People can carry varying types and amounts of debt. Some of the more heartbreaking situations I hear about are from folks that are carrying 6-figures worth of student loan debt, only to then feel trapped in soul-sucking jobs for years in an effort to pay it off. Sadly, this reality is a common one, and I feel like it's a little too normalized now. If you're committed to reaching FIRE and one major project is to pay off your debt, I've outlined 10 steps below.
(1) First, determine how much your total debts are.
Write out every credit card, student loan, personal loan, mortgage, IOU, etc. If you need a helpful place to consolidate this, I've personally found Empower (formerly named Personal Capital) helpful. (Not paid or sponsored by them, just really appreciate the fact that it's free and has a great dashboard.) Take note of the amount owed and the interest rate charged.
(2) If you haven't already done so, establish a budget.
Please do not skip this step. As important as it is to free yourself from debt, it is also critical that you pay yourself first. If you need guidance, I've written a blog post on developing a budget.
(3) Decided on an order for payoff.
My strong recommendation is to order this by the highest interest rate, aka the debt avalanche method. However, some folks might need a psychological win by starting with the smallest and working their way up (aka the snowball method).
(4) Determine how long it will take to pay off these debts.
This is especially important if you're currently only paying down the minimum amount owed each month. Learning the length of time of debt payoff can be accomplished using a debt calculator. There are plenty of free ones online, and the one that I've found most helpful is the Debt Payoff Planner app. (Not sponsored by them, just want to give a shout out given how helpful it was!)
If you plan to use the debt avalanche method, I recommend using this debt payoff calculator as it gives a good breakdown and instructions. Below I've included an example of using the debt avalanche method paying just the minimum amount versus adding an extra $100 payment per month.
Paying the Minimum Amount Only
Paying the Minimum Amount PLUS $100 Extra Per Month
I would argue that knowing the length of time it'll take to pay off your debt is more important than knowing the total amount of debt that you owe, especially if your goal is FIRE. A lot of people I know (myself included) would much rather have more time than more money. Calculating the numbers can feel incredibly discouraging when you see how many months or years it'll take to pay off not just the principal, but the interest alone. Please know that whatever feelings come up -- shame, guilt, anxiety, etc. -- are normal. These emotions do not have to determine your future reality. You can absolutely work through this.
(5) If possible, reduce the interest rate.
The most immediate step you can take here would be to contact your credit card company or loan provider to see if there is any way that they can reduce the rate. (This doesn't always work, but it never hurts try.) Another option would be to consolidate your debt for an option with a lower interest rate. This option also carries its own pros and cons, so I'd only recommend this if the benefits outweigh the drawbacks.
(6) If you haven't already, find a way to reduce overall spending.
If you don't already have a budget, take the opportunity to track spending for one full month. This will give you a decent idea on how much you spend on fixed expenses (such as rent, utilities, and subscription services) and variable expenses (such as gas, groceries, and clothing). If you only use cards to pay for things, print out your last month's statements to get a good idea of your spending. Use different highlighters to note what were your needs, wants, and emergency expenses.
(7) Find a way to increase your income and devote the extra pay towards debt payoff.
I've covered some recommendations on increasing income in a previous post on budgeting, including the following:
Negotiate higher pay and/or search for a higher paying position.
Take on a side gig.
Sell items that you no longer use.
Rent out your car or a room in your home.
If you're already feeling burned out with work, aim for an approach that feels sustainable. It may be unrealistic to, say, work 7 days a week if you already have other demands on your plate. Your end goal is FIRE after all, and I imagine that you would like more of your time back. Remind yourself that debt payoff is a temporary situation. It can be shortened with higher payments (and more work) in the beginning. This will not be a forever state.
(8) Continue to put money towards your emergency fund.
It may be tempting to devote whatever funds you have available to your debts and to not save any money for yourself. No matter what debts you have, I strongly urge you to save money for yourself. I'd recommend FIRE-friendly accounts such as funding your 401(k) up to the employer match or maxing out your HSA. However, if there is only one account that you save in, please make it your emergency fund.
If you need more guidance on this, I've written a post on building an emergency fund.
(9) Keep going until the debt is gone.
Please be patient with this process. Remember that wherever you are in your debt journey, it will take time. Make space for any emotions that come up. Then, redirect yourself to your plan.
If you notice strong feelings of discouragement, try to practice a bit of gratitude for what you do have right now. In her book We Should All Be Millionaires, one exercise that Rachel Rodgers recommends is writing a letter to your debt. What, if anything, did it allow you to do? As strange as it sounds, can you identify any good that your debt provided you? These can include powerful lessons, joyful experiences, a lifesaving medical treatment, or a degree.
(10) Once the debt is gone, commit to staying out of (bad) debt.
I would categorize "bad debt" as any debt taken on for a resource that cannot be recovered or does not support building your wealth. Unless you have a high net worth, it might be unavoidable to purchase assets, such as a home, without a loan. However, keep your goal of financial freedom in mind and do your best to stay out of bad debt.
Feel free to share any tips on getting (and staying) out of debt.