How to become debt free quickly

A year ago I posted the introduction to my book Money Habits for Success: 33 Actions to Survive and Prosper . . . in any Economy. Personally, I thought that that Introduction to the book was one of the best pieces of writing I’d ever done.

The book was timed to come out at the height of the pandemic. I figured people needed encouragement and advice in such challenging times.

There followed, of course, thirty-three chapters, perhaps not all as brilliantly written, but stacked with good advice and logical explanations.

More than a year later, not much has changed, and I’m finding the advice in that book is as relevant and necessary, perhaps even moreso, as before.

So, I’ve decided to share some of those individual habits with you, sprinkled into this sequence over the next few months.

Today’s habit, how to become debt free quickly, is probably as relevant as ever, a year further into this pandemic, as many, it seems, have accumulated more debt during this stressful time.

Sooner than later, you need to turn the surging debt load around. That means paying off more each month than you add, including the interest added to outstanding balances. So, obviously, you must first make the commitment to paying off more than your minimum payment.

Provided you’re disciplined about this, there is a way of accelerating debt pay-down, getting rid of it rapidly, rather than slowly.

It’s called the “Snowball method.” Here is how it works:

Begin by listing all of your debts, along with their interest rates and minimum payments. For installment debts, the payment is usually a fixed amount so that it gets paid off over a prescribed period, perhaps 2, 5 or 7 years. For revolving debts, like credit cards, it is usually the accumulated monthly interest plus a very small extra amount, perhaps $10, towards principal. Paying only the minimum, it may take 40 years to pay off such debt. (Credit cards are now required to indicate that on every bill.)

If you have a mortgage, you can ignore it if it’s at a rate that is below that of inflation (another topic for another time).

Let’s look at an example:

Let’s say you decide that you can manage an extra $200 a month, on top of the $883. How do you allocate that? Add a little to each?

Absolutely not! That’s the slow way to pay it off. Here’s the fast way:

Order your debts in a sequence based not on the total amount of the debt—that is completely irrelevant–but on their highest-to-lowest interest rates. It’s the interest rates that kill you much more than the principal.

Now separate them into two groups: the top one with the highest interest rate, is alone in one group; all the rest are in the second group.

Now, every month, pay all of the extra $200 to the debt in the first group. Pay only the minimum amount due for all the debts in the second group. Be consistent; repeat every month until that first debt is fully paid off. In our example, that will take only 3 months.

Now that debt #1 is paid off, move the next debt on your list up to the first category. Continue to pay the same total amount every month—1083.15–but allocate everything you had paid on the debt you just paid off ($276.60), to the new category 1 debt, in addition to that debt’s minimum amount. (You will now be paying $309.83 on Credit Card B–$33.23+$276.60). Continue to pay only the minimum amount due for those debts still in the second category.

Continue this process until each debt is paid off. By the time you reach your retail loan, you will be paying $698.15 a month and will pay it off in less than 2 months (because the outstanding balance will have been reduced somewhat by then).

Don’t reduce the total monthly debt servicing until all of your debts are paid off. You will be shocked at how quickly you will become debt free after the first debt is eliminated.

When you’ve paid off your debts you free up a lot of money for other uses. Allocate the money you’ve been using for debt servicing to your emergency fund, your retirement plan, or other needs, like home renovations or lifestyle purchases—or even to go on your dream vacation!