest to largest and you pay off your smallest debt. Once your smallest debt is paid off, you work on your next smallest debt. The Avalanche method is where you list your debts from highest interest rate to lowest interest rate. You pay off the debt with the highest interest rate, and once that debt is paid off you work on the next debt that has the highest interest rate. In either case you make the minimum payments on the other debts that you have.

So, which method is better? You math nerds will argue that paying off the highest interest rate debt is going to be the best to eliminate debt because you do not accrue as much interest over time, but that method does not take into consideration human behavior and the psychological wins that you get when you pay off a debt. Research has also found that when you pay off a large percentage of a debt you also get a psychological win.

Taking all this information into account, the best way to pay off debt is with the debt snowball method. It might take you one or two months longer to pay off your debt, but when you’re doing this over the course of two or three years, that one or two months doesn’t really matter. If debt was a math problem, why are you in debt anyway? Math would have told you that interest is not your friend, nor is debt your friend.

List your debts smallest to largest. If a couple of your debts are the same size or about the same size, then list the one that has the highest interest rate before the one with the lowest interest rate. In your budget make sure you are paying the minimum monthly payments on all your debts.

Get Out Fast

The best way to get out of debt is to get out of debt fast. If you decide that you’re going to take five or 10 years to get out of debt you almost have no chance of getting out of debt. You need a different plan. Your goal should be to get out of debt in less than 3 years.

In order to do that, you’re going to have to cut expenses out of your budget. Some of you aren’t going to want to give up your vehicle payment. Don’t expect to get out of debt. Some of you won’t want to give up your new iPhone every couple of years. Don’t expect to get out of debt. If you can’t give up your new car payment or your new iPhone payment right now, what makes you think that you will give it up in 2 to 4 years when you’re no longer satisfied with a vehicle or the phone that you have? Not only are your monthly payments killing your budget each month, those payments are preventing you from applying that extra money to your other debts. If you keep buying products that keep depreciating, this is not a good way to build wealth.

Increase Your Income

If you haven’t already sold all the stuff you do not need or use, then this is a good time to do that and apply that money toward your debt. Another thing you need to do is get a second job or get a part-time job. If you can make another $1,000 a month that can be applied to your debt, that’ll help you eliminate debt faster. You don’t need to keep working 60 or 80 hours a week for the rest of your life. You are just doing this for the short-term to help get in a position where you can start building wealth.


To recap, you need to first get on a budget. Next save a little money for a starter emergency fund. This should be around $1,000. Then you start attacking your debt. List your debts smallest to largest. Pay off the smallest debt with all your available money as you make minimum monthly payments on the rest.

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