Advertising Disclosure

Debt Free Step Two: How Much Debt Do You Have?

Are you so in debt you ignore your bills? And even if you’re still paying them, when is the last time you looked beyond the minimum payments? If you seriously want to get out of debt, you need to face the ugly numbers…

The second step in my Debt Free in Seven Steps system involves composing a clear picture of the debts you want to get rid of, any assets you are willing to liquidate to make debt payments, and your monthly cash flow. You will want to have copies of your most recent credit card and loan statements, bank or investment statements, and a pay stub. A calculator and pen and paper will also be helpful. Ready?

Prioritize your debts
Begin by writing down the most recent balances of each of your debts. Next to that balance write the annual percentage rate (APR) you are paying on that account, and, if applicable, the minimum monthly payment. (Not sure where to find your APR? Look at the bottom of your credit card statements where it says “finance charges”. You should see a column that says “corresponding annual percentage rate”.

There are myriad ways to prioritize your debts. Some people recommend simply paying the balances with the highest interest rates first. This will save you the most money. Others, like Dave Ramsey, recommend starting with the smallest balance first, because paying that off first will provide some motivation to keep going. If either of these methods seems right for you, then go with it.

As an alternative, here’s a simple method that directs you to pay-off the card with the highest balance to minimum payment ratio first. It’s like the best of both worlds.

To calculate this ratio divide each account’s balance by the minimum payment. You will then pay the card with the highest ratio first. For example, with the following three credit cards you would want to dedicate additional money to pay off the MasterCard first, followed by the Discover and Visa cards. If two cards have very similar ratios, pay the card with the higher interest rate first.

Debt One $4,832 balance / $65 min. payment = 74.3
Debt Two: $2,191 balance / $40 min. payment = 54.7
Debt Three: $8,392 balance / $165 min. payment = 50.8

In this example, you would want to pay off debt one first, then debt two and debt three.

Apply existing assets to your debt
Now that you have your debts prioritized, take a look at your assets. If you have any cash in savings accounts or under the mattress, you should immediately consider using all of it to pay off some debt. Likewise, if you have valuable items that you aren’t using, sell them on eBay or hold a garage sale and put the cash towards your debt. You will want to save up money later, but right now the enormous interest rates you paying on your debt is far more devastating to your long-term finances than cashing out a savings account.

Calculate your budget
After you have put any cash-on-hand towards your debt, it’s time to determine your monthly expenses. To do this, check out our list of 10 great budgeting tools.

If you haven’t tracked your monthly spending before, estimate the best you can, leaving enough padding for unexpected expenses without inflating categories that are not necessary. For example, if you currently spend $50 a month on coffee, enter $30 and resolve to cut back in the future. In the debt payment fields, enter only the minimum payments. When you are done the calculator will tell you how much money you have left over each month after your minimum obligations are met.

This is the additional amount that you will send to your top priority debt each month, in addition to the existing minimum payment. Each month you will continue to make minimum payments to your other creditors. Once you begin your plan you will use what is called the snowball technique to decrease both the time it will take you to get out of debt and the overall interest you will pay.

Each month going forward, the minimum payments on your non-priority debts will go down, usually by a dollar or two. You will take these few dollars (trust me, they add up over time), and put them on top of the total amount you are sending to your top priority account. When that debt is paid you will shift the entire monthly payment to the next debt on your list, until each and everyone is paid off!

Go to Step Three
Next, you will learn how to create a finalized debt management and determine exactly how long it will take to get out of debt. Go to Step Three: Creating a Personal Debt Management Plan. Or, see all steps in my Debt Free in Seven Steps system.

Published or updated on May 25, 2006

Want FREE help eliminating debt & saving your first (or next) $100,000?

Money Under 30 has everything you need to know about money, written by real people who've been there. Enter your email to receive our free weekly newsletter and MoneySchool, our free 7-day course that will help you make immediate progress on whatever money challenge you're facing right now.

We'll never spam you and offer one-click unsubscribe, always.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30.

  1. Tasha says:

    I have 50k in credit card debt (20K of that my mom is paying as she was an authorized user on one acct). I have about 50k in student loans. I make 75k a year and am able to pay all my debt and living expenses. Don’t have much in savings however as you can imagine. I just got engaged and fiancee doesn’t want to marry until I get out of my credit card debt, which will mean about 4-5 years. This is crazy to me. I have already cut my cards and have allowed him full access to my spending, so debt will not increase and only go down. What is wrong with marrying and keeping our finances separate for another 4-5 yrs til I am debt free? He has about 18 k in student loans and about 5k in credit card debt and a 10k medical bill. Any suggestions or advice?

  2. Speak Your Mind