Even before Covid-19 hit, America was already famous for our crushing personal debts. The Center for Microeconomic Data (CMD), which compiles and publishes dates for the Federal Reserve Bank of New York, recently had this to report:

The CMD’s latest Quarterly Report on Household Debt and Credit reveals that total household debt increased by $193 billion, or 1.4 percent, to reach $14.15 trillion in the fourth quarter of 2019. This marks the twenty-second consecutive quarterly increase, with total household debt now $1.5 trillion higher, in nominal terms, than the pre-recession peak of $12.68 trillion, set in the third quarter of 2008.

Over $14 trillion in mortgages, car payments, student loans, credit card debt, and all sorts of other obligations. It wasn’t that long ago I would have been sure about half of that was mine, then wondered who was in the hole for the other $7 trillion. Maybe you can relate. If it helps, you’re not alone – there are plenty of Americans worried about their ability (or lack thereof) to pay off debt.

Stimulated Reality

The Federal Government recently decided to mail qualifying American taxpayers stimulus checks of up to $1200. As I write this, they’re just starting to show up and people are discovering that debt collectors read the same newspapers and watch the same TV news they do. As CNN and dozens of other major outlets are reporting, collection agencies are waiting in the wings to grab that money to pay off debt you already owe whether that’s what you wanted to do with your stimulus or not:

Millions of people received their stimulus payments from the federal government. However, some of them are at risk of immediately losing the money if they owe medical, credit card, or private student loan debts.

A loophole in the law could mean some of those who are most in need of emergency aid doesn't get the money. About 33% of people in the United States have debt in collections and could be impacted, according to the National Consumer Law Center.

There are some limits as to what the money can and can’t be grabbed to pay for, but it’s nevertheless a sobering realization – many of us are so in debt that we can’t even be stimulated by the Federal Government effectively. Er… as it were.

Debt Elimination in the Time of Corona

Since times are already pretty weird, we might as well add some crazy of our own. I’m going to suggest to you that no matter what your debt situation, no matter what your current fears or challenges, there’s no better time to get serious about paying off debt than right now.

I know, I know – I must be insane, right? But hear me out. If it turns out I’ve completely jumped the shark, you can ignore me and get back to your lockdown. I don’t think it’s all that crazy, however. In fact, it may be even more important than ever to pay off debt, or as much of it as we can, if we’re going to make it through the coming years.

My colleagues at Debtry have already compiled several great resources for specific ways to pay off debt and stay out of debt. I find that simply reading through them periodically does wonders for my focus. I highly recommend ALL of them.

For today, however, I want to zoom out a bit and talk about some general principles for how to pay off debt – the philosophy required to do it and stick to it. The methodology is out there – on Debtry and other Goalry blogs as well as innumerable other sites. What we need is the mindset and commitment. The best way to pay off debt is to first change how we think about it, then apply the specific strategies and tools. The best way to pay off debt is as part of a larger effort to take more effective control of our personal finances overall.

Necessity is the Mother of Reduction

There’s an old proverb that “necessity is the mother of invention.” The idea is that sometimes innovations come out of need more than genius. Interchangeable parts, Velcro, even the modern mortgage, were all born out of problems that needed solving. (Look them up if you don’t believe me.) At the moment, most of us are facing at least two specific worries – we’re worried about our health, and we’re worried about our finances.

There’s plenty of advice out there about taking care of your health and minimizing your chances of getting or spreading the Coronavirus. There’s less talk about how to manage and protect our finances at the moment.

Take Care of Your Finances

While money comes in second to your health in terms of overall importance, it’s still a pretty big deal. Money isn’t everything, but it matters whether we want it to or not, so let’s prioritize ways to pay off debt and build up a small emergency fund if you don’t already have one. The best way to start building up an emergency fund is to open a savings account. So, if a savings account is something you're seriously considering, start looking here:

The Debt Dilemma

I realize it’s counterintuitive to focus on ways to pay off debt when so many of us are worried about even keeping our jobs or paying our bills right now. Some of us are currently just thankful we have the credit to use – that we can keep the lights on and food on the table, even if it means running up some credit cards or tapping into other resources. I’m not criticizing anyone for doing what you gotta do. I’m the first to insist that DEBT IS A TOOL and that it allows us to do things we’d often be unable to otherwise.

The reason most of us can buy a house, drive home a new car, pay for our daughter’s wedding, or go back to school, is because strategic debt allows us to. I’m not happy when my washer and dryer give up the ghost, but I’m thankful I have the credit to replace them promptly and pay for them over time. Most folks would agree that the right mortgage is a healthy form of debt. Credit cards can be good debt, but become bad debt far too easily. And as a nation, we’re nowhere near agreeing on how to handle, or even think about, student loan debt.

As appealing as debt free living often sounds, I’m not sure it’s practical, or even desirable, for most of us – not completely. There are highly qualified folks who disagree, but I don’t think all debt is evil. Like bacteria or cholesterol, there are good types of debt and bad types of debt; it’s just that the bad ones get all the press.

But…

Debt can quickly take over. It’s designed to be a servant, but it wants to be in charge, and often, it manages to swap places with us. Instead of working for us, we begin working for it. When we use debt to get what we need, we end up with a nice home, a reliable vehicle, a working washer and dryer. When debt uses us, we pay and pay and pay but it never seems to get smaller or go away.

Sound Familiar?

We need to do everything we reasonably can to reduce our debt and strengthen our personal financial situation. You know all those tips we like to offer about cutting your expenses? Lowering your utility bills? Renegotiating your cable, internet, cell phone, or other ongoing services? It’s time to revisit those. Many of us have too much time at home right now anyway. Time to start that online chat or pick up that phone and find out if you really can save 15% or more or whether it’s time to switch plans or reduce services.

That vacation you had planned? The big wedding you wanted to remember forever? The bathroom that desperately needs remodeling? Unless you’re currently debt-free and have plenty of money in savings just begging to be set free and stimulate the economy, this may not be the time. In such an uncertain climate, it’s dangerous to put yourself further in debt if it’s not absolutely essential.

There’s simply no reason not to do this, even though it’s not always much fun. You can use pen and paper, but a generic spreadsheet on your computer gives more flexibility and looks more legit. Start by listing all of your reliable income, and estimating any income which changes from month to month. Then detail your expenses – house payment, car payment, utilities, credit cards, groceries, gas, medical bills, etc. Ideally, you should be able to look at your total income last month and subtract the expenses you listed. The amount left over is exactly how much you have left in checking or you moved to savings recently.

Yeah, it didn’t exactly turn out that way for me the first time, either.

That’s one of the main points of making your budget. It’s not so that anyone else can tell you what to do with your money. What it does, however, is force us to be specific and honest with ourselves about just where our money is going. You can tell me what’s important to you all day long, but it won’t mean nearly as much as a spreadsheet showing me where your hard-earned money is actually going each month. You’re not doing it for me; you’re doing it to better inform you.

Make It a Habit

The first time you try to account for your expenses, you may end up realizing there are hundreds of dollars that you’re not quite sure where they went. Planning for next month’s spending is tricky at first as well – utilities change, unexpected events occur, and we’ve all been buying more groceries lately. But you’ll get it, as long as you commit to spending a few minutes with your budget every week. I find it helpful to set a reminder on my phone. Saturday mornings at 6:30, when I’m already through several cups of coffee but no one else is up yet, it’s time to do my checkbook, pay a few bills, and update Budget2020.xlsx.

That’s what I’m talking about when I say the best way to pay off debt starts with habits and mindsets rather than tricks or tips. The specifics matter, but not until the principle is properly established.

This builds on the budget you’re making. If you’re going to pay off debt, it’s going to take focus. That’s not the same as saying it has to take up all of your time and energy every day. Like losing weight or building better relationships, however, it requires changing some habits and some mindsets. Even before the recent craziness, life is usually complicated and busy enough that we don’t always make the best decisions when it comes to a few dollars here and another charge or two there. This is a great time to take a breath and revisit the basics of debt elimination. Even if you already know you should be doing some of these, it’s helpful to revisit them as often as necessary until they’re almost automatic.

As we mentioned above, the big things matter. Taking extra time to find the best auto financing, deciding whether or not to borrow money to go back to school, figuring out whether to pay someone else to remodel the bathroom or whether you can do part of it yourself – these are all huge decisions and will impact our budget for months or years to come. But we KNOW this going in. We might benefit from more options or more information (two things Goalry is all about providing), but we take this sort of debt pretty seriously already.

Bears are scary, but they’re big and obvious and you can prepare yourself to handle encounters calmly and rationally. It’s different when you’re dealing with mosquitoes or bees. The bear’s matter, but the bees and mosquitoes cause far more problems for most of us, and far more often.

It’s the little things that are often hardest to change – like renegotiating your cell phone plan or cable bill, or paying attention to utility usage, or avoiding cash withdrawals because it’s harder to keep track of what you spend that way. My wife and I realized we could save over $30 a month just by being intentional about eating leftovers. I make a mean pot roast, for example, and there’s always some left over. It used to go in the fridge for a few weeks until we remembered it and threw it away because it was old at that point. Now when we plan meals, it’s a given that the night after pot roast will be sandwiched using the leftovers. We buy special buns and sometimes there’s even cheese involved.

Is the solution to all of your woes… pot roast? Maybe I could write a book: Pay Off Debt With the Pot Roast Method!

Probably not. But that $30+ a month is nearly $400 a year. Even that may not sound like much by itself, but imagine finding that sort of savings in five or six different places – now we’re talking $2000 or more. What would that do to help you pay off debt on your credit cards or other outstanding obligations? Not only would it lower your balance, but now you’re paying less interest because your balance is lower. Suddenly, we’re getting some momentum. Plus sandwiches.

If we’re going to pay off debt, it’s going to start with a serious and ongoing look at all the little places our money is going. As we address each, we’re changing our mindset and building better habits. Note in my example that the solution isn’t that we’re skipping meals or starving or living on rice cakes. We’re simply being more intentional in a variety of little ways. These start to add up, and pretty soon big changes are underway.

We read up on how to get buns of steel. We research how to unclog a stubborn bathtub. We’ll even watch YouTube videos on properly replacing windshield wipers. If you want to pay off debt utilize the resources available. I value the encouragement as much as the actual information. If you’re not sure where to begin, I LOVE “Seven Common Mistakes People Make When Paying Off Debt” by my colleague Kevin Straus. I keep it bookmarked for when people ask me how to get started. There’s even a video summary embedded in the post itself. You’re welcome.

Now you’re on your way towards better choices for the big stuff and better management of the little stuff.

Conclusion

The best way to pay off debt? Don’t quit. Every step forward matters. Take one more.

Mindset. Education. Intentionality. And finally, Endurance. Maybe it's big stuff - refinancing, debt consolidation loans, etc. Maybe it's little stuff. Usually, it's both.

You got this. Let us know if we can help.