I pride myself on being as real as possible with anyone who reads this site. Its why I share real-world numbers and examples, its why I acknowledge our well above average income (We worked hard for it, and it cost us a S*%t ton of money in student loan debt, but you should still know it). I don’t like to skip over the details, trivialize the effort or short-term “sacrifices” we have made to accomplish what we have.
And I won’t blow smoke and tell you there are a million ways to pay down debt because
There are not a Million ways to do it
There aren’t even 10, or 5. Hell, I can only think of two that apply to most of the population (Not counting death, we stay alive at all costs around here and no debt is worth dying over)
As a family that just finished paying down $85,000 in student loan debt over the last seven years, I can tell you first hand that paying down debt is not easy. It took a concentrated effort, over the course of multiple years.
There Are NO quick fixes.
There Are NO easy buttons.
It’s pretty simple actually, If you want to pay down your debt QUICKLY you give the lender more of your money every single month until its gone. If that sounds terrible to you, the good news is you’re right!
The bad news is that you’re also right!
That doesn’t mean you get to ignore it. Sorry, adult time 🙂 – you have to take care of your past mistakes. If anything, use it as a motivator to bury it faster and get on with the fun stuff.
Building Wealth is next to impossible with Debt
Debt needs to be eliminated before you can build serious wealth, especially the high-interest credit card variety. That shiz is a cold-blooded money murderer.
Most people significantly underestimate how much money their debt is costing them. They think of the monthly payment as the main cost and that makes sense, the monthly payment has an IMMEDIATE impact on your finances. But the long-term implications are far uglier than the monthly payment and should be influencing your decisions.
The two questions that need to be asked:
- What is that actual cost of your debt?
- What is the opportunity cost of your debt?
The actual cost of your debt
Hypothetical Example of $10,000 in high-interest credit card debt (18%) making minimum payments
Calculator from Bankrate
That minimum payment ends up costing you an extra $14,423.16. Read that again. $14,000 dollars. What can you do with an extra 14K?
The second piece is the opportunity cost
The opportunity cost of the interest on just $500 a year is astounding:
If you put $500 extra a year away (which is about what you could save in the credit card example above), you could end up with over a $135,000 in 40 years. That assumes an 8% return, but that is below the long-term average stock market return.
You can view more examples in the FI Action Series Post: What is your debt costing you?
There might be a million ways to SAVE Money
When I first got excited about paying down my student loans I started googling “How to pay down debt fast” and was bombarded with info about saving money or reducing spending. The articles seemed to confuse two things:
Saving Money Does Not Equal Paying Down Debt
Yes, every dollar saved CAN be applied to your debt, but I don’t see a lot of people circling how much they saved at the grocery store, going home, and increasing the principal payment by a few bucks. Then doing that cycle all over again the next day. And the day after that. Etc. Etc.
I prefer to make decisions that will have a larger impact every month instead of a ton of tiny decisions that have a smaller impact. If you are the type of person who is disciplined enough to make micropayments towards your debt – Have at it! (I do know a few people who rock this method!)
If you know yourself and won’t stick to it – take a look at some of the strategies we have used below.
Debt Domination Strategies We Used
You will notice that these examples require more money……but I did warn you earlier that to pay down debt QUICKLY you pretty much have to give the lender more money so I get a pass down here.
We have used bonuses, tax returns, profits from sales of company stock and unexpected gifts from parents to speed up our debt pay down over the last 7 years. Big principal only payments kill debt!
Put those windfalls to use in an initially un-sexy way that leads to ultimate debt free badassness down the road
Early on in our careers, when we were in a particularly bad spot managing our debt (mostly the aforementioned Student Loans) increasing out income made a massive difference in our debt paydown journey.
As soon as I figured out how much more money my take-home pay was going to be, I increased our automatic payments by the same amount and every month we made incremental progress towards our goal.
For both of the above examples, I like to think of it this way:
If you were able to survive without the money the week before, you can afford to put it towards your debt without any lifestyle repercussions.
Are there any Debt-Paying Hacks that don’t require me to pay more money?
There may be a few ways in certain situations that apply to you (student loan forgiveness comes to mind) but for the majority of us there are only a few tools we can utilize
Lowering Interest Rates
The closest thing to magic that I can come up with is finding a way to lower your interest rate. We have pulled this move a few times.
- Refinanced my Student Loans, dropping our rate from over 6% to 3.85%-4.95% (variable rate)
- Refinanced our mortgage dropping our rate from 4.25% to 2.75%
We saved thousands by making these two moves. The Student Loan refinance was easy, took a few hours max to get everything approved and paid out. Refinancing our mortgage was a little more involved but was well worth the effort. Dropping our rate 1.5% on such a large balance is a huge win.
When I refinanced my Student Loans, the new payment was significantly lower than what we were used to paying already. Instead of taking the new lower payment, we decided to speed up our debt paydown and pay the same amount. Combined with the lower interest rate we cut a 5-year repayment term down to about 3 years.
0% APR Credit Cards
Yep, another method to lower your interest rate specifically for high-interest credit card debt.
I have walked a few people though this lately and you can save thousands of dollars with a little bit of organization and effort.* Head over to NerdWallet.com and find a 0% APR credit card that fits your needs. I have had people do multiple transfers to extend the 0% window if they have a particularly large amount of debt and can’t pay it off in the 12-18 months providers allow.
My three tips:
- Keep track of the 0% APR window and pay off your debt before that – if that is not possible look for another 0% balance APR card to transfer to before the term is up.
- Some cards do have a balance transfer fee (And some don’t!!!) – I haven’t seen one yet that wouldn’t net a positive swing if you pay the debt off in the 0% APR window. Do a quick calculation vs how much you are paying in interest to verify it is worth the effort.
- Don’t decrease your payment even if the provider gives you a lower one – if anything increase it as much as you can
*I love Credit Cards provided they are used responsibly, if you have reigned in your spending this solution might be a bad idea for you. Know Thyself.
Anyone have other ideas to pay off debt QUICKLY????