7 Debt Repayment Tips from Someone Who’s Been There

Debt repayment

When I graduated (as a newlywed) with a four-year degree, I also graduated with maxed out credit cards, student loans, and an auto loan. After two years of working, I had paid down some of the credit card debt, but a cross-country move and grad school ran the credit card debt back up, and added more to the student loans. I even ended up with more debt as a result of not being prepared to pay taxes with my home business. If there was a way to do it wrong paying for things, I probably did it.

My situation has improved since then, thanks to the efforts my husband and I have made to change things up with our finances. Here are 7 debt repayment tips that can help you move forward:

1. Stop Digging the Hole

You can’t reduce your debt if you’re still spending more than you earn. The first step to take is to stop digging the hole. Don’t put together a debt repayment plan until after you have your spending under control. Make it a point to bring your spending down so that you are at least starting from a place where your expenses no longer overcome your income.

2. Make Debt Repayment a Priority

Next, you need to decide to make debt repayment a priority. Commit to paying down your debt. Once you have made debt paydown a priority, you can begin finding money in your budget to make extra payments to pay down debt. If paying down debt is a true priority, you will make extra debt payments before you do things like spend the money on a trip to the movies or on buying another video game.

3. Decide Which Debts are Most Important

Figure out which debts you need to focus on first. For the most part, you should start with high interest debt, such as credit cards. In fact, I’m not against carrying debt if it has low interest. I still haven’t paid off my student loans, and I have no intention to pay off my student debt early because my consolidated loans have a low rate of 1.9% and the interest is tax-deductible to boot. Rather than paying off that debt early, I’d rather invest and enjoy a much higher return.

4. Be Realistic about What’s Possible for Your Situation

We hear inspirational stories about families who have paid tens of thousands of dollars of debt in a year or less. However, that might not be realistic for you. Carefully consider your situation, and what makes sense for you. If you are more likely to make solid, regular progress by paying down debt a little slower, then do that. For all those who pay off debt at an amazing pace, there are others who wind up in worse shape because after a few months they can’t keep up with the pace. Slow and steady is better than losing hope and stopping all progress.

5. Build a Cash Cushion

Don’t forget to build a bit of a cash cushion. Even if it means that a little less goes toward debt reduction, a cash cushion can be helpful. If you charge through debt repayment, but then run into a financial emergency, you might end up building up debt again if you don’t have a cash cushion. Make sure you set aside money for emergencies along the way so that you don’t end up in the same place when something unexpected comes up.

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6. Don’t Make it Just About Cutting Back

Make sure that you aren’t completely depriving yourself of everything that you like. After a while, you might give up, deciding that the debt repayment isn’t worth it. Set aside small amounts of money for things you enjoy, such as a latte once a week, or allowing yourself to buy a book you enjoy on occasion. A movie night sometimes can also help you feel as though you can still have a good quality of life, even as you reduce your debt.

Another way to accomplish this is to make more money, focusing on increasing your income rather than always trying to cut expenses.

7. Have a Plan for After You are Finished

Create a plan for when you are done with debt. This includes retaining a spending plan that allows you to stay out of debt for the long term. Hopefully, if you have been careful to stop digging your hole, and if you’ve been gradually paying down your debt, you have created new habits. Staying out of debt is a lifestyle. Have a plan for the money now that you have gotten rid of your debt. This can include saving up for other goals, such as retirement or buying a home, or it can just mean building a better emergency account.

Don’t just let your money sit useless, and don’t get into the habit of spending just because you now have more money available. Instead, think about what you want your money to accomplish next, and begin working on a goal that can benefit your finances for years to come.

Image credit: olle svennson

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  • Billiam

    Hello Miranda,

    Thanks for the solid advice.

    I sort of did a mental double-take and heard the proverbial needle slide off the vinyl when you wrote that your student loan rate was only 1.9%.

    Awesome. Do you suggest SoFi or a local credit union for student loan refinancing?

    Also, my student loans are only Stafford loans. Some higher rates than others. Do you recommend only refinancing the highest rate loans in the group, so that a portion of the student loan debt still keeps the federal loan benefit of forbearance, etc?



    P.S. – I subscribe to your Planting Money Seeds blog, and I have also heard you on The Money Tree Investing Podcast. Keep up the good work.