This blog post is for:
- New grads who want to pay off their debt quickly!
- Anyone who wants to pay off their debt on a modest income
Let’s assume you are a new college grad, have a starting salary of $48K, and have $65K in debt, including $50K in student loans, $7K in credit cards, and $8K on an auto loan.
Here are the steps I’d take to pay off this debt.
1. Increase income: Get a side hustle! Let’s say on the weekends, you can shop for Instacart and conservatively earn an additional $500 per month.
2. Pause or reduce investing: The credit cards are charging a very high interest rate, and the debt is eating up almost a quarter of the total income, so it’s important to pay this off as soon as possible. I would temporarily reduce investing to $100 or even $0 until the debt is paid off.
3. Reduce expenses: Here’s what I would propose as a revised budget:
4. Save up a starter emergency fund: Stop adding to the debt! You won’t be able to stop relying on credit without first having some savings set aside. Let’s say you save up one month’s income, $4,000. With $1,340 of additional cash flow, this would take 3 months.
5. Pay off debt using the
snowball method: With the debt snowball, pay off from smallest balance to largest balance, throwing all extra dollars at the smallest debt and paying the minimums on the rest, and then rolling the dollars into each subsequent debt. (For simplicity, this example does not include accrued interest but is meant to get ahead of interest.) Here’s what that would look like:
This example shows it is possible to pay off $65,000 on a $54,000 income in less than 3 years! If this new grad could live at home while paying off debt, this would be reduced to just 2 years!
Imagine what a gamechanger it would be not to have debt hanging over you and to be able to invest a greater percentage of your income starting in your 20s!
If you’d like to partner to strategize on paying off your debt quickly on a modest income, visit MakingMoneyIsSimple.com to get started with a free consultation.