A Cost Effective and Sustainable 5 Step Plan To Pay Off Debt

There are many benefits to living debt free, such as lower monthly expenses and being able to save and invest more to address your financial goals.  However, becoming debt free can be challenging.  “Many people tend to undervalue their debt,” says Provident Associate Financial Consultant, Jacob Merk, CPA, CFP.  “Because of that, there can be a little bit of sticker shock when you actually sit down and total up your debt.  And while that total number may be startling, it should help reinforce the need to start paying it off.”  Refinancing or consolidating your loans may be an option worth looking into to help lower the interest rates on your loans, depending on the fees you would incur in doing so.

“There are several methods and plans for paying off your debt, and I’m going to focus on a method to pay off your debt that emphasizes being both cost effective and sustainable.  To be the most cost effective, this method (known as the avalanche method), focuses on paying the least amount of interest possible on your overall debt.

Step 1:  Once you have your list of debts, put them in order by their interest rate, going from high to low.  If you want to be truly cost effective and pay the smallest amount of interest possible, then you’ll want to pay the minimum balance on all of your loans except the one with the highest interest rate.  If you can put any available cash toward that loan you’ll be coming out ahead financially compared to if you were to save it for last.

Step 2:  I mentioned putting “any available cash” toward the loan with the highest interest rate.  Creating a realistic budget can help you determine how much cash you have available to apply toward your loans, being careful not to touch your emergency fund.  You can start by making a list of your monthly expenses, including the minimum balances of each loan. 

Then take a good, hard look at your list and find the opportunities to eliminate some of the expenses and save.  When you’re looking for those opportunities, look for poor spending habits and areas that could benefit from a lifestyle change, not just temporary changes.  For instance, if you eat out for lunch five days a week, maybe consider packing a lunch for three of those days.  I emphasize making sustainable changes because you’re more likely to get onto a healthy financial track that you can maintain, even after your debts are gone.

Step 3:  If there’s any found money in a given month, such as a bonus from work or money in a birthday card, it’s wise to put that into your savings account so that you’re making progress on that front.  Putting that money toward your highest interest loan is another smart move.

Step 4:  With each loan you pay off, roll those minimum monthly payments right into the next loan you’re going to focus on.  By now you’re already used to not having those funds as discretionary spending and it will help you pay off your loans that much faster. 

Step 5:  Fast forward to the day when you have all your debt paid off, or maybe all of your debts except for your mortgage.  It’s time to take a good look at your savings and any investment accounts and start contributing more toward your long-term financial goals.  You’re in a much better place financially now than where you started out, and it’s wise to stick to your new spending habits and budgeting ability.

Again, this is just one way to pay off debt that focuses on spending the least amount in interest over time.  There are other methods as well that are worth discussing with your financial advisor to see which will be the most effective overall plan for you,” shares Jacob.  “Some of those other methods may provide you with the motivation and confidence you need to stay consistent, although you’d still be paying more in interest.  It’s all about finding the method that works for you in the long run and will ultimately pay off your debts.”

If you’d like to schedule a consultation to discuss your personal financial planning needs and goals with Jacob, call the office at 920-230-6898.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.