How to pay off debt: 7 practical tips

If you’re intentional about how you use it, debt can be a tool that allows you to make an investment into something important to you—like education, a home or reliable transportation for your family.

On the flip side, if you’re not planful and you accumulate too much of it, debt can hold you back from achieving what you really want in your life, and even be damaging. Maybe payments are restricting your monthly cash flow—causing financial stress or preventing you from spending, saving and giving the way you'd prefer. Or you may feel like ongoing payments are affecting your ability to secure solid financing for another big goal.

Feeling stuck? That's OK. Here are some steps to help you get out of debt and think through the role you want debt to play in your future.

Regardless of where you stand with debt today, a debt management plan requires organization and commitment. Here's how to get started, and stick with it.

The first step to getting out of debt is to really understand your debt picture. This means figuring out how much total debt you have, your interest rates and how much you should pay per month toward each. It can also be helpful to include the term, or how long you are going to be paying a loan.

Then you'll want to look at your income and spending: Are you spending most of, or even more than, your paycheck each month? Writing out your standard expenses and your typical take-home pay helps you understand where your money is coming from and going to. This step will help you understand how much cash flow (or income) you have available toward getting out of debt. This isn't about right and wrong—though if you identify any wasteful spending, it's not a bad idea to cut where you can. In most cases, however, people simply take a different approach to debt payoff depending on the tightness of their current budget.

Once you have a clear picture of what you owe, get into the nitty-gritty of cutting expenses and setting a budget. When it comes to cutting expenses, a good place to start is to think back a few years and evaluate any lifestyle inflation or nicer things you've grown accustomed to that you lived without in the past. Cutting out these extra purchases temporarily could really help with debt pay-down.

Here are a few other ways that you may be able to cut expenses and even earn more income:

• Get serious about meal preparation with less-expensive ingredients bought in bulk. Freezing big batches of meals can make food costs lower and make dinner just as convenient as eating out, but with less cost.
  
• Let your boss know that you are open to doing additional hours of work if the team needs overtime (if applicable).
  
• Consider a side gig on the weekends, then immediately put any earnings toward your debt.
  
• Rent out a room in your home, or consider living in a shared house or apartment rather than a single-family residence.
  
• Opt for staycations and regional vacations when you have time off, especially when you can stay at your family or friend's place rather than pay for lodging.

Remember, as soon as you finish paying a debt, that previously allocated money will be freed up in your budget, making room to pay extra on a different loan or credit card. Paying down debt rapidly to remove a bill from your budget can make other cost-savings measures less necessary as you progress through your debt management journey.

Many people are motivated to pay down debt by setting a concrete goal and working to achieve it. You start by looking at how much you could reasonably divert from other parts of your budget. This helps you come up with an approximate "extra payment" amount that you can afford each month.

Use those monthly numbers to see when it would be reasonable to achieve your first goal (think paying down a single credit card balance or one loan). The goal doesn't have to be enormous, but stating, "I want to be credit-card-debt free in 24 months" or "I want to pay off my student loans within six years" can help you identify progress over time.

Once you've picked your goal, write out a schedule of how much you want to put toward each debt each month. By laying out all the numbers, you'll be able to check off each month's extra payments and notice yourself progressing. Don't worry if you have to revise the schedule; just remember how motivating it is to see that progress. Sticking with the schedule can reinforce your positive habits.

Learn more about setting SMART goals

Putting a debt action plan into practice

Thrivent clients Paul and Ashley Silber addressed a mountain of debt while prioritizing other financial goals for their family.

Read the Silbers' story

People commonly choose two ways to pay down debts: snowball or avalanche. With both methods, you make a list of your debts and plan to make the minimum payment on all but one of them, says Andrea Erhard, associate vice president of Business Banking at Thrivent Credit Union. You pay extra money toward that one with the goal of eliminating it first.

The snowball method involves finding your smallest debt and paying down the balance as quickly as possible while making minimum payments on everything else. This gives you a quick win, building a feeling of victory and momentum. You can then start putting all extra payments toward the next-smallest debt, creating a snowball effect.

“You don’t even look at the interest rate,” Erhard says. “This method will slowly open up your cash flow as you eliminate debt.”

The avalanche method involves paying down the debt with the highest interest rate first while making minimum payments on other debts. Once that debt is gone, you aren't paying quite so much in interest costs, and you can start working on the debt with the next highest interest rate.

“For some, reducing the highest interest really helps people feel like they are making a dent in their debt faster,” Erhard says.

Many people benefit the most from paying off high-interest debt first. These are debts that are restricting your ability to spend and save. Lower-interest, long-term debt like mortgage loans may not cause as much disruption.

In either case, the goal is to validate that you're making progress even if you're giving up some everyday luxuries or making other pragmatic choices to reach your debt goals.

Be aware that life sometimes throws us additional bills and costs without warning. It's important to not get discouraged if an unexpected expense sets back your debt pay-down schedule. If it feels like you're putting too much money toward debt and not leaving enough to handle emergencies, consider slowing down your debt pay-down timeline.

Create an emergency fund with at least three months' expenses so you don't have to go into debt for unexpected emergency costs. Then adjust your schedule based on your new situation to get back on track.

Emergency funds: How much you should save and where to keep it

You may occasionally find yourself with non-paycheck income: Perhaps a higher-than-usual tax refund, a gift or inheritance from a family member, or a bonus at work. Even when windfalls seem small, it's wise to take advantage of them, because they are money you haven't budgeted already.

If you're in debt pay-down mode, consider putting 50% or more of any windfall toward debt. This way, you still get the benefit of a little extra wiggle room in your budget, but also a leg up on your debt payment schedule.

Once you’ve eliminated your debt or gotten it to a place that fits your priorities, it’s time to celebrate your victories while also developing a plan to manage future debt.

“You can fix the debt, but if you don't fix the problem that caused the debt, you could potentially end up in a worse position in the future,” says Thrivent financial advisor Robert Meaux. “You have to establish guidelines for your family and commit to keeping them.”

“I also suggest you review your financial foundation, both your life insurance and your disability income insurance, to help reduce the risk of what could take income away from you and your family,” Meaux says.

And decide what your limits are when it comes to using credit cards or other forms of debt. Using credit cards isn’t bad, necessarily, but you have to manage how you use them.

Finally: Give yourself grace. Even if you do everything right, there’s no guarantee that you won’t find yourself in debt again. How you handle it can make all the difference.

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