This is the sixth post in the Money Girl’s Beginners Guide to Becoming Rich. To read all posts in order, start with Change your Money Mindset then continue reading the rest of the series on this page.

Step 1: Make a List of Your Debt

Before you get out of debt, you need to know how much you have. Our first and easy financial task is to make a list of your debt to give you an overview of what you owe, to whom, at what rate etc. Hopefully, by the end of this series, you’ll have an awesome Debt Pay-Down or Debt Pay-Off plan.

Are you ready? Let’s go!

Use the “My Debt List” template below to list down your debt, balance, minimum payment, etc.

Click here for the PDF version of The Debt List.
Click here for the Excel version of The Debt List.

What should you put on your Debt List?

Write down every debt you have. Anything that you have to pay off. List the total amount remaining due for each, and the minimum monthly payment for each. Don’t forget personal debts to family and friends as well. You can create this list on a computer or just use a regular pen and piece of paper. The important part is to make sure you’ve written down every single debt you have.

Next, reorganize your debt list from the smallest total balance to the largest.

While it may be difficult to see huge numbers, this is your first step if you want to get out of debt.

Step 2: Create Your Debt Pay Down Plan

I like having plans. They’re how I get things done. Anyways, here’s the step-by-step guide to The Money Girl’s Debt Pay-Down Plan. This can be used for all kinds of debt like: credit card debt, hospital debt, personal loans, car loans, etc.

1. Stop Borrowing Money

It’s very obvious. You need to stop borrowing money to get out of debt. This decision comes down to personal responsibility and how well you can resist the temptation. It isn’t easy but it’s crucial that you do. Paying for your purchases with cash instead of credit will help you separate needs from wants, stay conscious about your spending, and make you think twice. The most common debt problem is credit cards. If you are serious about getting out of debt you need to stop using credit cards – cut them up or cancel them.

Rule #1: If you’re trying to get out of a hole, stop digging.

2. Negotiate Lower Interest Rates

Speaking of interest rates, it doesn’t hurt to call up each of your creditors and ask if they would be willing to negotiate. Explain that you are working hard on debt-reduction, and are ready to aggressively pay off that card or loan. If it doesn’t work, you may want to look into taking out a low-interest rate loan and paying off those high interest rate cards. If it’s a credit card debt, you might be able to transfer the balance of your higher interest rate credit card(s) onto a lower interest rate card(s). This is another way to restructure your debt and save on interest.

If decide to keep your current rates, you can still work the Money Girl’s Debt-Pay-Down Plan.

3. List all of your debt from lowest to highest.

I would suggest that you focus on paying off the smallest debt first, no matter the interest rate. The main reasons for choosing this method are to feel early success and have that motivation to keep moving forward.

4. Find Money to Pay Debt

Figure out how much money you can squeeze from your budget. Remember, you should still be saving while paying off debt.

5. Pay the Minimum Amount

Pay only the minimum amount required on all your debt, with the exception of the first debt on your list. This should be the card or debt with the lowest amount owed.

6. Pay the minimum and the money you squeezed from your budget toward the first debt on your list.

Here’s an example: Let’s say, you have an extra Php1000 in your budget, add this amount plus your minimum payment to your smallest debt. Continue to pay this amount each month until the smallest debt is paid off.

7. Use Unexpected Cash to help pay down the main debt you‘re focused on.

If you happen receive an additional money in the near future, in the form of a salary bonus, refunds, gift from parents, winning cash rewards or any other income boost, use that money to pay off debt at the top of you list and as well as save.

8. After that first debt is paid off, roll that amount over to your next debt as your payment.

After paying off the first debt, apply ALL the money you used each month to pay off that debt and put it towards the next debt (second lowest) on your list. This means that the minimum amount from the first, the minimum from the second, and the extra money that you found in your budget, will be applied toward the next debt on your list. For example: Your lowest debt is Php 10000 with a monthly Php625 payments each month and the second lowest debt is Php 20000 with a monthly Php1250 payments each month. Once you pay off the first debt (Php 10000), add that Php625 payment to your next payment to pay off the Php20000 loan. Since your minimum payment is Php 1250, you will pay Php1875 each month – without any impact on your current budget.

Following this debt strategy by paying down your debts and rolling over your payments to your next debt will save you years and money. I suggest you continue this cycle until you pay off all of your credit card debt. Pay off the second debt, then transfer ALL of the money you were paying each month to the second debt and apply it towards the third debt, along with its minimum.

Note: Remember, you’ll have to STOP borrowing more money and STOP using credit cards for the system to work. Once you are debt free, you’ll be able to finance your savings, retirement, and investment goals.

9. Be Patient and Disciplined: Getting Out of Debt Takes Time

Let’s be honest – it took years to accumulate that debt. Car loans, home loans, SSS loans credit card spending, shopping, eating out – it didn’t happen overnight. If you want to get out of debt, it will take discipline and perseverance. Realize that it usually takes longer to get out of debt than it took to acquire the debt.

Don’t give up! You can do this!

{Go to the next step: Build Your Emergency Fund}