How To Pay Down Debt

I absolutely hate hearing the term “good debt.” There is no such thing as good debt! There is simply bad debt, and acceptable debt. Some argue that you need debt to increase your credit score, this is FALSE! Utilizing credit cards appropriately and paying bills on time is actually the most effective way to improve your credit score. More on this in a later post.

Bad debt is any type of debt that is negatively impacting your life. This may include, but not limited to, high interest credit card debt, high interest personal loans, medical debt, or money owed to the IRS. SDB considers any type of debt that is not currently bringing you something of value to be bad debt.

Acceptable debt is the type of debt that is actively bringing value into your life. This may include, but not limited to, a mortgage, a small business loan, or low interest student loans. You’ll need to be careful with all of these.

Debt can be used as a wealth accelerator only if used extremely carefully. I once heard debt compared to a chainsaw; you’ll tackle the job faster but how many chainsaws can you juggle before you cut off your hand? Debt is never considered “good” because whatever you are doing with that money would have infinitely higher returns if you didn’t have the debt at all.

Creditors, and SDB for that matter, are willing to understand that most people don’t have $500k walking around money, so acceptable debt doesn’t impact your credit score negatively. The Savvy Solo will be able to determine which debts need to be prioritized, and which ones can be tackled at a later date.

I’m not going to lie to you, there is no magic bullet to getting out of debt. There are plenty of different ways to defer this debt (more on that later), but ultimately the debt you incurred has to be paid back… one way or another. In only the rarest of situations should you actually be considering bankruptcy; it is generally more damaging than helpful.

It’s worth noting here that getting rid of all debt as soon as possible is not always the best tactic. For someone with a 3% mortgage, the Savvy Solo would most likely put that on the backburner while they invest their freedom $ in order to get a higher ultimate return; thus raising their overall net worth in the long run.

I’ve seen a lot of advice insisting that 6% is considered high interest debt, but I know plenty of people who have mortgage loans higher than that. Generally speaking, if the debt is 8% or higher, it’s going to be challenging to justify investing with that spare money, so we’ll use this the benchmark of high interest debt.

The classic tactics on paying down debt are the snowball method and the avalanche method. I recently heard of the emotional method, and then of course we have the SDB method. We’ll go over each of these in detail.

Personal finance has always been more of a behavioral factor than a mathematic equation. It’s up to you, Savvy Solo, to determine which method (or which hybrid of methods) is going to keep you motivated throughout this process. Below we’ll use some figures as an example, these numbers are completely made up. We’ll get into my personal money story in a future post.

The snowball method of paying down debt is probably the most popular. Simply list each debt in order from smallest to largest, and tackle in that order. Some of us have student loans split up into several different loans, keep them separated for this tactic.

See below a basic example:

Since personal finance is all about behavior, this method is sworn by many advisors and coaches. Despite the fact you’ll pay more interest overall, the early wins keep you motivated to keep going! For this method, you might be able to get rid of that first student loan right away, awesome! Take the monthly payment you just saved, and apply it to the next debt. Here we come Grandma!

For the truly robotic and nerdy of us, the avalanche method is the fastest way to get out of debt, while also paying the least amount of overall interest. You’ll want to list your debts in order from highest % of interest to lowest, and tackle in that order.

See below using the same example:

By getting out of that credit card debt first, we are able to stop that 22% interest working against us earlier, thus saving more overall money. Again, once you finish off the first debt, use that freed up payment against your next debt, and work your way down the line.

Unfortunately, not all of us are robots. After getting out of credit card debt we might feel burnt out after such a long slug, and stray away from the plan. Not to mention, poor Grandma is left for last after such a nice deed! “Sorry Grandma, I’m on this debt plan right now. Looking like 2047 on paying that back, you’ll still be alive right?”

“How dare that avalanche guy leave his poor grandmother for last! Doesn’t he have a heart?” Nope, he’s a robot remember? We’re all human, let’s try to act that way.

The emotional method prioritizes debts by the level it’s impacting your emotional health. I love this idea in theory, but it has its shortfalls. Let’s take a look at why this can be detrimental.

Here’s our plan:

So, in this situation, we obviously want to take care of the G-ster first. We happened to read recently about car depreciation, and that’s making the anxiety rumble, so let’s clear that up next. Our co-worker can wait, we agreed to pay interest anyway, right?

Month 1, we pay Grandma an extra $500 with the intention of paying it off in the next few months, all is according to plan. That is until the co-worker makes a snide comment in the office in front of others that you still owe him money. What a dick, right?

Ok, here’s the new plan:

Let’s prioritize this debt from the co-worker, we’re tired of hearing about it. At least we paid Grandma some of the debt. Entering into month 2 we pay the co-worker an extra $500. Heading into month 3 we happen to notice how bad this 22% interest rate on credit cards is killing us, while at the same time that vehicle debt hasn’t been touched (other than the minimum payment), and Grandma just called to ask if everything is ok.

In an emotional bind, we tell Grandma we need a little more time, and decide to pay $500 to the credit card to try to ease the rate of compound interest working against us. Now, heading into month 4, we have sent 3 extra payments in 3 different directions. At this point, we have the same minimum monthly payments we had 4 months ago, and it feels like we haven’t made any progress. If we had stuck to our guns, Grandma would be paid off by the end of this month! “Ugh, I need a vacation, where’s that credit card?!?”

Emotions are a fickle beast; they may change direction as suddenly as the wind. I dare even the emotionally healthiest to not make a rash decision when put under the stress that debt can bring.

I’ve mentioned before that stoicism in personal finance is key. It’s important to not let emotions drive the bus on our financial journey. That doesn’t mean we need to be heartless, it means we stick with a plan through thick and thin. I put together a method that has worked for me, I hope it works for you as well.

The SDB Debt Payoff Method:

1. Dangerous Debts
2. Debts that impact our relational health
3. Next highest interest rate
4. Smallest remaining balance loan
5. Back and forth between 3 & 4
6. Leave your mortgage (hopefully your largest debt) for last

Dangerous debts are the debts that may compromise your paycheck and/or well-being. This could be outstanding debt to the IRS, defaulted student loans, or really anything that could result in wage garnishments. Many times, a simple phone call will help clear some of these up. You may want to reach out to a financial coach to help you negotiate terms with collection agencies if it comes down to it.

This plan is a bit of a hybrid of all plans. The intention is to minimize the amount of overall interest paid, while keeping the Savvy Solo motivated to keep it up! If you don’t currently have any dangerous and/or relationship debts, feel free to start off with a small one to get the ball rolling! The key here is once you pick a debt, don’t stop with that debt until it’s fully paid off.

Using the SDB Method on the example, our plan would look like this:

In this case, we don’t have to worry about dangerous debts, so we jump right to the relational debts. Between these, determine which ones are weighing on you the most; we’ll stick with the G-ster at #1. We’ll speak to the co-worker about our plan, and make sure they are ok with it. If they happen to make comments after that, it’s not our problem, we already spoke with them.

Working our way through the list, that credit card debt is going to be a tough trek. We’ll definitely celebrate when we get through that one, but also look at that! Our next debt can be handled in a month or two! Keep going, keep pushing yourself! Everything is more fun when you gamify it!

After you filled out the SDB MFC! and listed out all your debts, it will most likely feel pretty icky. I was pretty intimidated when I finally sat down and did it; but it motivated me to get a handle on things. Don’t beat yourself up about things like credit card debts, what’s done is done. Decisions have been made, it’s time to move forward. Use this feeling as motivation to start making better financial decisions moving forward.

In certain cases, it might be beneficial to consolidate some or all of your loans. We’ll get into this in more detail in a later post, but for now start tackling that first debt. Consolidating will generally help you in the short term, but can bite you in the long term if not addressed properly.

Right now, I want you to look at your freedom $ amount, and figure out how much per month you can put towards your first debt. It doesn’t have to be ALL of the freedom $, but it most likely should be part of it. Figure out how long it will take you to get out of debt with that $ amount, take a few minutes to establish if you are comfortable with that timeline, and adjust accordingly.

Have a can’t miss wedding coming up in 6 months? Start putting money aside each month for it now. If you aggressively pay off debt with every dollar and no plan, you’ll wind up back in debt when life strikes. One of the reasons people tend to get caught up in a paycheck-to-paycheck cycle is not planning well enough for the future.

This is a great time to push the envelope on increasing your total monthly freedom $. What can you mitigate in the fixed costs section on the MFC! for now? More importantly, what can you do to increase your income? We’ll get into some of these tactics in the future.

In Closing

There are several ways to tackle debt, the important part… is that you in fact tackle it. Feel free to create your own hybrid of the existing methods as I did, whatever keeps you motivated. Deferring student loans so that you have enough money to party in your 20s is only going to haunt you in your 30s and 40s. Trust me, I know… I’m living proof 😂.

Like I said above, it’s not always in the Savvy Solo’s best interest to pay off all debts as soon as possible with reckless abandon. Some advice out there would insist you live on rice & beans for two years before you go to the dentist 😂. There’s also other advice out there that would have you take out several million dollars in loans to invest in a business idea 😬.

Everyone has different risk tolerance levels, as well as debt tolerance levels. I don’t believe in a one-size-fits-all plan when it comes to debt management. It’s up to you, the Savvy Solo, to put out forest fires… AND to come up with the debt management plan that best impacts your life 🤪.

I love hearing about money wins, send me a message or post below if you just paid off a big debt!

Stay classy solos! ✌️