Stop Adding More Debt Right NOW!


Debt is a normal part of life for many people, especially younger adults who are just out of school and starting careers. Debt also has the habit of making our lives miserable once “enough” is accumulated. As a society, consumers are encouraged to buy and credit is easily obtained. Credit seduces borrowers into spending beyond their ability to repay. But if you want to reach financial independence, you should not be like the rest of the population and stop adding more debt right now.

A second pitfall of using credit to make purchases is the amount of interest that accumulates can significantly add to the original purchase price. Consider the purchase of a car for $20,000. The loan is at 8% interest rate. Paid over 4 years, this will result in $3,400 in interest charges. That same loan paid out over 7 years will result in almost $6,200 interest. The true cost of the car is the total of the original purchase price plus all the interest charges. Do you really want to pay that much?

The Plan for Paying Off Current Debt

I would suggest as the easiest method of dealing with debt to list all the debts that you have, the amount owing, the type of loan, the interest being charged, and the monthly payment.

Bill, for example (I have NO debt so I can’t use myself as an example) is a thirty year old teacher who lives alone. He has purchased a home and has done kitchen renovations. He also has a car loan, credit card debt and a student loan. He finds that money is really tight and wants to turn things around. So he decides to review his finances. He starts by listing his debts – the first and best step to seeing the big picture.



Amount Owing


Monthly Payment

Term Left






25 Years

Kitchen Reno

Bank Loan




4 Years


Manufacturer Financing




3 months


Credit Card



$150 min.



Credit Card



$200 min.


Student Loan

Bank Loan




7 Years

So we can see that in Ben’s case, monthly debt payments alone exceed $2200 per month. Basically, he’s throwing away a nice vacation MONTHLY. This is the cost of debt if we want to look at it that way.

The second part of the process is to itemize their income and expenses. Which would look like this in Ben’s case:

Monthly After-Tax Income


Debt Repayment


Groceries / Gas for Car


Heat / Light


Cable / Phone / Internet


Car Insurance / Household Insurance






Bill’s monthly expenses total $3794, a shortfall of $294 every month. Bill is clearly living beyond his means. Something has to change or he is headed for bankruptcy. Either his spending must be reduced, or he will have to come up with extra money.

Bill considers taking in a room-mate but instead opts to take on a part-time job on weekends which adds a monthly after-tax income of $600. In addition, he spends less on entertainment, just $200 per month. He is working most of the weekends with his part-time job and does not have the time to go out.

Now Bill’s income less expenses creates a small surplus of $500 instead of a shortfall of almost $300. How can this money be best used to pay down existing debt?

Normally, the loan item with the largest interest charges would be addressed first. However, in Bill’s case, the car loan only has three payments left. If the extra $500 is applied to this loan, that debt will be removed in two months. This now leaves $900 extra dollars extra for debt reduction.

The next two items are the credit cards because of the high interest rates. The first to be addressed should be the Visa. With $900 plus $150 minimum, the Visa will be paid off in five months. Now there is $1050 to use towards the Mastercard bill. $1050 plus $200 minimum gives $1250. The Mastercard bill can be repaid in less than seven months.

It takes Bill just over a year to get household finances in order. By working a part-time job in addition to the regular job added extra income. Monthly debt payments are reduced by $750. If he continues to work the part-time job, his monthly income will be $4100 and his monthly expenses have been reduced to $3000 leaving a surplus of over $1000 that can further used reduce debt.

Continuing this plan, the kitchen reno would be next to be paid down and finally the student loan. If Bill continues with this plan, it will take about 4 years in all to be pay of all debt, other than the house mortgage. A situation that would otherwise seem impossible to get out of becomes just a mistake of the past. This is the great thing about debt: it’s a mistake that you can undo if you are motivated!

A different approach

Of course, not everybody would find the option of getting a second job as a real option. However, all is still not lost: Bill could easily cut down the costs of some expenses: for one person, groceries and gas at $450 is pretty high. He could easily cut $100 to $150 per month here. Clothing is no longer a priority because Bill does have enough clothes, just like all of us, so a minimum decrease of $150 is easy to achieve. Bill also spends too much on entertainment, just like all single guys do. We won’t be that harsh on him here and will only cut the costs by $100 (although it could go lower). So without getting a new job, Bill can still cut down costs and save $60 per month. Not as good as the extra $500 as in the first example, but better than adding more debt. And even though it will take longer, all debt (excepting mortgage) will be paid a lot sooner.


The true cost of purchasing items on credit can be more costly than one can imagine. Not only do interest charges increase the true cost of items, but if debt is not addressed quickly and effectively, the borrower risks losing everything to bankruptcy. Stress experienced by the borrower can lead to health issues so we can consider debt (or at least excessive debt) a real plague.

In dealing with debt, it is important to commit to a plan and be disciplined to follow the plan. Plan to pay debt off as quickly and start doing it right now. Don’t add more debt just because everybody does!

[image by Friends of the Earth]


  1. Paying off the ‘smaller’ debt step by step is indeed a great idea. And making an effort to clear as much of it as possible. It’s really sad to look at your paycheck each month and realize a huge chunk of it goes to the bank.

  2. My favorite part of paying off debt is that it builds the skills of budgeting, living below your means, tracking expenses, and builds general personal finance knowledge. Once the debt is paid off, the skills remain, and that individual is now in a situation wherein he can save huge sums every month just by continuing what he’s doing.

    Good post: it’s good to see a case study illustrating the impacts of debt on a budget.


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