How to Pay Off Debt: 10-Step Action Plan

Americans love debt.

According to this study, the average American carries more than $38,000 in personal debt in 2018 on top of their home mortgage if they have one.

This is $1,000 higher than last year.

If you are in debt, you are not in control of your money.

Borrowing money to buy something you cannot afford on your own means you are spending money you don’t have.

If you want financial freedom you need to reduce the amount of money you owe to other people.

Getting out of debt seems overwhelming when you are swimming in bills, payments, late notices, etc.

This article shows you exactly how to pay off debt with 10 practical steps you can take now to begin your journey to financial freedom.

I recommend blocking out an hour or two to go through these steps and develop a plan of action.

If you’re married, you need to include your spouse. This will not work if you’re not both on the same page.

Tackling this together will bring you closer and give you a support system when you have to make hard choices.

If your spouse isn’t into it, find a way to make it fun for them.

My husband and I have gone through this journey before, which is what ultimately allowed me to become a stay-at-home mom.

We remained debt free for several years before a couple of life circumstances forced us to go into debt once again.

We don’t use credit cards, but a growing family, rising health care costs, starting a business, moving, and renovating a home depleted our savings account.

We went from debt free with a pretty sizable savings account to medical bills, paying for healthcare insurance out-of-pocket, a mortgage, a construction loan, two vehicle loans, etc.

We are still pulling ourselves out of that hole, but we are getting closer and closer to the finish line and look forward to becoming debt free once again.

I’ll share more on our current journey later, but for now, I will show you the exact steps we took to get out of debt the first time.

What is debt?

Debt is money that is owed to a creditor.

When you take out a loan and use it to purchase something that you cannot pay for with cash, you are putting yourself in debt.

This comes in the form of credit cards, student loans, home mortgages, auto loans, etc.

You are obligated to pay that money back with interest, which basically means you are paying someone else in order to borrow their money to pay for something you cannot afford to pay for on your own.

Just because you can afford the monthly payment does not mean you can afford the item you are buying.

If you cannot pay for the item with cash, you cannot afford it, plain and simple.

Borrowing money in the form of a credit card or loan puts you at the mercy of your lender.

If there comes a time in which you cannot make your payments you will get hit with late charges before your account gets turned over to a collection agency.

Why is paying off debt important?

Living in debt is stressful. When you overextend yourself and can’t pay your bills, you feel embarrassed and defeated.

This is no way to live your life.

One of the top three answers I get when I ask people what keeps them from achieving their goals is money.

So many people allow their financial situation to hold them back from living a life they love.

If that is you, rest assured that you can change this by taking action right now.

How to pay off debt: 10-Step Action Plan

There are some steps you need to take if you are serious about paying off debt and achieving financial freedom.

These are the exact steps my husband and I took to pay off $30,000 of debt, so I could be a stay-at-home mom.

We will go through these steps again soon to get out of debt a second time. It works if you commit to the plan and stick to it even when it’s difficult.

Follow this 10-step action plan to get started on paying off your debt immediately.

1 // Know what you owe

If you’re going to pay off your debt, you have to know what you owe.

Before you can create a plan of attack, you need a realistic picture of how much money you owe and to whom.

Start by making a list of each debt, the payoff amount, the monthly payment amount, and whether or not you are current on the payments.

List out everything outside of regular monthly bills, which may include but is not limited to:

• Credit cards

• Medical bills

• Student loans

• Auto loans

2 // Contact your creditors

If you are behind on payments, it is best to contact your creditors before your account gets sent to a collection agency.

A collection agency will be much more aggressive in collecting a debt.

Your creditors are more likely to work with you if you contact them up front. They might be willing to lower your interest rate or extend your due date.

The worst thing to do is ignore the debt and allow it to go to a collection agency.

You do have rights when it comes to dealing with a debt collector. Be sure you know what they are, so you are prepared if they do call.

3 // Develop a payment strategy

We chose the snowball method after reading Dave Ramsey’s Total Money Makeover, the book that convinced me it was possible for us to get out of debt when I was so desperate to stay at home with my babies.

To follow the snowball method you need to place your debts in order from smallest to largest.

Throw any extra money you have at the smallest debt first, while continuing to make minimum payments on the others.

Once you have the first debt paid off, add the minimum payment of the first debt to the minimum payment of the next debt on your list.

Pay that amount plus any extra money you have toward the second debt on your list each month and so on.

The idea behind this method is that you will feel such a sense of accomplishment by paying off smaller debts quickly that you will gain momentum for paying off your other debts.

Also, if you continue to add the minimum payments of each debt you pay off to the debts that you still have, you will end up making larger payments on the larger debts toward the end of the process.

This will help you get them paid off faster.

4 // Assess your debt-to-income ratio

Once you know what you owe and have a payoff plan, you need to determine what it’s going to take to accomplish your goal to pay off debt.

Write down the total sum of all income sources for a given month. Then write down the total sum of all of your minimum debt payments for the month.

Compare these two numbers to get an accurate depiction of how well your money is working for you.

Are you accumulating wealth or spending all or most of your earnings?

5 // Stop spending

If you are in debt or spending more than what you make, you have to stop spending.

It might be beneficial for the whole family to go on a spending freeze until you have a plan in place.

A spending freeze means you stop spending money on anything outside of the necessities.

No more dining out. No more retail therapy. Any and all extra money you make needs to go toward paying off your debt.

During this process, you will find out if you are a spender or a saver.

This is just what it sounds like – spenders are energized by spending money and savers are energized by saving money.

This step will be harder for you if you are a spender, so be prepared.

6 // Create a budget

If you don’t have a budget, you are missing out. If you have a budget already, you are one step ahead.

Budgeting is a major component of financial freedom.

You need to plan where your money will go ahead of time, so you don’t spend money you don’t have.

Following a budget gives you the freedom to spend when necessary because you know the money is there.

For those who have never used a budget, here are some pointers:

• Print off last month’s bank statement

• Create a spreadsheet to categorize every expense

• Take note of how much money you spent on each category

• Create a new spreadsheet and list out all of your monthly expenses

• Split your income between all of your monthly expenses

• Pay bills and necessary living expenses first

• Use what is left over to put toward your debt

• Track your spending throughout the month

If you already have a budget in place, look for unnecessary spending that could be used to pay off debt.

Note: I use an online budgeting tool called YNAB: You Need a Budget. It makes budgeting super easy, and it does the math for you.

7 // Sell items you don’t need

After you have listed out all of your debts, you may find that you are making payments on something that you don’t currently need.

This could be anything from fancy cars to recreational vehicles, such as a motorcycle or boat.

Selling items you no longer want or need could help tremendously in paying off your debt.

If you sell something for more than what you owe, you can pay off one debt and use the surplus to pay down another. Win, win.

You can also sell a higher priced vehicle and decrease your payment by financing a lower priced vehicle.

If you’re really committed, you could drive a vehicle you are able to pay for with cash. A car does not need to be fancy, it just needs to be reliable.

8 // Find ways to save

Take a look at the budget you created in Step 6, and look for ways to save.

Do you pick up coffee at a coffee shop on your way to work? Start making coffee at home. It’s less expensive and it’s better for you.

Another big expense for a lot of people is dining out. Make a meal plan and cook at home, taking leftovers for lunch the next day.

Cutting cable is becoming more and more popular for people who are tired of paying outrageous prices for mediocre television.

There are tons of ways to save money. You just have to get creative about it and think outside the box.

Speaking from experience, though, once you gain momentum in paying off your debt, your motivation to save in certain areas to throw more money at your debt will likely increase.

9 // Increase your income

After you take a look at your debt-to-income ratio, you may find that you’re spending more than you make.

In this case, you may need to find ways to increase your income.

This might mean looking for a new job, getting a job if you don’t have one, or starting a side hustle.

There are lots of things you can do to earn extra cash.

You could babysit, mow lawns, house sit, pet sit, clean houses, sell crafts online, or even start a blog.

Click here to learn how to start a blog and here to learn how I made my first $100 blogging.

If you are willing to work, you can make extra money.

10 // Track your progress

One of the most important steps in paying off your debt is to track your progress. This will help to keep you motivated when times get tough.

This process is not easy all of the time. There are times, yes, when you will feel excited by the work you are doing to pay off debt.

There are also times where it feels tedious, overwhelming, and long-lasting.

It helps to keep track of your progress each month, so you can see how far you’ve come.

This journey is totally worth it, and you will be so thankful you stuck with it in the end.

Now, it’s your turn

Are you ready to pay off debt, so you can finally achieve financial freedom?

It will take effort and commitment on your part, but this 10-step action plan outlines each step you need to follow in order to succeed.

• Know what you owe

• Contact your creditors

• Develop a payment strategy

• Assess your debt to income ratio

• Stop spending

• Create a budget

• Sell items you don’t need

• Find ways to save

• Increase your income

• Track your progress

What are the steps you are taking to pay off debt?