How to Manage Debt Effectively (6 Tips For Debt-Free Living) 

This is a guest post from Miguel at The Simple Paradise

Are you struggling to pay off your debt and feeling overwhelmed!?

Are you looking for a solution to your debt troubles and want to know how to manage your debt effectively? 

Managing your debt and paying it off effectively is all about managing your behavior to prevent getting into more debt and creating a solid financial foundation with a strategy in place to pay off your debts over time.

I’ve paid off nearly $20k of my $26k student loans balance as well as a few thousand in credit cards over the past 3-4 years and have used these strategies to help fix my finances and get on the road to being debt-free! 

If you’ve really had a tough time staying on top of your debt and have anxiety from it looming over you, don’t worry! 

I’ve felt the stress of being underwater with multiple debts, but I’ll show you how you can take steps to not only pay off your debt effectively but also stay out of debt and build a great financial foundation that you can build on moving forward! 

How to Manage Debt Effectively:

Good Debt vs Bad Debt

Before we begin our debt-free journey and learn how to manage our debt effectively, we need to understand that not all debt is the same. 

Obviously, staying out of debt is better than having any debt if we can help it!

However, in life, there are large purchases/investments that usually require that we go into debt.

Good Debt

According to Investopedia, good debt can be anything that will give you higher earning potential, increase your net worth, or even enhance your life.

These good debts can include:

• Mortgage: Allows you to buy a house and build equity. This can increase your net worth and give you ownership of a tangible asset that will be appreciated over time.
• Student Loans: A college degree can help you build the necessary skills for your field of study and increase your earning potential. This can ultimately allow you to have a job you enjoy/want and allow you to afford a good lifestyle. This can enhance your lifestyle despite the debt you take on. 

• Starting a Business: Starting a business isn’t for everyone but can pay off significantly if you can make it successful. This can allow you to fulfill your passions as well as increase your earnings potential. Lastly, the added freedom you can potentially have can increase your overall happiness depending on the business you have. 

Bad Debt

Now that we understand what good debt is, let’s take a look at bad debt. If you’re reading this, then let’s assume you already know some of them.

In technical terms, Investopedia defines bad debt as: “money you borrow to purchase a depreciating asset.”

However, in plain terms, bad debt is when you buy things you shouldn’t with money you don’t have. 

These bad debts can include:

• Credit Card Debt: I feel like this is something we all inherently know, but to put it in perspective, credit card debt is the worst of all because it harms your credit score, and the interest rates are sky-high! For example, the Discover It Credit Card has a variable interest rate of 17.24%-28.24%. If we do the math and use 28% APR with a balance of $4,000, you would be paying around $93 in interest each month, but most likely more if your balance keeps rising. That’s not even the principle, so on top of paying down your original $4k, you are now stuck paying insanely high interest rates. 

• Shopping/Clothes: There’s not too much math involved with this one, but we all know why it’s bad. Shopping for things we don’t need can already be troubling if we’re looking to live a minimalist lifestyle, but it can damage your finances severely if you aren’t at least budgeting for these purchases. 

• New Car: Finally, cars are great for convenience and taking you places, but they are terrible when it comes to growing in value. In fact, cars lose their value the minute you turn your new car on (or push to start, depending on your year and model) and drive it off the lot. A car is the definition of a depreciating asset. In addition, a bad interest rate can give you terribly high monthly payments that eat away at your paychecks. If you finance, you want to find a loan that has 0% interest. But if you have the money saved, it may be best to pay in full. 

How to Manage Debt Effectively (6 Tips For Debt-Free Living) 

1. The Snowball Method

Now that you understand the different types of debt, it’s time to go over the methods to get out of your debt. 

First, the Snowball Method for paying off debt is based on paying off the smallest debt first and then adding what you were paying onto the next smallest debt. With each debt you pay off, your payments “snowball” into bigger payments.

This way, you build momentum and confidence that you’re making progress. 

This method is more behavior-based and can work if you feel your debt is overwhelming and you need to see little wins and progress. 

Otherwise, it might feel like you’re not making any dents. 

2. The Debt Avalanche Method

Next, the Debt Avalanche Method is all about paying off debts with the highest interest rate first. 

This method is technically the most efficient/fastest way to pay off your debt mathematically. 

Even though the avalanche method is the fastest method on paper, it is sometimes not ideal, depending on your debt tolerance or preference.

For example, you may have a small debt payment, say $200, with a lower interest rate compared to another debt that is a larger sum but a higher interest rate…

For some, the logical thing to do is just pay off that smaller amount in full even though it has a lower interest rate. 

This is where behavior and debt tolerance come in, and you can choose which method/methods you want to use to tackle your debt.

Obviously, there’s no right or wrong way to pay off your debt; you just need to find a strategy that you can stick with and use both methods if you can’t decide. 

Helpful Tip: Use a combination of both methods for different financial situations you find yourself in! The Avalanche method works well with credit cards and student loans, but the snowball method may work better when those debts are paid alongside car payments with lower monthly amounts. It may make more sense to pay off a small remaining balance if you can despite its interest rate if it means getting rid of a separate debt in some cases.

3. Managing Your Money is About Behavior

If you want to manage debt effectively, you need to understand that your finances are linked to emotion and behavior. 

Shopping therapy is a real thing and can be troublesome because you get a good feeling when you order online or make purchases.

These types of consumerist habits that get you into debt are caused by the feeling you get from wanting to own what you see. 

So, if you want to know how to reduce bad debts, you need to learn to curb your behavior and embrace a mindset shift. 

This mindset shift should consist of cultivating a mindset of:

• Saving more money
• Frugal minimalist living
• Planning for future large purchases
• Planning to donate if you can/want to
• Creating financial goals

It’s easier to reach your destination if you know where you want to go!

If you have financial goals to work towards and a way to achieve them, you’re much more likely to stick to your plan and go through with it because you know there’s something better on the other side. 

It’s vital that you stop getting yourself into more debt if you can help it, especially if your debt is mostly behavior-based, such as shopping, etc. 

It makes no sense for you to put in the effort to manage debt effectively only to get yourself back into a hole all over again. 

So, let’s learn how we can stop the bleeding and fix this leaking bucket!

Creating Your Strategy

When it comes to changing your money mindset and creating better spending habits, there are some steps you can take to make this happen.

One of the best ways to become debt-free is to embrace simple living or minimalism and spend money on needs while budgeting carefully for wants. 

This will help your intentionality and help you to plan your spending instead of spending impulsively.

Next, Create a budget and learn to track your expenses. On a practical level, this will help you to see where your money is going and help you to identify your pain points. 

These pain points in your budget are the areas where you tend to spend the most money, not including needs/bills.

Where do you spend money the most each month?

• Clothes shopping?
• Food? 
• Entertainment?

If you find you are spending way too much in the “wants” department, then it’s time to make a change!

4. Build a Solid Financial Foundation

Now that you’re on the right track with creating a solid mindset around your finances and have started to make some changes, it’s time to build a solid foundation for your finances!

Even though your main goal is paying off your debt effectively, you need to ensure you don’t have a financial house of cards and can sustain your positive financial habits for the future.

First: Start an emergency fund. This should normally be around 3-6 months of living expenses. But you can start small first. The point is to have money saved for any type of emergencies that may arise and prevent you from getting into more debt. 

If your baseline monthly expenses are $2,500, then save around $15,000 for a 6-month emergency fund. 

This way if anything happens with your job or any medical emergencies arise, you hopefully won’t need to go into debt in order to cover the costs. 

I recommend creating a separate savings account with a different bank than your primary checking.

This way, you won’t be tempted to use any of this money, and you won’t be able to see it regularly. 

Next, Invest in a way to track your debt payments. You can find tons of different Etsy shops that sell debt payoff spreadsheets completely made for you and ready to go. 

5. Make Debt Payoff Goals

Setting debt payoff goals is one of the final steps in learning how to manage debt effectively. 

Making debt payoff goals is GREAT because they help you:

• Stay motivated and eager to pay off all of your debt ASAP
• Keep track of your progress 
• Remember your “WHY”

These debt payoff goals don’t need to be fancy but can be as simple as paying $300 towards one of your debts every month or paying off your debt by X date, etc.

Whatever debt payoff goals you choose, make them attainable and realistic!

Once you’ve created your debt payoff goals, think of all of the great things that come from paying off your debt…and how it can improve your life!

How can paying off this debt improve your life? 

• Reduce stress/anxiety
• Donate to causes you believe in
• Give you more freedom/flexibility
• Allow you to save more and reach your financial goals

6. Make Financial Goals

Lastly, we want to make financial goals to motivate us for our financial future!

Along with debt payoff goals, these financial goals are the motivating factor to push you to have a better life and a better relationship with money.

Jot down what you’ll be working towards saving for:

• New House
• Vacation 
• Car
• Donate to charity

Final Thoughts on How to Manage Debt Effectively (6 Tips For Debt-Free Living) 

I hope you enjoyed this post and found these debt payoff tips helpful! 

I’ve struggled with my finances and wish I had known a lot of this financial education sooner.

So I definitely understand what it’s like to be in a hole, unable to manage shopping habits and uncontrollable spending. 

Give any of these tips a try, and good luck on your debt-free journey! 

About Me: My name is Miguel, and I’m a simple living and budget spreadsheet advocate! I have a degree in communications from Penn State and enjoy writing. I’ve been decluttering my life since 2018 and love everything related to simple living. I aim to help you learn how to live a simple life, become intentional with your spending, and manage your money right! Check out my blog here.