debt snowball

How to pay off your debt in five easy steps.

Being in debt is very common in the Western world. Often it can seem suffocating and people wonder how they can ever escape. I have good news, it is possible. I paid off £38k of debt in 7 months so I know how to break free. I’ve put together this guide which will show you how to pay off your debt in five easy steps. But first lets take a look at how we get in debt.

How debt begins

As adults, we are conditioned by society to accept being in debt. From an early age, we are encouraged to enter into debt to improve our lives and status. The legal age you can own property in the UK is 18 years old, and that also happens to be the age where you can go to the pub, vote and of course, borrow money. That means it is impossible for you to be in debt under 18 (without a guarantor).

Sometimes borrowing money can be a good idea. For example, getting a mortgage to purchase a home is good debt. Most of the time, however, debt is bad.

The student trap

Many people become students at age 18 and sign up to large student loans to finance their education. While getting an education is a great idea, the cost is very high, and for most, that means getting a big loan which will be repaid once they have a job.

Additionally, banks are very keen to offer students large overdrafts to help them get through university. I’m sure that many students want to have the best time possible and end up getting a credit card to spend more.

Continuing to grow your debt

By the end of the 3-4 years at university or apprenticeship, most people will find a job which pays reasonably well and has good career prospects. After such a long time of being broke, people want to reward themselves for all the hard work and success. What do they do? They buy a car, eat out in nice restaurants they could not afford as a student, and generally party with friends. All these activities are expensive. Of course, that’s OK because your friendly bank just offered you an extension to your overdraft to help you through that difficult phase of partying, I mean graduating. The bank will also raise your credit limit because you are such a reliable and good sucker person. Go on, buy those clothes. You deserve them.

Before you realise, you are up to your eyeballs in debt. However it is OK because this is normal and everyone else is too.  All your friend have nice clothes and cars. They are also getting houses and that means you should probably do the same. If they are doing it then it must be OK.

Good news! Your credit rating is great because you’ve been paying your debts reliably but you haven’t been paying off your debt. That means you can borrow more money!

You’ll need it because now all your friends are getting married and going on Stag and Hen do’s around Europe. Thank God you can put it on the credit card and pay it later. It’s OK too because you are earning Avios on that flashy AMEX card, so it’s like you are saving money.

Before you know it, you can’t breathe because you are living pay-day to pay-day and spending on a credit card just to get by. You are drowning in debt.



Does this sound familiar?

You are in an emergency. The roof is on fire. The shit has hit the proverbial fan. You MUST act or you will certainly be financially crippled and working until you die a miserable consumerist death.

Now let me help you and take you back to my 5 steps.

How to pay off your debt

Step One – Wake up!

Step one of how to pay off your debt is realising the situation and potential hole you have dug for yourself. You need to take stock and understand that this is unsustainable. You can’t go on like this. I suspect if you are even reading this you have already worked this out. Well done. Now you need to find out the size of the problem you have. Do you really want to be working until you are 75 to pay for all these things?

Firstly, start by make a spreadsheet which lists out the following:

I’ve made an example table of debts for someone who may be in their late 20s or early 30s above.

It can be quite an effort to get hold of all this information and sometimes you may have lost track. That’s OK. Losing track can be a coping mechanism of sorts. Burying your head in the sand is the natural reaction to this situation. Step 1 is about lifting your head above the earth and looking around. 

The easiest way is to start by looking through your direct debits in your current account and see if there are payments going out. It should say to whom. Make a note and list this in the table.

Secondly, Try looking for statements for each card or loan online. If you can’t remember the login details, go to the provider’s website and inform them you can’t recall your password and user name. Once done, the bank or credit card company will be able to send you the details, but it can take a few days. You can now get onto the online account of the provider and find out the balance. Doing this can take a while and be tedious, but please see it through. You can do it on a Sunday afternoon when it’s raining (but don’t wait until a rainy Sunday to do it!).

If things are really overwhelming, I would recommend getting an account at Checkmyfile offers a 30-day free trial, which is £14.99 a month thereafter and can be cancelled at any time. You can check all the credit reference agencies in one place at the same time and see if you have any credit cards you have forgotten about or stray loans you may have forgotten. I personally subscribed for a few months and sorted out a lot of issues with my credit file. Sorting out my credit score improves my chances of being approved for a loan if I need it (good debt only), and lowers the interest rate I will pay on my “good” debt such as my mortgage.

Run a check against your own records and payments with those in and make the table above. *

Step Two – Categorise

Congratulations, you now know where you stand. Knowledge is key to determining how to pay off your debt. The next task is to categorise the debts.

Not all debts are bad. For example, if you have a mortgage, this falls into the good debt category. Similarly, the student loan debt is also sort of good and is not a priority at this time. Furthermore, it will be paid regardless from your salary so let’s not worry about that one for now.

Credit card, store cards, and hire purchase agreements fall into the ‘bad’ debt category. These are the debts that are really holding you back and costing you the most money.

Assign a category of good and bad, then look at the bad ones.

Step Three – Prioritise

Once you have categorised your debt, the next step of how you pay off your debt is you need to prioritise the loans you want to pay off. Start by looking at the interest rates you are paying on each debt. The highest interest loans should be tackled first. In the example above, the AMEX is the highest at 23%.

You may want to check the rate of interest you are paying on your mortgage too. It may be that you can get a lower rate which will free up some money to pay off the other debts.

Step Four – Paying Down the Loans.

This is by far the hardest part of paying off your debt because will take time, require discipline and sometimes make you feel sad.

Personally, I am a fan of consolidating debts into one loan with a low-interest rate and a single payment. Consolidating will make things simpler so you know what you have to pay to reach your goal. If you think you can do it, transfer the credit cards to a new introductory card with 0% interest and make the highest payment you can make on to it. It must be higher than the term divided by the debt. EG 24 months interest-free on £3000 means you need to pay: £3000/24month = £125 / month to pay it all off. You must be disciplined as one missed payment will cancel the 0% offer in most cases. Cut up the cards you paid off.

Alternatively, you can do the snowball method. Pay the most you can on the highest interest loan whilst paying the minimum payment on other loans. Once that loan/card is paid, you pay the same amount you were paying to the previous loan into the next highest interest loan and repeat. Eventually, you will be paying off all the debt quicker each time.

Check out how much you can sell your car for on Should the value be higher than the value of the remaining loan, sell it and buy a cheaper car or make do without one. If not, then try to pay it down until the value is higher than the debt and sell it.

Selling your car can be a huge step and if you can’t bring yourself to sell (I know I struggled with this one) you can also pay it all off quicker by continuing the snowball method on the finance deal. Once it’s paid off it’s your car.

You will be surprised how satisfying it is to pay off these debts.

This is the hardest bit because it involves saying no to many things that you like doing so you can save the money to pay off the loans. I’m not going to sugar coat it. Stop eating out and cook at home. Don’t go to the pub for a few weeks. Consider postponing that holiday or turning down an expensive wedding invitation. Sacrificed must be made to achieve the goal. It’s short term and you can get through it.

Step Five – Invest

Once you have paid off your debts, save up an emergency fund. This serves two purposes; one, to give you money to use in an emergency, and two, money to lend to yourself. By lending to yourself, you pay for an item (an essential purchase only!) from the emergency fund and then pay back the money over a few months. You should aim for 3-6 months of monthly expenses. Keep the saving spirit you learned while paying down the debt.

You can also consider making additional payments to your student loan. If you are on Plan 2 I think you should do this as the interest is quite high if earning above £46k. If you are on Plan 1 – maybe don’t bother and pay the minimum. The returns from a Vanguard ISA will outweigh the interest on this loan.  Money-saving expert has a great article on this.

The End of paying of your debts

So, there we have it. Debt is bad (mostly) but if you follow my plan you will be free within a reasonable time. It took me 7 months to do it where when I started, I thought it would take me about 2 years when I started but things started to accelerate. It’s not easy, but I know you can do it.

* This is an affiliate link to Being totally open, if you sign up I may get a small fee for you doing so. It’s to cover the modest cost of running this blog. I am recommending them because I think their service is great and use them myself. I actually found out I had a bunch of issues with my credit file and they helped sort them out by contacting the credit agency and putting things right.

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