We’ve avoided the subject of debt payoff on this site for a long time because we’ve never had any debt ourselves. Somehow it felt less than genuine to talk about how to do something that we’ve never actually done personally.

Up to this point, our strategy has been to encourage people — especially young people — to avoid debt altogether. That’s a great plan, and if you’re reading this article at 18 years old, you should definitely try your best to make it happen. But what about everybody else?

Recently, we realized that we have some perspective to offer on debt payoff, in spite of the fact that we’ve never had to actually do it. I mean, why did we avoid debt our whole lives? What made that seem so important to us?

And after all, rapid debt payoff is kinda just the same thing as quickly saving money. To make it happen, you have to widen the gap between your income and living expenses, and then plow the difference into a singular goal as aggressively as possible. Our personal goal was increasing a pile of investments, but it could have just as easily been to pay off a mountain of debt. The exact same principles apply.

Photo of Alaskan mountains
Mountains reflected in Tern Lake, Alaska.

Harnessing the Emotions of Debt

One way that paying off debt is admittedly different than saving money is the fact that debt comes with more emotional baggage. Debt represents decisions and circumstances from the past, and they’re not always great ones. Here are two thoughts you might have when thinking about debt, and how they can actually be used to your advantage:

1. “I hate the system that put me in this position.”

Photo flipping off Starbucks
If you’re offended by Starbucks ads (and MacBooks?), you might be ready for hardcore debt payoff mode.

We live in a consumerist culture. It’s almost impossible to go about your day in the United States without being pummeled by dozens of advertisements telling you to buy garbage you don’t need, or telling you that happiness is just one more purchase away. And it has a real effect on most people. If it didn’t, advertisers wouldn’t pay for it.

But once you see shiny new cars, top-of-the-line smartphones, and designer clothes as the exact things that put you in your current financial predicament, they start to become way less attractive. You can grow an immunity to advertising by leveraging this anger. The next time you see an ad for a Peppermint Mocha Frappuccino or a brand new Toyota Tundra, it should actually sorta start to piss you off. Cultivate that response.

2. “I hate myself for getting into this position.”

Self-loathing isn’t healthy, but it’s unfortunately pretty common among people who are deep in debt. There’s actually a positive side to this dark emotion though: It’s an indication that you accept the fact that your financial decisions are within your own control. If you didn’t believe that you were ultimately in charge, then you certainly couldn’t justify being mad at yourself. Let that empower you to make a change.

Photo of Lauren with a pile of snow
Some bad weather in Lassen Volcanic National Park, California. Paying off debt can feel like trying to shovel this pile of snow sometimes.

There is one common thought among people who are in debt that isn’t very productive though: “I feel like I’m drowning.” Today, it’s not uncommon to see six-figure outstanding balances, especially with the rise of things like student loans and medical debt. When you start to think that the challenge before you is insurmountable, it’s easy to give up hope and stop working toward debt payoff.

To see your debt as something you can conquer, our best advice is to start tracking your net worth right away. When you make loan payments, it’s easy to think of that money as disappearing into thin air. But in terms of your overall wealth, paying off debt is exactly the same as putting money in the bank. By tracking your net worth, you can see how much richer you’re getting every month by chipping away at debt, even as your savings seem to sit stagnant.

It’s also helpful to know what’s possible by looking to others’ examples. We were able to save over $100,000 in two years on public school teacher-level salaries at the beginning of our careers. We had no debt, so all of our money was being shoveled into stock market investments. But think about this: If we were $100k in debt at the time instead, we could have been debt-free in just two years by following the exact same steps!

Seeing Debt as an Investment Opportunity

When we were in full-on money-saving mode throughout our 20s, it felt really exciting. A lot of that excitement came from the fact that every dollar we saved was being invested — meaning that it would magically multiply itself every year thereafter, compounding and growing over time.

For most people, paying off debt doesn’t bring about that same exciting feeling. But mathematically, it’s actually much more exciting, though nobody seems to realize it. When you pay off debt, you’re eliminating a balance that was previously accumulating interest against you. The interest rate of the loan you’re paying off is equal to the effective “investment return” you’re earning by doing so.

Think about it: If you shovel an extra $10,000 into paying off a credit card balance at 10% APR, you’re eliminating $1,000 per year of interest that you would have otherwise had to pay as long as you held the debt! That’s the same thing as earning a 10% investment return on that $10k!

Actually, it’s even better than that. To earn a 10% return by investing your money, you’d need to take some risk in the stock market, a rental property, or something similar. But by paying off your 10% APR loan, you’re getting a guaranteed 10% return — risk-free!

Oh, and I forgot to mention — when we invest in stocks, we have to pay taxes on the profit we make. But there’s no way for the government to tax interest that you prevented yourself from having to pay. So the “investment return” you get by paying off debt is not only risk-free, but also tax-free! Your debt is the most powerful investment vehicle you have at your disposal. For this reason alone, you might even miss it when it’s gone.

How to Pay Off Debt: The (Modified) Debt Avalanche Method

Okay, so now you’re convinced and motivated to crush your debt. But how do the mechanics of that work? Which debts do you tackle first? And is there anything more important than paying off loans?

The answer is pretty simple, actually: Just aggressively pay off whichever loan has the highest interest rate first, and then work your way down to the lower interest ones. The balances don’t matter at all here — just compare the interest rates. This ensures that your money is allocated as efficiently as possible at all times.

Suppose you have the following four loans:

  • Big bank credit card @ 19% APR
  • Small credit union card @ 8% APR
  • Mortgage @ 4.5% APR
  • Car loan @ 3% APR

To follow the debt avalanche method, just pay the minimum payment on the car loan, mortgage, and credit union card, and then take all available excess income and throw it at the big bank credit card (because it has the highest interest rate). Don’t put extra money in your savings account. Don’t add to your investments. Don’t buy yourself a treat. Just destroy that high-interest debt.

Photo of snowy mountains over the Gunnison River
A snowy Black Canyon of The Gunnison, Colorado. Your avalanche is waiting to happen.

Eventually, that big bank credit card will have zero balance left, and you’ll move on to attacking the credit union card with all available funds til it’s gone — and so on — until you’re completely debt-free. If you want to complicate things just a little more, there are a couple of optimizations to be made on the debt avalanche method…

The first is to realize that there is one investment opportunity available to you that’s even better than high-interest debt, and that is getting a company match in your retirement account. If your employer offers a 1:1 match on contributions to a 401(k) or similar plan, they’re effectively offering you an instantaneous 100% return on your money, and it is perfectly rational to prioritize getting that match over paying off a little bit of extra debt.

Secondly, there is a question of whether accelerated debt repayment is optimal at lower interest rates. Some would argue that paying off a low-interest mortgage or car loan early doesn’t make sense when you could invest that money into the stock market and make a higher return instead. There is some logic to this, but it should only be a consideration on very low-interest debt (probably under 5% or so), and it’s a personal decision that depends on your risk tolerance. Paying off debt is always the safer option, and personally, we prefer to just be completely debt-free.

Aside from those two small optimizations, there’s one huge alternative to consider, too: Instead of chipping away at your debts ’til they’re gone, you can lop off gigantic chunks of debt all at once by downsizing.

Bought too much house? Sell it. Then buy something in a lower-cost area, and watch $50,000 drop off your mortgage balance all at once. Financed a new car? Bite the bullet, sell it at a loss, and buy a beater for cash. Your car payment will literally disappear overnight. Even small things like consumer electronics and expensive furniture can be liquidated and thrown at the credit card debt from whence they came. Don’t be afraid to get creative.

Widening the Gap to Pay Off Debt Faster

Paying off debt the smartest way possible is pretty easy — just tackle the highest interest rates first. But how do you pay off debt faster? If you only have $1,000 per month to throw at a $50k loan, it’s still gonna take 50+ months to pay off. The real magic happens when you can turn a debt repayment trickle into a gushing firehose.

The amount of excess cash you have available to pay off debt every month is given by a very simple formula:

Excess cash = (Income) − (Expenses)

If you make $5,000 per month, and you can manage to live on $1,500 per month, then you have about $3,500 per month available to direct squarely at your loan balances. This amount is the “gap” between your income and expenses, and it’s the number that will solely determine how quickly you can get out of debt.

To increase your income, try working a side hustle. We’ve done everything from photography and tutoring, to credit card churning and casino bonus hopping. You can also consider asking for a raise, continuing your education, or job hopping.

Scoring a higher income almost always takes hard work. On the other hand, reducing your household expenses can sometimes be as simple as a mindset shift or a quick phone call. Start with the big stuff: Rethink your housing costs and choice of car. Then tackle recurring costs like insurance or your cable bill. If you feel like you’ve got all of that down to an absolute minimum, direct your attention to smaller optimizations like buying stuff cheaper on eBay and hacking your way to discounts at restaurants.

Not only will widening your income-expense gap help you pay off debt super fast, but after your debt is gone, it’ll accelerate you toward financial independence faster than you would have ever thought possible, allowing you to be more adventurous with your life and worry less.

Chasing that feeling of absolute freedom is what this site is all about. If you want to stay motivated to crush your debts, start investing, and actually have fun along the way, follow us on Facebook, Instagram, Twitter, and YouTube. We want to help you get where you want to be.

— Steven

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