Getting out of debt and then staying debt-free isn’t easy. But it becomes impossible if you don’t know how to take the steps towards a debt-free life. And I know it’s so hard given that we have to pay up for so much. If you are currently going through a debt-crisis and finding it hard to pay it quickly and effectively without burning all of your savings, I think you’ll find this guide helpful.

On average, Americans are under $60-90,000 in debt that makes up the mortgage, student loans, credit card debt, and other personal loans. While it sounds impossible to pay off over $60,000 quickly, it is not entirely impossible.

How to pay debt: the initial first steps

1. Identify the type of debt you have and create a budget  

Is it a credit card? Personal loans? Open up an excel sheet and create a budget. Outline your active income (the money you receive from your work at the end of the month) and your expenses. Divide expenses into two categories: essential and non-essential. Your debt, groceries, etc. is your essential expense, while Netflix is not.

If it seems hard to get started with Excel, use these budgeting apps to get started.

2. Hold off any extravagance until you are debt-free.

Just cancel any subscriptions, including Netflix, gym, magazines, etc. Anything non-essential to your survival. You may think it’s just nine dollars, but those nine dollars can go into your essential expenses; for example, your monthly vitamins and grocery. Do not compromise on food or health supplements. That’s an investment for the long run.

Ask yourself: What can I Live without? And then one-by-one start cutting down things.

Here is a list of essential expenses:

– Debt/mortgage

– monthly groceries/travel/phone

– home/vehicle/other maintenance

Here are your non-essential expenses:

– Cable/Netflix


– eating out

– expensive gifts

– Designer clothes

After you have unsubscribed from all the non-essential expenses, divide your active income into three parts: essential expenses, short-term savings, and long-term savings. Allocate a percentage for the three. For example, 20% savings and 80% expenses.

Now every month, take the money from your active income and put it into essential expenses, and both short and long-term savings. 

Next, we’ll talk about how to invest that 80% in expenses to pay off all debt. In the coming section, we’ll talk about allocating the 20% in different saving options.

How to use 80% of your active income to pay off debt

Cut your 80% into two portions: one for the debt and one for the other essential stuff, including mortgage and monthly groceries. For example, 60% should go to the debt, and 20% should go to the other monthly expenses. The key is to allocate as much as to your debt so you can pay it off quickly without compromising on other essential payments.

Here are the steps you need to take next:

Pay off your high-interest debts first

The credit card companies only ask for a 2% payment per month but avoid falling into this trap. The more you delay, the more debt piles up with interest.

Note: we are assuming that you don’t have substantial savings at this point. But if you do, use them to pay off high-interest debt first.

Transfer balance to another low APR credit card   

If you have credit card debt, transfer the balance to another credit card. 

If another credit card company offers a 0% annual percentage rate (APR) and a grace period from anywhere between 6-18 months, transfer the balance to that credit card and reduce the interest you have to pay on your credit card debt.

Use tax refunds and stimulus checks

Apart from the 60%, use any other additional income you receive to clear the high-interest debt. Remember, the goal here is to be debt-free as soon as possible. So do not give in to the temptation to use the stimulus check for non-essential expenses.

Negotiate for a lower interest rate

There’s a good chance that your bank will lower your interest rate if you have a good standing with them. This is one of the reasons I do not recommend you file for bankruptcy. (I have done a post to outline the reasons why you shouldn’t file for bankruptcy) Bankruptcy makes you ineligible for personal loans and future credit.

Use debt consolidation

Debt consolidation includes refinancing by taking out one low-interest loan to pay off high-interest debt. If you can find a bank willing to give you one big loan at a very low-interest rate, you can use that to pay off all the high-interest debts and continue paying the new low-interest debt from your 60% allocation.

Pay a lower percentage on mortgage

If you have high-interest debt, a mortgage can wait. So make sure to get the lowest percentage on the mortgage. Once the high-interest debt is off your shoulders, you can increase this percentage to pay off the house.  

You can also meet a reputable credit counselor to discuss your unique debt situation.

What else can be done?

Find a side hustle

People who live a debt-free life usually use more than just their active income. If you can squeeze another job into your schedule, do that. Even a few more extra hundreds will help a lot. Here are some side hustle ideas that can help you build something substantial on the side.

Look for coupons or shopping deals

Do you know that Warren Buffet is jokingly known as the “big spender” by his friends Bill and Melinda Gates? Why? Because even with billions to his name, he is rummaging his pockets for coupons. Another interesting fact: he still lives in the same house he bought years ago. You won’t find Warren Buffet and extravagance in the same sentence.

Avoid paying whenever you can. Remember that every dollar counts. If you buy a $3.99 coffee every day, you are spending over a thousand bucks on coffee every year! That thousand could go into your debt payment.

Either make a killer living so you can indulge in extravagance, or count every penny.

So this would conclude what you need to do with the 80% (remember, we divided the active income into two parts). Next, we’ll look into what to do with the 20% of your active income.

The 20%

Divide the 20% into four sections: Long-term investments that you won’t touch for another 5 years, short-term investments, personal growth and education, side hustle/business.

Long-term investments

Long-term investments include your investment in commodities, bonds, etc. And your personal growth. Both are equally important.

 Invest 8% of the 20% in bonds, ETFs, savings accounts, stocks, crypto, and commodities. You can invest in high-interest bonds, gold/silver/diamond, or company stocks.

Divide the remaining 12% as follows:

Invest 5% in personal growth and development. If you want to make more money, you have to invest in your education. You may have to pay for a course or buy a subscription to a personal development coaching service. This is a long-term investment.

Invest 7% on a side hustle or business. Try these 5 side hustle ideas that will pay for themselves. If you want to start a business on the side, you will need to invest in your MVP. Read my guide about how to start your business with just $100.

If you follow the mentioned guidelines, you will not only be out of debt soon but will have a small pool of savings too! And if you have done everything right, you would be able to turn your side hustle into a six-figure business. Some people put in all of their current savings to pay off debt. However, we recommend that you only use savings to pay high-interest debt and keep some percentage saved.


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