Let’s start with a few simple questions relating to your debt. Do you know the month of your final debt payment? Do you know how much interest you are paying each month or the interest you’ll end up paying over the life of your debts/loans? Did you know that your debt payoff date can change drastically based on the money you throw toward it each month?
Hold up. Do you even know how much you are actually in debt?
Answering these questions is important if you ever want to get out of debt. And the best part is that answering them costs zero dollars and involves little effort.
This article introduces a framework to eliminate your debt. All you have to do is input the numbers and pick a payoff strategy.
steP 1: set up your excel spreadsheet
The game-changing moment at the start of our debt payoff journey was discovering a Microsoft Excel Loan Amortization template. If I could offer just one piece of advice for getting out of debt, it would be to use this Excel template.
In short, a loan amortization schedule is a table that shows monthly loan payments and the amount of principal and interest applied for each monthly payment until the loan is paid off in full.
What the hell am I supposed to do with that information you might ask? Find your final debt payoff date.
how to find your debt payoff date
If you have Excel, open it up and find the template section. In the search bar, type “Loan Amortization Schedule” (or download here). You will then be presented with an adjustable template with built-in formulas where you provide the inputs.
Once the template is loaded, you’ll need the following information to start:
- All of your debts or loans
- The interest rates for each
- The minimum monthly payment
Once you have this information, start plugging the total debt value into the “Enter Values” section and the “Loan amount” tab. If you have more than one debt, copy the Excel sheet at the bottom and follow the same steps.
Next, fill in your annual interest rate and if you happen to know the total length or “loan period in years” you can type that in the section as well. The number of payments per year is obvious at 12 and you can use the start date of the loan for next month.
If you don’t know your loan period value, all you need to do is type in an arbitrary number into the “loan period in years” field and watch the “Scheduled Payment” below change to a number that gets you close to what your minimum payment amount is currently. Leave the “Loan Summary” section alone as this will automatically change with the inputs.
After you input the values of all of your debts, take a look to see if everything looks right. Don’t worry about the “Extra Payment” section just yet. Keep this section at $0 for now.
Again, if you have more than one loan, all you need to do is duplicate the sheet into another tab in Excel.
Heres a sweet video I made that will walk you through everything. It summarizes the rest of the article so feel free to just watch if you’d rather see it than read it.
The Fun (Nerdy) Part
Once you have the program set up, start playing around with the numbers a bit. Here are a couple of questions I asked myself at the beginning of the debt-free journey that I found the answers to by using this tool:
- What is my final payoff date for all of my loans? When will I be free of this shit?
- How much interest would I pay if I only paid the minimum payment for each loan across the life of the loan?
- What if I updated the “Extra Payment” field to pay an extra $100-300/month? How would that change my payoff date? How much would I save in interest?
- What if when the first loan is done, I shift all of the “would-be” payments to the next loan? How much quicker would I have my second loan paid off? The third?
- Would it matter if I started with the highest interest rate first in terms of total interest rate cost? What is the total interest I would pay over the life of my loans?
- How about if I consolidated my student loans and tried to refinance to a lower interest rate? Would it be worth the hassle and cost savings during my debt payoff journey?
- Where could I cut my expenses to pay more on my debt?
- Do I really want to be a slave to my debt for X years?!
By playing around with the numbers, I realized that if I paid the minimum payment on all my loans, my payoff date would be about 10-15 years in the future. And, the interest owed during that time would be astronomical. It was obviously not in line with “debt-free by 33”.
Keep in mind, this spreadsheet reflects your current situation. Not the next huge purchase you put on your credit card. If an emergency does happen, simply update the fields!
A few words of advice before we continue
When I saw the power of what extra payments can do, I was able to more directly weigh the pros and cons of the choices of my loan payoff strategy. Consolidating my loans to lower my interest rate, extra monthly payments, and unspent money were all things I could account for and examine with this template. This template empowered me to become more focused and accountable for getting rid of all of our debts. Its what led me to shave off 3-4 years of time spent in debt.
The purpose of this spreadsheet is to serve as the inspiration you need to see the light at the end of the debt tunnel. Now that you know what your debts are and your debt payoff date, you’ll need to think about the debt payoff framework.
Step 2: pick a debt payoff framework
“Broke people ask ‘How much down & how much a month?’. Wealthy people ask ‘How much?'”Dave Ramsey
I’m sure most people have heard the name, Dave Ramsey. He has written extensively about personal finance and helped thousands of people get out of debt. I, of course, do not completely buy into everything Dave says.
He can be a bit much sometimes with his arrogant and self-righteous sounding rhetoric. But, you have to give the man credit for his massive success and non-coddling, direct demeanor he has used to millions get out of debt. The number one rule, of course, there is no “good debt.” Only debt.
Nevertheless, I was on board with this line of thinking from the beginning as it relates to paying off debt as quickly as possible. And to take it one step at a time.
You see, it took me nearly 6 years of struggling through my finances until I realized that something needed to change. And unless you make that something your one thing, its a lot tougher to stick to a plan when willpower fades.
We don’t rise to the level of our expectations, we fall to the level of our training.James Clear, Author of Atomic Habits
While you might not agree with the baby steps and think you are the exception, ask yourself, is what I’ve been doing working for me? Am I where I want to be financially? Do I even know what good financial standing looks like? Maybe it wouldn’t hurt to make a change.
The seven Baby Steps
Dave recommends 7 baby steps to becoming wealthy. Only when each step has been completed do you move on to the next one. They are as follows:
- Save a $1,000 as an emergency fund
- Pay off all your debt (except your mortgage) using the debt snowball method
- Save an emergency fund equal to three to six months of expenses
- Invest 15% of your income in tax-advantaged retirement accounts
- College funding for children
- Pay off mortgage
- Build wealth and give.
All we are doing here is focusing on the first two for now.
Don’t Complicate this
This is about the point where people may start making excuses, explain how their situation is different and point out the flaws of this method. Sure, you could do that.
You could also read hundreds of articles and books written about debt payoff and personal finance in search of the “perfect” method. You could spend time analyzing the perfect situation weighing the pros and cons trying to hack your way through this. Not fully committing to any one strategy or step.
The best strategy is the one that makes you take action and consistency and discipline are more important than the strategy. It’s about what works. And speaking from experience, I would say that this is a “good enough” strategy to help you crush your debt first and then your financial life. It doesn’t have to be forever. Commit.
The second part of Dave’s model is the snowball method. It is rooted in human psychology and was built to maintain consistent action through small wins.
What’s The debt snowball method?
If you are not familiar with the snowball method, it’s quite simple. The idea is to pay the minimum amount on all of your loans and pay extra/payoff the smallest loan first as fast as you can to completion. Then, you would use that “would be” payment you were making on the smallest loan and transfer that money to the next smallest.
The power is in the psychology of the method. You feel like you are making significant progress because you are reducing the many loans you may have and simplifying your life with fewer payments. Quick wins are where it’s at.
Having said that, the basic steps in the debt snowball method are as follows:
- List all debts in ascending order from the smallest balance to the largest. Don’t worry about the interest rate unless the balances are identical. Then you would place the higher interest rate one ahead. See the above excel setup
- Make the minimum payment on every debt as you normally would each month
- Determine how much extra out of your monthly budget can be applied to the smallest debt
- Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off
- Once a debt is paid in full, apply the “would be” payment from the old loan to the second smallest debt (on top of the minimum payment there)
- Repeat until all debts are paid in full
If you have a lot of smaller loans, poor commitment skills, and a strategy that hasn’t worked in the past, don’t discount the benefits of simplifying your life a little bit with the snowball method. In the end, if you’re busting ass the interest rate shouldn’t matter too much.
some things to be aware of
Yes, I’ve considered the most popular opposing views to the method I’ve just highlighted. You should be aware of these too because they are surely going to come up in this journey. Yet, I see and respect both equally. Here are two opposing views that kept coming up for me:
the High vs. low-interest rates debate
Many argue the effectiveness of the snowball effect from a purely number-driven standpoint regarding interest rates. I can’t say I disagree. However, I am just as easily persuaded by the psychology of paying off debts.
People are easily distracted and when they don’t get small wins and tend to give up easily. Before the start of our journey, I had spent 7 years before I made significant progress. What does that tell you?
So why not simplify it? I used the debt snowball method not because its the best way per se rather because I wanted the psychological advantage of getting small wins. Something that was clear and defined.
I realized that when you are busting ass paying debts off then the true interest paid didn’t matter much because of how quickly you’ve paid them off. The goal is to be debt-free as fast as possible and its better than the alternative.
While I have mixed feelings about the logic of completely ignoring interest rates, I won’t take a hard stance on what is best for you. Take a good look at the total amount and the interest rates of your debts. If you truly feel that it makes more financial sense to pick one with a higher balance and a higher interest rate over the other, then by all means. It’s a financial principle later in life that will serve you well.
Either way, you still snowball it.
the investing vs. paying off debt debate
This is another one you’ll hear a lot about that has a lot of disagreement on in the contest of debt. Some say you shouldn’t sacrifice your retirement funding and only pay your debt due to the power of compound interest. I have read that argument at length and again, have mixed feelings on it. I also wrote an article on it.
Yes, compound interest is the eighth wonder of the world but I don’t believe a couple of years makes a difference assuming you become debt-free and shift all your “would-be” debt payments to investment accounts to catch up and continue forward. You might feel guilty about not investing for the time being but getting your life in order before doing so might not be such a bad idea.
There is a middle solution I think is worth considering that I was forced into due to my government job. That is only paying into your retirement up to what your employer offers as a 401k match.
This is free money! If they don’t offer a match, maybe that’s a sign that postponing investment to crush your debt is more of a priority now.
Either way, when you pay off debt, stick to your budget, and live more simply, a lot changes in your life. You become more of a master of your money. You see and learn the benefit of investing in the long term which is what you will do beyond your debt-free years.
I’d like to conclude with a parable I heard from a great entrepreneur and writer (Derek Sivers, https://sivers.org). The legend of Buridians Donkey.
“Buridian’s donkey is standing halfway between a pile of hay and a bucket of water. It keeps looking left and right, trying to decide between hay and water.
Unable to decide, it eventually dies of hunger and thirst. A donkey can’t think of the future. If he could, he’d clearly realize that he could first drink the water, then go eat the hay.
Most people overestimate what they can do in one year, and underestimate what they can do in ten years. Think long term. Use the future. Don’t be short sighted. You can do everything you want to do. You just need foresight and patience.Derek Sivers
There will be a lot of complexities in your life during this period but knowing when you’ll be debt-free will keep you sane through it all.
Let this amortization template be one of the most powerful tools you have in your bag. Anything from salary increases, layoff, changed jobs, big unexpected expenses, new city, moving expenses, car troubles, found money, tax breaks/penalties, and everything in between can be planned for.
You’re smart enough to handle this even if you don’t know anything about Excel. The formulas are set for you. You are in control. Time to crush it.
Remember the following:
- Stop wasting time figuring out the best debt payoff method as a crutch to avoid action.
- Stop going further into debt by putting stuff you can’t afford on credit cards…that you do not plan of paying off at the end of the month.
- Know your debt payoff date and keep up with the inputs into your loan amortization schedule.
If you’re still with me, we have one more article to bring it together. The next step is to create a budget that doesn’t suck.