One of the toughest areas of finances to overcome can be paying the personal debt you might have accrued over a certain time period.
Yet, paying this debt is so critical to improving your finances and future quality of life. But for most (including myself), it’s not easy and can be a long process.
And debt in America is not getting any better.
The average person owes $46,000 in student debt, over $27,000 in car loans, and has almost $7,000 in credit card debt according to Federal Reserve Bank.
I also fell into these statistics, although fortunately not every area was as high as the average. But nonetheless, it held me back financially for years — until I took control.
Background Into Personal Debt
After graduating college, I had looming student loan debt to payback in the tune of just over $28,000.
Not bad for four years, but I was able to keep this relatively low compared to my peers because:
- Scholarship money for my academics every semester
- Worked part-time to pay for my books
- My family was able to pay for some of the tuition
- I did not live on campus as I went to a local college
However, during this time period I was also not paying attention to my finances very well.
I racked up over $1,500 in credit card debt and decided it was a great idea a few years later to buy a brand new Subaru that cost close to $24,000.
All this while I was living with a girlfriend at the time splitting rent, utilities, and had less than $1,000 in an emergency fund. Oh, and I was making less than $35,000 a year.
You can see what a dangerous financial situation I’m starting to put myself in.
By 2014, I had enough of my situation. At this point I had finished a full year living on my own (previous relationship did not work out) and had just recently been living with a friend to help split costs.
I was living paycheck to paycheck, my personal debt barely seemed to be getting lower, and I had very little money saved or invested for my future.
But since that time, I amassed six-figures saved and invested (which includes a 12 month emergency fund) and as of December 2019 became completely debt free.
Acknowledging Financial Privilege
Let’s talk about financial privilege first, before I dive into my simple personal debt process.
I’ve been featured and quoted a few times in other media publications and the comments in these articles are astounding.
The assumptions and the complaining! I get that plenty of it is trolls or miserable people looking to make excuses about why someone else succeeded in their own goals.
And some of the big headlines in the financial media can be eye-rolling or even fabricated stories. So in a way, I do get the skepticism too about these kinds of stories.
But if you have read previous articles by me, there is one thing I always like to share with story or anything related to my finances: transparency.
A lot of hard work went in to fixing my finances, changing my mindset, and improving my career to get these results. But there are of course some privileged areas that helped me too.
Not everyone has these “assists” as I’ll call it and some people have way more too. No matter what, it shouldn’t take away from the work and determination to better ones finances.
So here is my privilege when it comes to my personal debt situation:
Not married and do not have kids
I put this as a privilege because marriage and having children can cost plenty of money! I’m actually getting married in October 2020 and we will have kids sometime after that.
I mention this because my financial results and situation might be different with having kids.
Focusing on my family’s finances would be more of a priority, instead of solely on my own if I had kids and was married during that time.
My student loan debt could have been higher
In total I had just over $28,000 in student debt with average interest rates at 6%, as mentioned earlier.
I got a few scholarships for academics every year (which would be much harder to attain today), I paid for my books, and I did not live on campus (which saved an additional $10,000 per year).
Additionally, my parents had worked hard over the years to be able to cover some of these college tuition to keep the loan costs down as much as possible.(The college I attended would be $40k-$45k+ per year at the time).
I know I’m fortunate to graduate from a private college with less than $30,000 in total debt based on the actual costs it could have been. Many of my peers were $50,000 to $100,000+ in debt!
Moved back in with my parents for a bit
Gasp! How dare I!
All jokes aside, in 2015 I moved back to my childhood home for just over a year. I paid rent, but much less than on my own and did not have utility bills during this time (besides a cell phone bill that I paid for).
But at this time, it gave me a chance to actually build an emergency fund that I desperately needed to have.
Not everyone is fortunate to have this option, I’m grateful I did.
If I did not have the ability to move back with my parents, I believe my results would have been completed in six years instead of five.
Ideally, I should have stayed home a year after college first before moving out at 22. But I was very young and excited to be out on my own, which fogged my intelligence.
So I was not in my parents basement for these five years. They did not give me money. I did not inherit money from family.
What I got was some time to save a bit of my $45,000/year salary at the time to build an emergency fund and be better prepared when I moved back out.
Some may roll their eyes and that’s fine.
I don’t feel bad about doing this because it was a way to help me get a plan in place and save some money. I don’t think it takes away from the hard work of learning, teaching myself finances, and working on building a new career path.
Steps I Took to Tackle This Personal Debt
Everyone wants a big secret or formula for fixing personal debt or saving money. There is none! In fact, for people who know personal finances well, they will not find anything surprising.
So if you are looking for secrets, then click away now because you’ll just be disappointed.
But if you are curious about how I approached it and got results then keep reading. There will be variations in other personal debt stories, but these areas might be able to help your own strategy too.
Got real with myself
You want to make changes and see results? Then you have to get real with yourself, even if you don’t like what you see.
For years I coasted by on a mediocre salary, not paying attention to my finances, or really understood all the debt I had accumulated. I did nothing about it, other than complain from time to time.
I left years on the table of wasted time that I could have been improving and making changes. But I wasn’t ready to face the real issues. I knew it wasn’t good, but I chose to ignore it and continue on.
Worked on my mindset towards money
After a few years of sad looking financials, I was tired of it. I had a long conversation with a friend then got real with myself.
It was the first part of my “financial awakening.” Cheesy, but it’s really what it was at the time.
However, I wasn’t completely ready to make a plan yet. I had to start correcting my mindset towards money.
I let money control me, had this consumer mindset, and was stuck in this 9-5 traditional view of the world.
This is where I started reading money books, which helped me think differently.
It made me realize I should be in control of my money, that I can make money work for me, and understanding finances is not as hard as the world makes it seem.
My mindset did not improve overnight, but dedicating time to learning started to mold my brain to view money differently. And quite frankly, to actually give a shit.
Some of those books I read in the early days included:
- Rich Dad, Poor Dad
- The Millionaire Next Door
- The 4 Hour Work Week
- Your Money, Your Life
- The Simple Path to Wealth
Correcting your financial mindset is NOT EASY. If you don’t want it badly enough, it’s going to be challenging and take time.
Wrote down all my debt and interest rates
I think it’s easy for anyone to login and look at the debt. It’s also easy to put automatic payments and never look at it again until it’s paid off.
But to me, that leaves everything on autopilot instead of really understanding the personal debt and the numbers.
I wanted to see everything in one place, understand the interest rates, and be able to better visualize the big debt picture.
The easiest way was to put everything into a spreadsheet.
This included total debts, how much I paid so far, interest on each of the loan types, interest already paid, how long it will take paying the way I am, etc.
Anything and everything about my debt, I built into one solid spreadsheet.
Choose one to pay off first
At this point, I needed to make a personal debt payoff plan. Paying the minimum each month was going to take years.
For example, my student loans were to be paid off in 10 years and my car loan was for six years. I did not want to carry that debt that long anymore or pay all the interest.
There are two really popular debt payoff strategies: debt avalanche and debt snowball.
The debt avalanche method involves making minimum payments on all debt, then using remaining money to tackle the highest interest rate debt.
Where the debt snowball method involves paying off the smallest debts first to remove them, then moving on to bigger ones. It sort of motivates you when you see something paid off.
I went down the debt avalanche method, with my personal twist. I certainly wanted to remove the high interest rate debt first.
But then I also wanted to tackle the highest debt bill per month too, because that extra could then go towards saving and investments (like the stock market or real estate crowdfunding).
- My credit card was first, over $1,500 on it. But the interest was over 18%! Not too big of a total loan to payoff, removes any high interest, and I get a good feeling of removing some debt. Check.
- Next, I went after my car loan. That was just over 6% interest, but I had almost 4 years left with a $320+ payment per month. This meant I needed to put extra down each month. Check.
- At the same time, I was making an extra payment when I could to my student loans. I had two each month to pay, but the interest rates ranged from 4-5%.
- Once my car was paid, I started paying more on the remaining student loan debt until it was completely gone in 2019.
- At the same time, I was saving and investing because I did not want to miss years of compound interest and I quite frankly, needed to build my savings up. For a solid stretch I put more emphasis on this than paying extra on student loans.
Increased my salary to pay off more
I think it’s a no brainer that you want to increase your salary. In order to pay off debt more aggressively, it helps to have a larger income.
No duh, right?
But it needs to be said because it was critical to paying off my personal debt. Too often financial advice focuses on cutting expenses. It’s important for sure, but there are limits compared to making more money.
In mid 2014 after being laid off, I was really taking an interest in digital marketing. I went to college for computer science and graphic design, but it wasn’t my thing once I got into the working world.
So besides teaching myself about finances, I started learning about marketing too.
I saw the pay scale on websites like Glassdoor, that there was demand for digital marketing, and that there were opportunities for remote work too — which could cut back on driving and car expenses.
Then I started taking free certifications from Google and other marketing companies, got some freelance marketing work for my resume, and then ultimately working for a digital marketing agency to ramp up my skills.
Over a span of three years, I increased my salary by 120% by switching to marketing and working to elevate my skill set.
Will that happen for every career choice? Of course not, but I found one that was interesting to me and can pay well if you work for it.
Side hustle for extra cash
While working towards building a better strategy, something to consider in order to pay down personal debt is to side hustle.
I’m not into the whole hype of side hustling yourself to exhaustion, you still need some quality of life to avoid burnout.
But side hustles can help bring in extra cash that you can use towards extra payments on your debt. I had two freelance marketing gigs that I used to save money and put a bit extra towards my debt.
I did not do this for the entire five years of this debt payment plan, but it was enough to help push through. Once my salary grew, I focused on that to really get my debt paid off.
Stuck to the plan and watched the number of debt go down
Lastly, I stuck to my personal debt payoff and plan until it was completely gone. The results were slow at first and it felt like I was barely making a dent.
Not going to lie after a year, I felt like I wasn’t making progress at all.
But I stuck through it because I reminded myself of the situation I was in before and that if I was patient, results would come.
And just like compound interest when you have more time and money invested, my debt payoff started to compound quicker.
Once one debt was paid and I increased my income, the chunks of my payments got bigger and the timeframe to payoff shortened.
Starting off a new decade debt free is an exciting feeling. And especially now, because I can ramp up my savings and investments further with the extra cash flow not going to debt.
Have you paid off some significant personal debt in the last few years? How are you approaching it? Any other tips for people? Let me know in the comments below!