It’s that time of year when we look at what we’ve accomplished and what we haven’t accomplished and decide what to tackle in the second half of the year. Even though we are living in extraordinary times, most people will still consider eliminating debt and building wealth to be their most important goals.
If eliminating some of your debt while simultaneously improving other parts of your financial life is among your goals, then this article is for you. It’s time to take back control and stop your debt.
It may seem like paying off large amounts of debt in a short period of time is impossible – but it’s not! You can even pay off $10,000 in debt in just one year. Whether you have student loan debt or credit card debt, there are options.
Here’s how you can pay off $10,000 in debt in one year.
Step 1: Work backwards
The first step in any good debt repayment plan is knowing how much money you need to save to achieve your goal. Saying you’ll pay off $10,000 in debt in one year isn’t good enough. You need to break down this number so you can achieve smaller accomplishments.
The simplest way to do this calculation is to divide $10,000 by 12. This means you need to pay $833 per month to be able to contribute the target amount to your debt repayment plan. However, this number does not take into account the interest on your debt.
If you want to know the interest impact and how much you can save by accelerating your debt repayment plan, you can use a debt calculator like the one we offer Bank rate.
In the example below, we assume a credit card balance of $10,000 with an interest rate of 16%. In order to pay off the balance within one year, payments of $907 per dollar would be needed, which would save over $4,000 in interest – a huge savings!
You can use this calculator to calculate all of your current debt and see what you can save with an accelerated debt repayment plan.
I can tell you that after a decade of helping people get out of debt, simply getting organized and understanding your debt is the number one reason people don’t make progress.
Step 2: Decide your strategy
If you only have one loan or credit card, you don’t have to worry about coming up with a strategy. (Other than the amount of your monthly payments, of course.) You can simply choose to automate your payments and consider yourself done.
However, if you are dealing with multiple loans and debts, you will have to decide the order in which you want to repay them. There are two common strategies for doing this: debt snowball and debt avalanche.
The debt snowball method Using this method you will list your debts from smallest balance to largest and work to pay off the smallest balance while making minimum payments on everything else. Once you pay off the smallest balance, you can move on to the next smaller balance and still meet all other minimum payments.
This is a method popularized by Dave Ramsey, and the goal is to get some early gains by getting rid of small debts – which in turn strengthens your attitude towards paying off the remaining debts. Plus, setting aside that extra money to cover the next debt helps get rid of it faster.
Debt collapse – Using this method you can list all your debts from highest interest rate to lowest interest rate. You then focus on putting all your extra money toward your highest interest rate while making minimum payments on the rest.
This method is mathematically the least expensive way to pay off your debt, but it can also mean a longer period before you see gains.
There is a lot of controversy about which method you should use and there is no right answer. The debt snowball method is a great option if you like quick wins and want to eliminate small bills. The debt stream method is great if you’re focused on saving the most money in interest.
Once you’ve chosen your strategy, you should also consider how often you’ll be making additional payments and whether or not you want to automate your plan.
Step 3: Free up money in your budget
At first glance, paying $10,000 a year may seem like a huge number. However, once you break it down, coming up with the extra money is not as difficult as it seems.
If you’re serious about getting rid of your debt, one of the first places you should look is at your current spending. There are always ways to stretch the budget with minimal effort.
Here are some things to consider:
Monitor your spending – It’s impossible to know where to cut back if you don’t know where to spend. You can sign up for a service like Empower for free. Empower will automatically monitor and categorize your spending after linking your bank accounts.
You can also check out our list of the best budgeting apps here.
Participate in Uber Frugal Month – Cutting back on spending has as much to do with mindset as it does with actual needs. Early retirees, Mr. and Mrs. Frugalwoods have achieved tremendous financial success by practicing thrift and without feeling deprived. In January, they host a month-long Uber Frugal Challenge. This challenge can help you cut your costs and discover alternative ways to make your money work.
You can participate in the challenge here.
You can easily save an extra $500 per month – It is very likely that you are spending money unnecessarily without realizing it! This post explains fifteen simple ways you can squeeze an extra $500 out of your budget every month. If all of these ideas are applicable to your situation, you will be able to free up up to $7,000 over the course of a year.
Budget for your character – One of the biggest mistakes new budgeters make is trying to adopt a system that doesn’t fit their personality and they won’t stick to. The trick to making budgeting effective is finding a way to make it a regular part of your life.
This post will explain the different ways you can create a budget that works for you.
Step 4: Earn more if you need to
While it’s always a good idea to cut the fluff out of your budget, it’s also important to look for ways to earn more if necessary.
Depending on how much extra money you need, you may be able to get it by devoting a few hours a week to overtime or you can start a side hustle to earn more.
Earning more money is a completely viable option for the majority of the US population. You can take a look at some of the hundreds of different ideas already listed on this blog.
This has been one of the most important strategies for me when it comes to paying off my student loan debt. I’ve been able to make an extra $2,000 a month by selling things on eBay and starting this blog.
Step 5: Track your progress
Paying off $10,000 in one year is not easy. It will take hard work, and you may have to recommit to your goal several times. One of the best ways to motivate yourself is to continually track your progress and celebrate small wins.
When things get tough don’t give up. A year from now you will thank yourself for sticking to the plan!
Finally, make sure to reward yourself for small accomplishments. Paying off debt takes a lot of work, so give yourself a compliment every now and then!
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