Step 23: Start paying off 1 debt

From the previous step you are now up to speed about the positive effect of extra payments on outstanding debts. That leads us to the current step: start paying off a debt. You might think you are already paying off a debt, or several of your debts, but the point here is that you are going to pay off a debt faster by making higher monthly contributions than the minimum required.

When you pay off a debt faster than scheduled, a few amazing things happen:

• You end up paying less interest, resulting in a lower amount of money paid back overall;
• It takes less time to pay back the loan, meaning you can tick it off your list a lot sooner;
• Psychologically it is a great relief to have paid off a debt: one less thing to worry about;
• It increases your motivation by showing you that you can achieve your goals;
• And here’s a great thing: once you’ve paid off a debt, that monthly amount you poured into this debt suddenly becomes available, which you can then use in its entirety to pay off another debt, meaning it keeps up that momentum!

It’s important to decide on just one debt to pay off, don’t just start paying off all debts at the same time, as not only will you not see any clear results for years, it also won’t give you the advantage of freeing up money at an early stage to then help you with the other debts, thereby creating momentum. Also some of your debts with a high interest rate might be much more important to look at as soon as possible, as they give you a bigger financial advantage when paid off faster, than those with a relatively low rate..

Step 23 – Start paying off 1 debt – in detail

This is where the real action happens so get ready to kick some ass in these subsequent baby steps:

• Find your list of debts.
• Now decide on the debt to attack first. There are two common ways to decide: you either pick the loan with the highest interest rate, or the loan with the lowest outstanding amount.The advantage of the first one is that over time you save a lot of money as you avoid that high interest rate from compounding. There is also something to say for starting with the lowest outstanding balance, as it’s the one that gives you results faster which will hopefully create more stimulus and keep your motivation up. Decide what works for you.
• Some might argue not to count a mortgage as a debt in the same way, because they believe that although it is borrowed money, the money is put into a house that will hopefully increase in value, making it an ‘investment’. I disagree, a mortgage is still a loan you pay interest on and therefore lose money on. Secondly whether your house will really increase in value you never really know. That said mortgages usually have a smaller interest rate than other loans, so you’ll probably start with other loans here. Also since the amount is usually very high, leave your mortgage out the equation for the moment, as that will take you a LONG time to pay back.
• Now decide on how much extra money you feel you might be able to pay a month, and use the information from the previous step where you used an online calculator to find out about the effects of extra payments. What do you feel you can actually achieve?
• Look at your budget and spending patterns. From which category are you going to get that money? Will you be okay without the extra money there? What adjustments do you need to make?
• Once you’ve decided on how much money to put in and where the money will be coming from, add this to your budget, marking the extra amount as part of your budget towards paying off this loan.
• Consider making extra contributions in certain months if you have any money left over at the end of the month or if you get bonus from work for example. Even if you don’t use the full amount of “extra money” for this, it will still make a difference. Now that you know the effect even small extra payments can have on your debt reduction strategy, you might be even more inclined to move a little faster towards the $0 finishing line.

I hope you feel slightly more in control of your debts (or at least getting there), instead of your debts controlling you. It might be a long and sometimes difficult process that you’re in for, but remember that it’ll be worth it in the end when you get to that financial independence stage!

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.