debt

How to Pay off Debt

6 Minute Read

If you owe money on student loans, car loans and credit card bills, you’re not alone. Worrying about paying off debt is a national epidemic.

The latest numbers from the Federal Reserve show the average American household owes $131,431.(1) Even more alarming, the total national household debt stands at $12.96 trillion.(2) That’s trillion. With a "T."

Yes, debt is as American as apple pie, but you’ve probably discovered it isn’t as sweet. So stick with us for the next few minutes, and we’ll show you how to pay off debt and stay out of debt.

But first things first—let’s define debt.

What Is Debt?

Anything owed to someone else is considered debt—that includes student loans and car loans. Ongoing bills like electricity, water and utilities are not considered debt. Those are just variable monthly expenses. The same goes for insurance, taxes, groceries and childcare costs.

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Now, how you pay for these expenses can turn into debt. If you use credit cards to pay for these expenses, you’ll accumulate debt.

And while your mortgage is technically a type of debt, it’s the only one Dave Ramsey won’t yell about—as long as you don’t borrow more than 25% of your monthly take-home pay and stick to a 15-year, fixed-rate loan. But that’s a different rant for a different day.

To fully enjoy the benefits of debt-free living, you’re going to want to pay off all non-mortgage debt as soon as possible.

Non-mortgage debt includes:

  • School loans
  • Car loans
  • Credit cards
  • Medical debt
  • Home equity loans
  • Payday loans
  • Personal loans
  • IRS and government debt

Again, if you owe a balance and make payments to someone, you’re in debt. And the first step to paying off debt is to know how much you owe.

A study released by the Federal Reserve reported that many Americans underestimate by about 40% just how much debt they have.(3) This means many Americans owe a lot more than they realize.

We understand that calculating your total debt can be intimidating and . . . well, frightening. We don’t want you to tally that number just so you know it and then worry about it. We want you to calculate your total amount of debt in order to take action against it.

So if you’ll bring the courage, we’ll bring a super cool tool that will calculate your total amount of debt and tell you how quickly you can pay it off. Once you get your results, take a deep breath and stay with us. We’ll show you the proven plan that will help you pay off your debt in the fastest way possible. Click the debt calculator below to get started.

debt calculator tool

Why Debt Consolidation Doesn’t Work

Let’s get straight to the point on this one: Paying off debt is never easy. You can’t find a quick fix, but you can find a time-tested, permanent fix if you’re willing to roll up your sleeves and work hard. We’re fully aware of the buzz surrounding "quick ways" to get rid of your debt.

In fact, here’s a look at the most often advertised ways to reduce debt, and why we suggest you steer clear of these methods at all costs:

Debt consolidation

This is basically a loan that combines all your debts into one single payment. This sounds like a good idea until you discover the lifespan of your loans extend, meaning you’ll stay in debt longer. Also, the low interest rate that looks so appealing at first usually goes up over time.

Debt settlement

Debt settlement companies are the seedy underbelly of the financial world. Run from this option. Companies will charge you a fee and then promise to negotiate with your creditors to reduce what you owe. Typically, they just take your money and leave you responsible for your debt. No thanks!

401(k) loans

Never borrow from your 401(k) to pay off your debt! You could get hit with penalties, fees and taxes on your withdrawal.

Home equity loans

It’s never a good idea to borrow money against your home! You jeopardize losing your house if you’re unable to pay back the loan on time! Don’t do it!

These debt reduction strategies are risky at best, and only treat the symptoms of your money problems. They’ll never help you address the core of why you have financial issues in the first place. You don’t need to consolidate, settle or borrow to deal with your debt. You need to change how you engage with your money.

That’s right—your money will never change until you do!

And that’s why we’re here. We have a proven game plan that shows you how to take control of your money. You’ll learn how to budget, live on less than you make, and pay off all of your debt.

How to Pay off Debt the Smart Way

We teach a method called the debt snowball which is the core of Financial Peace University, a step-by-step, money-management plan taught by America’s most trusted financial guru, Dave Ramsey. The debt snowball is a verified debt-reduction strategy where you pay off debts in order of smallest to largest, gaining momentum as each balance is paid off. We know there are a lot of resources out there that will tell you either to pay off your largest debt or the one with the highest interest rate first. While that makes sense mathematically, Dave says personal finance is 80% behavior and 20% head knowledge. Paying off debt is more about your motivation and intensity than it is about the numbers.

Here’s a high-level overview of how the debt snowball works:

  • List your debts from the smallest to the largest payoff balance. Again, disregard interest rates when you’re writing out your debts. Just stick to listing your debts based on the payoff balance.
  • Make minimum payments on all debt except the smallest. Attack the smallest with everything you have.
  • After you pay off the smallest debt, take the money you were paying on that debt and roll it into the next highest payment. See? Debt snowball!
  • Repeat this method until you cross off the very last debt!

The average family who uses the debt snowball method while taking Financial Peace University pays off $5,300 in debt and saves $2,700 within the first 90 days!

Are You Ready to Start Paying off Debt?

Better than that . . . do you want to learn how to never worry about money again? If you want to move from powerless to powerful when it comes to finances, Financial Peace University will show you how.

Financial Peace University will give you everything you need to take control of your money and transform your life. Go through the entertaining videos with a local class or in the comfort of your own home. Either way, you’ll join nearly five million people who’ve used Financial Peace University to budget, save money, and get out of debt once and for all.

Get started today!

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