Paying Off Debt – Where To Start

23/12/2024

Financial Freedom comes from building wealth for the future so that one day, work is optional. But for many of us, we’re not starting from zero, but from a minus figure. We have day-to-day debt on credit cards, personal loans and the like, and we need to clear that before we can start to build. This is the ultimate guide showing you how to pay off debt.

All of us want to be financially free so that work becomes optional rather than compulsory and to do that you have to build wealth. Some of us will start that journey from £0 but for many people, it is more realistic to start from a minus figure. We have day-to-day debt on credit cards, overdrafts and personal loans and we need to clear that debt before we can start to build.

This blog post will hopefully give you some guidance on debt and practical tips for paying off your debt and starting to build real wealth.

Good Debt vs Bad Debt

The first thing to be aware of is the difference between Good and Bad debt. Generally speaking, Good Debt is something that has the potential to increase your net worth or enhance your life in an important way. Examples of this could be a mortgage on a property which means you making monthly payments to own more and more of your house as years go by, all the while your house is hopefully increasing in value.

Bad debt is generally debt taken on to live a lifestyle beyond your means. This includes impulse spending on credit cards or overdrafts.

Somewhere in the grey area is car loans. My view is that as long as they aren’t excessive they can be viewed as a necessity as a lot of people don’t have a large amount of money to put towards buying a car outright and more and more it is becoming acceptable to have car loans as part of your everyday expenditure. Just be wary of interest rates and make sure you shop around.

There is no quick fix

Debt can be a massive psychological burden and the flip side of this is that the feeling of being proactive and having a plan to pay off the debt can help ease this burden. Then the feeling of paying off debt can be a massive boost.

When you are planning to pay off debt it is important to fully realise that there is no quick fix to paying off debts and that the only way to do it is to dedicate your surplus income to the goal of being debt free.

Steps to take

Know your debt – It can be easy to shy away from balances but the first step to paying debt off is to be absolutely clear on what you owe. If you have one debt this is simple as you will have one amount to clear but if you have multiple debts you need to find out how much you owe, what interest rate you are paying and what your monthly payments are. Make a list, or spreadsheet, of all of this information.

Consolidate if you can – You can consolidate debt but it is an area to tread carefully on. If you have all credit card debt then it’s possible you could transfer the debt onto one card at 0% and make payment from there, saving yourself from interest. With consolidation, it is best to avoid high fees or high-interest rates as sometimes there is no material benefit to consolidation and you could end up paying more interest over time.

Decide on your method – There are two main ways to tackle paying multiple debts off at once:

Avalanche method

The avalanche method involves paying off your debt in order of interest rate. Focus on clearing the balance with the highest interest charges first, whilst making minimum payments on all other debts. Once that one has been cleared, move onto the balance with the next highest interest rate, and so on.

Every time you pay off one debt, you free up additional money to help clear the next one.

Snowball method

Rather than focusing on the highest interest rate, the snowball method focuses on eliminating the smallest debt first and making your way up to the largest over time. Like the avalanche method, each debt cleared allows you to allocate more money towards the next balance

However, this method may result in more interest being paid overall when compared to the avalanche approach.

Go for it

Once you have the above in place and you have your plan then the only left to do is to go for it and start paying it off.

You will inevitably have setbacks and some months will be tougher than others but know that you are on track to financial freedom.

Matt