How to Pay Off Debt and Be Debt Free

Considering the current state of the economy, it's likely a smart thing to try and rid yourself of any excess debt right now.

I made the comment last week that I'd like this to be the year I finally pay off my excess high interest debt.

Mine comes in the form of an auto loan. What about you? Do you have plans to pay off your debt? If so, here's a simple plan on how to pay off debt and be debt free.

Being debt free is a lofty and important goal. It can literally change your life! Read to find out how you can make the changes necessary to pay off all of your debt, become debt free, and stay that way!

Step 1: Know Exactly What Debts You Have

Step one is to fully understand your debt situation. Take an hour out of your next evening to break out your latest credit card statements, auto loan statements, student loan statements, etc. Or, if you use a program like Personal Capital (see our review) to simply link all of your online debt accounts.

However you do it, just make sure you fully understand what your debts are. If you think you might have some old, forgotten debts out there, you may want to get your free credit report from

Step 2: Prioritize Your Debts

Now that you understand your debt situation, step two is to apply some type of priority or ranking to the list. For me, the priority is placed on the interest rate.

The higher the interest rate on the debt, the more you're paying every month in interest charges.

Therefore, I'm motivated to stop paying so much out every month in interest charges. My auto loan is somewhere around 8%. Whereas my home mortgage and student loan debts are a bit lower, and are also tax deductible.

Some people decide that it's easier to pay off your debts by starting with the smallest debt: the Dave Ramsey “Snowball Method.” That's cool, too. Whatever motivates you to pay off the debt is the best method.

Step 3: Establish a Debt Payoff Plan

Step three is to set up a payment plan based on your newly established priority ranking. You may want to put all your extra money every month towards the debt with highest priority, or you may simply want to make double payments on that debt.

Choose the method that's right for you and your budget. Make sure you at least make the minimum payments on the other remaining debts though.

Step 4: Make Debt Payments Automatic

The fourth and final step is a key one for me. Make the extra effort to set up an automatic payment from your bank account to pay off your debts. Taking the time to setup an auto payment will help to ensure the extra payments get made.

Make sure you set the payment for a time when you're sure to have money in the account (i.e. just after your paycheck hits).

How to Pay Off Debt For Good – Additional Steps

Some of us need additional motivation to stick with a plan. Here are some ideas:

  1. Find a partner to hold you accountable.
  2. Post your list of debts in a spot where you will see it everyday.
  3. Tape a mini version of your debt list on your credit card.
  4. Consider using a service like

Do you have any other suggestions for how to pay off debt in the new year? If so, leave them in the comments below.

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  1. Having a good plan for reducing your existing debt is a good thing. Planning not to increase your debt is another. Often, when someone determines that they can pay an extra $50 to $100 a month to reduce their debt, they fail to realize that they are still increasing their debt each month by $200 to $300. Additionally, some people who start reducing their debt will get that feeling of success, especially once their nest egg starts to grow, and decide to celebrate and spend that nest egg on something frivolous. I suggest making two lists: “Things I Need” and “Things I Want”. The “Needs” list should contain your monthly bills, mortgage/rent, car payment, groceries, and everything associated with your debt reduction plan. Each item on this list should also include the monthly payment and a total at the end. This list should also include an item called “Pay Yourself First”. The “Pay Yourself First” entry is the amount of money you can comfortable add to your nest egg, after you have met your obligations, and still achieve the goals you’ve set in your debt reduction plan. The goal for this nest egg should be to build it up to approximately three times your monthly income. It will take some time. The idea is that if you lose your job you will have about three months to find another one. The time frame to find a new job increases if you will be eligible for unemployment or you can adjust your debt reduction plan a bit. The “Wants” list might include that new flat screen TV, or that new fangled iThingy, or a new computer. Include how much each item costs, and then consider if that cost will go down in the future. If an item on your “Wants” list replaces something you already have, will the item you have suffice until you can afford to buy the one you want. The cost of electronics almost always goes down over time, so wait and save. If your “Wants” list includes a new car, consider how much you are currently spending on your vehicle. Are you still making payments, is the gas mileage really poor, are you “paying through the nose” just to keep it running? Will the new car payment be more or less than you are currently spending?

  2. A huge thing to keep in mind while you’re trying to pay off debt is the transaction/pay date/or whatever the bank/creditor your paying calls it. What I mean is that there is usually a pay data box to select the date you’re paying on. If your payment is due on the 15th, this box is usually set as the 15th. The tricky thing here is that if you’re making your payment on the 10th you avoid interest for the next 4 or 5 days but if the box is already pre-filled with the 15th that makes you think that this is the only date you can pick therefore your transaction will be on time but you will be charged the interest although you paid early. Be sure to select the date you are paying on or the next day. This is something that Bank of America does (which I think they are crooks and are super greedy bank, even if some people disagree, my personal opinion) so keep an eye out for your creditor doing the same thing, you think your avoiding interest but in reality the bank is setting you up to pay up either way……

  3. It’s good to pay extra on an automobile loan. One thing to remember/check a lot of contracts state a payment must be made every 30 days.So when you pay more then your min. payment you pay less in interest and pay the loan off faster. This does not mean that if one month you are short on the payment that you are okay. Read the fine print.

  4. Paying off debt is a huge deal and I think the strategies in this article and subsequent posts are excellent!

    Here’s one I’ve used with great success: played “right”, every month you’ll have a certain amount that you could use to pay off debt. I advocate saving half that amount and using the other half to pay down debt.

    Why? This way if something untoward happens (like you get layed off or your hours get reduced), you’re prepared.

    After a rough spot, I landed a great job and diligently started paying off debt, living on the very minimal amount that I could manage. About 14 months in, I was very close to being out of debt and **wham** my employer merged, I was “redundant” and lost my job. I had no savings (as I’d been using every penny to pay off debt) and so, to bridge the gap between actual living costs and unemployment, guess what? Yup – HAD to borrow to survive.

    Now that I’ve got another gig, I am again paying back at a good rate BUT this time for every dollar I pay back, I save a dollar – just in case…..

  5. Jesse Bouche says:

    I’m a big fan of the automatic payments for my minimum payments (they all go out on the 30th, come hell or high water), but I send my extra payments as they come in. So, $100 comes in and $100 goes right out to the debt. I’m not a “lump sum” kind of guy.

  6. Some really good debt free advice here. The sooner that debt problems are tackled then the closer you are to becoming debt free.

    For UK resident (except Scotland), there is Government help with allows you to become debt free in as little as 60 months, which is know as an IVA.

  7. says:

    I understand the ‘paying off the smallest first thing’. If a person has five credit cards they may feel overwhelmed, and feel as if they can never accomplish being debt free.

    If they pay off the four smallest, and are left with the largest then the task seems much more doable, and inspires them to keep going.

    My grandma just went through all her receipts for the entire year (Yes, she saved them ALL.) I’m thinking she’s going to have a heart attack when she figures out exactly how much money she spends on ‘little things’.

    I always made sure I paid some ‘extra on my car payment’ so much so that I didn’t technically “owe a payment” for about six months.

    Every little bit helps! Even if you only have $50 extra that month eventually it could put you so far ahead that if you’re accidentally a little short in the future it won’t matter. : )

  8. Automatic payments plans are huge because it takes the human error out of you forgetting to make a payment.

    I agree 100% w/ J’s statement to round your payment up, even if it is $10. It will pay off big time over time.

    I want 2009 to be the year I totally forget about credit cards, build up a small liquid emergency fund, and, most importantly, knock of a huge amount of principle from my student loan debt.

    It starts this Friday w/ my first pay period!! Great work PT Money, great way to start the year off!

  9. vilkri on lower debt says:

    Instead of finding an actual person as a partner you can also use the internet to keep you accountable. For one, you can blog about your finances. That will give you an incentive to do the right thing. You can also decide to stick to a budget. (There are plenty of free budget planners available on the internet.) And finally, you can sign up at where you can be your own partner and hold yourself accountable to your commitments. (The site was developed by Yale professors and I have no commercial interest in it.)

  10. 1. Round up. Take you car payment, mortgage payment, any set monthly payment and round up to the next nearest even-dollar amount you are comfortable with. Example: if your car payment is $249.50, set it for autopayment at $260. Over time, your required payment drops, the extra gets the car paid sooner, and you can drop it down if you have to for something like a house down payment. I plan to do the same with my mortgage as soon as I can.

    2. Try to pay car/house insurance in one payment. Most insurance companies now charge a monthly fee for every month it’s not paid in full – mine was $5/month. Over 10 months, thats $50 I have better uses for. Look at the interest you gained in a savings account and see how it stacks up against this extra fee. Besides being one of my 2008 goals I achieved, it adds piece of mind that I won’t forget to pay it.

    3. Kill student loans. I can’t emphasize this enough. Interest may be tax-deductable, but because it is amoritized and compounded daily, it’s akin to mafia loan-sharks. Don’t let other things like car and house slip, but compared to credit card double-cycle billing for profiteering, the DOE is just plain mean.

    4. When budgeting, round down your income. By shaving $50 off your expected weekly (or $100 for bi-weekly) pay, and then building your budget from those figures, you automatically have some left over. This comes in handy for sudden car repairs, replacing a suddenly-dead coffemaker, or other little life always throws at you.

  11. To the poster above: I do something similar except I use an excel spreadsheet instead of a whiteboard. Its amazing how fast you can make progress when you track it correctly.

  12. I agree that staying accountable is a big deal!

    But something that keeps us both sane and self-aware? A whiteboard. Every time I make a payment, I change the tallies. This way we both see that we still have a way to go — the amount is staring us in the face — but we also get to see the number go down. It can really be a nice thing.

    Also, I suggest making payments with each check, rather than once a month. First of all, if you’re on a double-billing cycle (and most people in credit card debt are) the daily total will go down more quickly, thus you’ll accrue less interest. But important to the psyche: You’ll get to take those totals down a notch more often. It reminds you to celebrate your progress. And it keeps you checking your money scenario — how much you spent this week via how much you have left to put toward the debt — far more frequently.

    It’s really helped for us! On a $3,000/month total income, we’ve paid down $4,000 since mid-June. We’re down under $10,000 and looking forward to slashing even more in the coming year!

  13. Studenomics says:

    One thing I want to add is that when finding a partner to hold you accountable you should look for someone that will not judge. The reason I say this is because in the past I’ve had workout partners or study partners that will judge when you make a small mistake. Mistakes will happen but when they do I want someone to motivate me to improve myself or to learn from my mistakes, not to judge me.