How I Paid Off Over $50,000 in Debt in a Year
And boy did it feel good! To be fair, the $50,000 was a combination of personal debt and business debt. However, the process I used for both was EXACTLY the same for both the business and personal debt. I'll be sharing an overview of the how I did it, and OnTrac will be incorporating a lot of these steps in our "Paying off debt" SMARTrac within the app itself.
First of all, let me share with you why paying off debt was so important to me. In fact, I felt strongly that it was a critical part of my plan to achieve a happier lifestyle. In an earlier post, I came to the conclusion that happiness is about choice. Debt eliminates choices. When you have a significant amount of your money going toward paying off debt, that is money that is taken away from things that you want to be able to use it for such as going on vacations, buying things for loved ones, etc. In the case of a business, money going toward debt service is money that could be put toward hiring another employee or additional marketing that could grow your business. No one would choose to use their money to pay off debt. The credit card, bank, or financing company makes you. Now, that being said, you legally agreed to that obligation so make sure you take responsibility for that. So the first step I took to eliminating my debt was to stop spending money I didn't have. On a personal level, I decided I was going to pay for everything using my debit card and not my credit card, which meant that I couldn't buy things I didn't physically have the money for. I did the same thing on a business level as well. I know my wife had a cousin that was having trouble with her spending so she made her give her all of her credit cards except one. That made a huge difference for her cousin. Having an accountability partner on this journey can be an important component for you so don't count that out for yourself.
Ok, making the conscious decision to stop spending money I didn't have was just the beginning. I had to figure out how to make bigger payments toward my existing debt. If you're only making the minimum payment on your credit cards, it is typically going to take a minimum of 3 years or possibly more for you to pay off your credit card. You can figure out exactly how long using this credit card minimum payment calculator on Bankrate.com. That, of course, is assuming you don't buy anything else on credit during this period of time too. Once you make the commitment that you're going to make more than the minimum payment on your credit card(s), you then have to select a strategy and here are a couple of the most commonly used ones:
Avalanche Method - this method involves paying off the balances with the highest interest rates first. Mathematically, this will save you the most money over time.
Snowball Method - this method involves paying off the lowest balance first.
As I mentioned, the Avalanche Method will always save the most money because you are paying the balance with the highest interest rate first so you're going to minimize the amount of interest that you are paying. However, psychologically, the Snowball Method will allow you to see progress quicker. I personally used the Snowball Method, and I personally would recommend this method to most people. I had a credit card that had about $3,000-4,000 left on the balance. I was able to pay that off fairly quickly, and it felt SO good. I got addicted and I couldn't wait until I paid off the next one. On the business side, I had purchase my car through my business, and I had about $6,000 left so I decided to pay that first. Getting these small wins early was all the difference and allowed me to get momentum, and I may not have gotten those wins if I had paid the highest interest rate account first if it was also the largest balance.
However, the key to making this all work was I had to create a "snowball", or an excess amount of money on a monthly basis that I could apply toward my debt on top of the minimum payments. You can create a snowball in two ways: increase your income or decrease your expenses. Since I didn't really want to drive for Uber, I decided to reduce my expenses. I literally went through my monthly statements, line by line to find expenses I could either eliminate or reduce. I cancelled subscriptions I hadn't used in months, I shopped my cell phone bill and my car insurance. I was able to create an initial $200 snowball. Same thing for my business. I cancelled a ton of services that I wasn't getting any value from, but I had on a recurring monthly payment that I just hadn't taken the time to review. The more I paid my debt down, the more I wanted to find more savings. Whenever I got a lump sum of money either from something like a tax return, I took the whole amount and applied toward paying off debt. In the past, I probably would have found something spend that money on. As soon as I paid off a debt, I then took that monthly payment and added it to the minimum payment of the next largest balance (hence the "snowball). What started out as a $200 snowball quickly became almost a $1,000 a month snowball, and then I really started to see balances drop. It became even more satisfying to see.
As I look back, I was truly proud of what I had accomplished over the last year or so. More importantly, it has changed my life and given me the foundation to build on going forward. Reflecting on the path that I took, here were some of the keys to my success:
I set a SMART Goal. I wanted to pay off all my debts within 3 years. I'm actually still ahead of schedule to accomplish that.
Another key was having a very specific plan and consistently sticking with it. I did research and learned about the Snowball Method. I came up with a plan and stuck with it.
Another one of the keys to my success was that I tracked my progress toward my goal and as a result, I was consistently able to see my progress, and that motivated me to accomplish my goal even faster.
I've incorporated these lessons along with many more into the initial SMARTracs, or SMART goal roadmaps that we've built for the beta version of OnTrac. Our ultimate goal at OnTrac is to make the process of achieving your most important life goals as easy as possible so you can focus on the tasks you need to accomplish instead of worrying about creating the plan and figuring out how to track your progress.