I’ve been doing a fair amount of research on how to get out of debt as fast as possible since I realize this is an important step in getting to FIRE. Debt payments are currently eating up a significant amount of our budget, and I really want that money to be going into savings and investments!
Some experts would suggest that if you’re making more on your investments than you are losing on debt, don’t bother with paying it off fast. To that I say, “Phooey!” We don’t have a ton of debt, so if I can get rid of it say, within 1-2 years, I’d be able to start piling much more on retirement savings and other investments.
For now, I’m going to disregard mortgage debt, since I don’t really have a budget to pay off my mortgage any faster, and it’s the lowest interest rate. That leaves me with 2 other debts:
- RRSP Loan, with interest rate of 5.something % – approx. 12k
- Line of Credit with interest rate of 4.something % – approx. 8k
Fortunately we do not have a TON of debt; we’ve been lucky enough to keep up with day-to-day expenses without relying on credit. We did buy a significantly larger home in 2016 which resulted in a significantly larger mortgage. That said, we have some potentially large expenses coming up, and we’re using YNAB to the best of our ability to budget sinking funds for those to avoid the need to put anything else on credit. So, let us talk about steps to get rid of debt as fast of possible!
Step 1. Move any high interest Credit Card debt to lower interest options, if possible.
If you have significant credit card debt on a high-interest card (we’re talking about anything over 15% here), try to get this debt moved somewhere else. Talk to your bank about a lower interest loan or line of credit. Look for opportunities from other competing banks to transfer your balance for a lower interest rate. I feel this is a necessary step if you are in this situation. Fortunately I don’t have any high interest credit card debt, so on to step 2.
Step 2. Figure out which method is best to pay off your debt.
There are two effective methods to pay off your debt. Which one you use depends on a few factors. Here is a quick rundown:
Avalanche – most experts agree that paying off the highest interest debt first (with minimum payments on the rest) makes the most sense financially. This will mean you are paying less interest over the long term. You will need to know the interest rates of each debt so you can pinpoint where to start. For me, it’s the RRSP loan.
Snowball – this is where you start with the smallest debt you have and pay the max on that, while making minimum payments on the rest. You disregard the interest rates on all of your debts, and just focus on picking them off, one at a time. The idea is to generate a sense of achievement for each debt you pay off, which has a snowball effect. Mentally you will become more and more motivated to throw money at the bigger debts as they move to the top of your list.
I feel these 2 methods are aptly named, since I really hate snow at the moment (Canada, January. You get the picture) and I also hate debt!
Personally I am more pissed off about paying interest than I am motivated by paying off smaller debts. Therefore, my plan is to use the avalanche method and attack that loan with as much money as I can until it’s paid off, while making minimum payments on the line of credit. You may be motivated differently, and that’s cool. Use whatever method works best for you!
Step 3. Set up your debt repayment plan.
A handy tool I’m using to calculate a plan for paying it all off is a free site called Undebt.it. Once you set up your account, you need to enter all your debts along with their minimum payments and interest rates. Then, you need to choose either the snowball or avalanche method for debt repayment, depending on which one works best for you.
Once you do that, Undebt.it will give you a handy chart to tell you exactly how much to pay each month, and when your debt will be gone forever. Here’s my example chart, which shows if I stick to the avalanche plan, I’ll have paid off my debt by June of 2020!
I also enjoy that this chart tells me how much interest I’m paying to the bastards every month. Extra annoying motivation!
Now if you’re not really into this Indebt.it thing, you can still set up a plan similar to this in Excel, Google sheets, or on a piece of paper. I didn’t do that because it requires maths. Maths are not my strong suit. I’m more of the creative type. Anyhoo, pick your method and stick with it. If possible, set up your payments as per your chart to “autopay” as soon as you get paid, so there is no opportunity to spend the money in the meantime!
Step 4. Track progress in a visible way.
In exploring the various philosophies on the best way of paying off debt, I’ve learned that many of us are motivated by visual cues. There are tons of printable “debt repayment” sheets online that you can stick on your fridge and check off the boxes as your debt disappears (some printables are free, some cost a small fee). I’m really into checking boxes, and creating stuff, so I made my own chart!
This chart has 100 squares, so if I divide my $20,000 in debt by 100, each square will represent $200. Based on my debt payoff chart from Undebt.it, I’ll be able to fill in all the squares by June of 2020.
Let me just say, I’m super-jazzed to fill in squares. I dunno why. But it’s exciting. What colors will I use? Will it be solid squares or will they have a pattern? Maybe I should just do Xs? Let me know your thoughts.
Step 5. CELEBRATE every payment! (without spending money).
Maybe it’s a dance party in the kitchen when you fill in squares. Maybe it’s mixing a special beverage that you already own from your overflowing liquor cabinet (read: I have a lot of unconsumed liquor…anybody got any good Jagermeister recipes?) Go for a hike in the woods. High five your family or pets. Whatever your celebration looks like, do it every time.
If you would like a copy of my debt-free printable, click here to download!