Kill High-Interest Debt
High-interest debt (anything over 8%, like credit cards) is a financial emergency. In Step 2, you will halt all non-essential investing and use the Debt Avalanche or Debt Snowball method to aggressively pay down toxic debt.
Debt Snowball vs. Debt Avalanche — Which Should You Use?
There are two primary methods to attack debt, and choosing the right one depends on how you are wired:
The Debt Snowball focuses on psychology. You list debts from smallest balance to largest. You pay minimums on everything but attack the smallest debt with all your extra cash. Once it's gone, you roll that payment into the next smallest. It provides quick wins.
The Debt Avalanche focuses on pure math. You list debts from highest interest rate to lowest. You attack the highest rate first. This method saves you the most money and time overall, but requires more patience.
How Much Should You Pay Toward Debt Each Month?
Look back at your 50/30/20 budget from Step 1. The entire 20% bucket should be directed toward your target debt right now. Additionally, consider temporarily reducing your "Wants" bucket (the 30%) to accelerate your payoff timeline.
Common Debt Payoff Mistakes
The biggest mistake young earners make is trying to invest heavily while carrying 20% APR credit card debt. The stock market historically returns ~10%. If you pay 20% in interest to a bank while earning 10% in the market, you are moving backward mathematically. Kill the debt first.
Run the Numbers
Use our free calculator to see how this step impacts your timeline.
Open Debt Payoff CalculatorAction Sheet
Download the checklist for this step. Check off items as you complete them to stay on track.