Table of contents
- Good Debt vs Bad Debt
- Lever 1 – Reduce Expenses
- Lever 2 – Increase Income
- Debt Payoff Plan
- Putting it All together
Are you wondering how to pay off your debt fast, even if you think you have no money? Indeed, in this article, I’ll cover some of the strategies you can do today to pay off your debt, fast.
The fastest way to pay down debt even with no money is through a combination of reducing spending and increasing income. Furthermore, you’ll need a budget and a plan to determine which debts to pay off first.
Are you in a far from an ideal financial situation? For example, do you feel like you’re always trying to catch up? If so, you’re not alone.
In the US, the average household debt is $137,063, including cars, credit cards, mortgages, and other forms of debt.
It is no wonder that many people feel that it’s impossible to pay down debt fast. But it’s possible!
That doesn’t mean it has to stay that way, but it feels a bit like we’re all in the middle of a financial crisis, or at least we’ve all been trying to catch up, right?
Becoming debt-free isn’t easy. Plus, becoming financially independent isn’t easy either. Indeed, both take work. But, once you make it a priority, I assure you it gets easier. No matter how bad your debt situation may seem, master two simple levers, and you’ll get yourself back on track. Indeed, you’ll be able to pay off your debt fast.
Good Debt vs Bad Debt
Let me be the first to tell you, it’s imperative to know the difference between good debt, bad debt and how to get rid of it. To be sure, debt on its own isn’t the devil. When used correctly, debt can be a wealth-generating tool that pays you back for a lifetime. But, high-interest debt, i.e. from credit cards, acts in reverse. You see, it keeps you broke.
Here is an example of what someone’s debt load might look like:
|Amount Owing||Interest Rate||Monthly Payment|
|Credit Card A||$10,000.00||19.90%||$100.00|
|Credit Card B||$4,000.00||19.90%||$80.00|
|Credit Card C||$5,000.00||17%||$100.00|
What about the mortgage
Some might say, look, get rid of the mortgage and you’ll save a ton of interest. Yes, but the mortgage is good debt, as it’s secured, i.e. it’s tied to an asset. The interest rate is also very low, making it a cheap source of funds. Mortgage debt is good debt as the cheap source of funds allows you to invest your excess funds- which is the key to becoming financially independent!
Further, as a mortgage is a secured loan, if sh*t really did hit the fan, you could sell your home, and pay off the mortgage (and hopefully keep any remaining equity).
What about the credit cards
By contract, you probably can’t say the same about your credit card, or perhaps not even your car loan as many car loans are “underwater”, meaning the loan exceeds the value of the car for many years.
So what to do? Work to pay off those credit cards as fast as possible. Start with the one with the lowest balance (Credit Card B). Then take the monthly payment that you would have applied towards Credit Card B, and put it towards the Credit Card C. And when that one is paid, finish with the last card.
Does it mean you shouldn’t use a credit card? No. By all means, use a credit card that gives you some nice perks, i.e. credit card points, or cashback. But pay it off every single month, in full! The interest on those cards is just killer, so why not pay it off?
What about the car loan and the mortgage? If you absolutely need the car, keep it. But pay it off fast. As fast as possible. That car payment could be used to invest in yourself, in a rental property, a side hustle, or your retirement (stocks).
Lever 1 – Reduce Expenses
Create a Budget and Break it down into Wants & needs
First, you’ll need to know your monthly income. In case your monthly income varies, then take an average of the last six months, and adjust as needed. Click here for a downloadable budget that you can fill in.
Decreasing spending is by far the easiest way to generate a monthly surplus. The monthly surplus can then get used to paying off debt. When you reduce your monthly spending, it might feel strange. Sure, you might want to “keep up with the Jones’,” but I assure you, for at least a few months, no one will notice. Not that it even matters!
Needs are fixed expenses like:
- Car payments
- Insurance (Home, life, health)
- Credit cards
- Lines of credit
- Other debt payments, etc.
You might be surprised I included credit cards and lines of credit. Only the minimum payment needs consideration at this point. Also, you must stop using the credit accounts now! Keep in mind, we want to pay them off, not add to the debt.
Start by breaking down your expenses into wants and needs. Indeed, wants are things that are “nice to have”. For example, wants are things like: New clothes, spa treatments, eating (and drinking) out, etc.
- Cut out the restaurants, and learn to cook at home.
- Enough of the $5 lattes – make them at home!
- Cable / Satellite TV
- Enough of the 2nd and 3rd car payments – and no, cars are NOT investments! Sell the cars, stick with one, maybe two if you absolutely must.
- Stop spending on clothes, just for now.
- Cancel the vacations/holidays, for now.
Lever 2 – Increase Income
Increasing income can be a more difficult thing to do. However, it’s essential to tackle this lever, nonetheless. Further, you might be worried that you can’t earn more money. To be sure, anyone can earn more money. You just have to make it a priority.
Consider a side hustle
In the short term, think about starting a side hustle. To be sure, side hustles are a perfect way to (temporarily) increase your income.
For example, you might consider ridesharing or working online. Indeed, some of the highest paying jobs available online include teaching English, tutoring, or virtual assisting. To be sure, you can do projects on sites like Upwork or Fiverr, or perhaps you might deliver food.
No, side hustles don’t need to be forever. Side hustles should be a temporary means to make an extra $1000 a month, or more to pay off debt, only. Otherwise, you’ll be overworking yourself. And, if the point of paying off debt is to become financially independent, then you’ll need to (eventually) enjoy your time! So, aim to have a side hustle just for the amount of time you need to pay off your debts.
Ask for a raise or get a new job
Another way you can increase your income is by asking for a raise. Then, if that doesn’t work, look for a new job that pays more.
What if you want to pay off debt and have no money?
If you’re a compulsive shopper, one way to (quickly) raise some money is to start selling the things you don’t use. For example, do you have a car sitting in the yard that gets rarely used? What about some old technology lying around? Whatever it is, chances are there’s a market for it. Even an old iPhone can fetch some good money. Organize the things you haven’t used in a few months, and put it on craigslist or eBay. Then, use the money to pay off some debt.
Pay off debt by investing
You can invest in stocks, or buy a rental property, or start a small business. Sure, it can be a conundrum if you have no money and wonder how to pay off debt. However, with a little creativity, you’ll be surprised at what you can accomplish. To be sure, the profits from investing can be used to pay down debt.
Debt Payoff Plan
Once you have your budget set up, your debts all listed in order of interest rate, you can start to work on a plan to pay it off. For example, do you first start paying your student loans, or your credit card?
To be sure, your monthly surplus will go toward paying down the debt. But which debt? It depends. There are two methods of attacking debt.
To get started, we need to determine the interest rate, and the amount owed (not the monthly payment, but the total amount owed).
In general, your mortgage will likely be your largest loan, and it will probably come with the lowest interest rate. By contrast, lines of credit, and credit cards will have smaller balances than a mortgage but come at a higher interest rate.
Snowball method – an excellent way to pay off debt, fast
The debt snowball method for reducing debt offers quick wins, but mathematically, is not the fastest. With the snowball method, you organize your debts by amount owning, from highest to lowest. Generally, your mortgage will have the highest balance, while a credit card might have the lowest.
With the debt snowball method, you work to pay off the debt that has the SMALLEST balance off first. Sure, you continue to make your minimum payments to the rest of the creditors, but the debt that has the SMALLEST balance gets paid off first. Quickly, you’ll have your first win. Then, you work to do the same to your next debt.
Avalanche method for paying off debt
The avalanche method happens to be my favorite way to reduce debt. Also, it’s mathematically the fastest way. However, some people prefer the snowball method as it gives you quicker “wins”. But, in the end, the avalanche method is the fastest.
Here is how the avalanche method works. Remember your list of debt and the interest? With the avalanche method, you’ll aim to pay off the debt with the HIGHEST interest rate first, using your monthly surplus.
Loans with the highest interest rate often include credit cards and lines of credit. You just need to make the minimum payment on all the other debts and make larger payments on the debt with the highest interest rate using your monthly surplus. Easy! Once you’ve eliminated the debt with the highest interest rate, pat yourself on the back because you just discovered how to get out of a debt spiral.
Now it’s time to tackle the next credit account!
Putting it All together
Now that you’ve gotten a handle on what you owe, how much you earn, and what’s leftover, you can start to plan on how to pay off your debt fast, even if you think you have no money.
Remember the levers: decrease your expenses and increase your income.
Once you have your budget set up, organized by needs and wants, and you have a monthly surplus planned out, its time to put it in to practice. The key to this program is that you stick to it! Day after day, month after month. I promise, if you continue to work the levers, you’ll be able to pay off your debt fast.
The only question is: Will you be using the avalanche method or the snowball method of paying off debt?
Comment below, and let us know why!