Want to pay off a little, a lot, or all of your debt? Try one of these strategies to help.
When it comes to debt, there are all kinds—short-term and long-term, mortgage and medical, credit card and auto. While 70% of American household debt takes the form of a mortgage, there are nearly $6 trillion other types of debt that people across the nation must pay every month.
The takeaway? If you have debt, you’re not alone. And, it can be hard to juggle wants and needs while simultaneously planning for unexpected events. That, in turn, can lead to debt that prevents you from saving for other financial goals.
Of course, debt isn’t always bad. It helps you achieve big goals, like buying a house. And if you pay your bills on time, or always pay off a credit card debt, you’ll help build your credit history and improve your credit score.
But if you have debt you want or need to tackle, there are ways to make measurable progress. That progress may equal paying down some debt, or getting rid of it entirely. How do you start? Follow these steps to find the strategy that works best for you.
You can’t figure out what shape you want your debt plan to be without first reviewing all your debt. The details are critical too, especially interest rates and balances. List out everything, including:
- Account or debt name
- Type of debt: This may be revolving, like a credit card where the balance may change from month to month, or installment—auto or student loans, for example, with set payments and terms.
- Current balance
- Interest rate: The highest numbers here likely come from credit card debt, if you have it. The average annual percentage rate, or APR, usually hovers above 20%.
- Payment terms or length of loan: For revolving credit, you can note the payment due date. Installment debt is typically expressed in months.
- Minimum monthly payment
You can inventory your debt however you like, from a spreadsheet to an app. If you need help getting started, try our debt management worksheet (PDF). Or, log in to your Principal.com account and navigate to your dashboard. Scroll to the bottom for a free budgeting tool.
No debt payoff plan will work if you don’t have a good handle on your budget. It’s key to the next step (your debt payment potential). To do this, spend some time with your budget. Is most of your current debt as a loan that you pay off in regular installments? If so, it should be part of your budget already. Or, have you had some unexpected debt that you had to shift to credit cards, which has led to you paying off a never-decreasing balance every month?
Wondering how much debt is okay to have? According to Heather Winston, director of individual solutions at Principal®, there's a helpful rule of thumb: Try to keep your debt payments at or below 36% of your income before taxes. This means if you add up all your "must-pay" monthly debts (like your mortgage, car payment, and student loans), the total should be no more than 36% of what you make each month before taxes are taken out.
For example, if you make $4,000 per month before taxes, your total monthly debt payments should ideally be no more than $1,440 (which is 36% of $4,000). (Search for “debt-to-income calculators” for free online tools.)
Once you’ve looked at your budget, you’ll have a better sense of two things:
- How much you’re paying each month toward debt you have, and how long the debt would take to pay off at that rate.
- How much extra you might be able to put toward debt balances, outside of those payments.
Unsure how to trim your budget to put even more toward debt? Use these budget building insights for help.
Say you have an auto loan that’s $250 per month. But you just have four months left before it’s paid off, and you’re already allocating the necessary funds toward that bill. Is it worth it to you to pay it off quicker? Or, would any extra funds you have be better put toward a lingering credit card balance?
That’s up to you to decide and there are any number of ways you can pay off debt more quickly. Which you choose depends on what’s most important to you, what helps you feel more secure about your financial foundation, and what motivates you to keep going. Here are three common debt payoff strategies.
| Debt payoff | What you do first | Then, what's next | The reward |
|---|---|---|---|
| Snowball | Pay the smallest debt as fast as possible. Pay minimums on all other debt. | Pay that extra from the smallest debt toward the next largest debt, and so on. | A quick payoff is a quick win to help boost confidence. |
| Avalanche | Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt. | Pay the extra from the largest/highest interest debt toward the second largest or high interest debt. | Paying off a big debt can boost a feeling of control and gets rid of big interest. |
| Consolidation | Combine debts into a single account. | Avoid any other debt until post-payoff. | One account may increase focus. |
As you review strategies, think about what motivates you in other areas of your life. That same drive can help you stay focused on paying off the debt you need and want to pay off.
Your debt payoff plan may focus on just one debt—or all of them. Whatever the case, what you do after you pay off debt matters almost as much. How will you stay on top of your income and expenses, and avoid too much debt when possible? Some ideas include:
Carefully consider new debt. Do you need something, or do you want something? If it’s the latter, remember that debt you take on today may impact what you want to do tomorrow. If you need help deciding, see how the new debt would affect your debt-to-income ratio. “The key is to figure out the right level of debt for you,” Winston says.
Can you save up instead of taking on debt? Perhaps you really want a new TV. That’s OK. Can you set a budget, give yourself a time goal, and save cash instead? That may motivate you to trim expenses so you can make the purchase sooner. It can also give you time to consider other options or find better deals.
Pay more when you can. Progress, even in small amounts, can help reduce either the term of an installment loan, or the total interest you pay on revolving credit.
Build emergency savings. About one-third of Americans
What's next?
Is debt affecting your ability to save for future goals, like retirement? Log in to your Principal account to see how you’re doing. Don’t have an employer-sponsored retirement account? We can help you set up your own retirement savings with an IRA or Roth IRA account.
