One Debt At A Time: 5 Steps To Paying Back Your Debt

Most of us have some form of debt. Whether it’s the credit card in your wallet, the line of credit you used to help pay for school or the mortgage you have on your home, debt is a common occurrence in our everyday life as consumers. While there is nothing wrong with accumulating debt to help pay for things, it’s important that you understand how it works, that you are using it properly, and that you plan to pay it back.

If accumulating debt is something new to you, or if you are finding your debt is adding up more quickly than in the past, it may be beneficial for you to establish a plan to pay it off. While these plans will vary by individual, they tend to all be created out of the same foundations. Using my 35 years of experience as a Licensed Insolvency Trustee, I have compiled a step-by-step process to creating a plan to pay off your debt.


The first step is to make a list of everything you owe. This list should include your recurring monthly payments for expenses such as rent, utility services, cell phone, insurances, etc., as well as your long term debt.  Your long term debt could include approved long term overdrafts, credit cards, lines of credit, student loans, vehicle loans and leases, and your mortgage. These debts will most likely be unrealistic to pay off monthly. Your list should also include the minimum monthly payment for each, the interest rates being charged, and the total amount you owe.


The next step in the process is to rank your long term debts into the order in which you want to pay them off.  There are contradicting views on this step in the process.  Some experts recommend going from the smallest amount to the largest, as it helps to get the momentum going, and crossing off a bill on the list can be seen as a positive reinforcement.

Other experts recommend that the debts be ranked from highest to lowest based on the interest rates. This method will save you the most money by reducing the overall interest being paid by you in the future.

The order you choose is up to you, but the most important part of this step is to stick to the list once you make it.


This step is all about knowing the income you have coming in on a monthly basis. More importantly, it’s about knowing the amount you have left over once you’ve paid your regular monthly living expenses and the minimum monthly payments.  Once you have an idea of how much income you will have left over, you can evaluate how much you can afford to use to make extra payments on your long term debt.


Keeping in mind that paying off accumulated debt can feel like running a marathon, it is important that you develop repayment goals that are Specific, Measurable, Attainable, Realistic and Timely.  For example, if you have only an extra $500 per month to pay down debt and you owe $10,000, it is not reasonable to expect the full amount will be repaid within one year.  A more realistic goal may be to have the debt repaid in two to two and a half years, depending upon the monthly cost of interest.

Quite often people become discouraged at this step, as it sinks in how long it may take for them to repay their debt. It’s important to forge on with the repayments as interest will only add up over time.


At this point, it can be helpful to take a step back and “work the plan” for a few months, remembering to track your results by recording the income received and payments made every month.  This often leads to making other changes to help you reach your repayment goals.

By knowing your monthly costs, you can now explore other options that may help increase your payments.  For example, if you are spending money on optional TV channels that you’re not watching regularly, you might discontinue the service and use the savings to pay down debt. Other options can be to sell assets that you no longer use or to pick up overtime hours at work to boost your income in an effort to make larger payments toward your debt.   

Additionally, there are often times where you may have extra cash from birthday gifts or holidays, performance bonuses at work, or income tax refunds.  This is another source of funds that you can use to make lump sum payments.


Regardless of how you ranked them in the above step, it is important to work the plan, and pay off the first debt on the list.  Apply all extra money toward that first debt, while paying the minimum on all the other payments.  The reasoning behind this approach is that when you focus on one debt at a time, you are more likely to pay it off quicker, as more money is going toward the principal balance owed and less is spent on paying interest.  When you spread your extra money over several debts, you are often lessening the impact it has as you are paying more interest.

Once you have paid off the first debt on your list, move on to the next, while continuing to pay the minimum payments on the others. Repeat and continue until you have repaid all of the debts on the list.

At first, it may seem like it will take forever to pay off your first debt, but as you work down the list, you will gain momentum and as less interest is being paid, you may surprise yourself at how quickly you reach your goal.


Once you have paid off your debts, this is the time to focus on building up a savings account that will help you from going back into debt in the future.  A large emergency fund of up to six months of living expenses is one of the best tools to use to take control of your finances and avoid going back into debt.


Often, due to life-changing events such as loss of a job, your health, a relationship, or a spouse, income is reduced to the point that monthly living expenses, let alone minimum monthly payments, cannot be paid without incurring more debt.  In the short term, the use of new credit to keep up may be an option, but this usually does not work long term.

When facing life changing events that significantly impact income and the ability to pay monthly living expenses and accumulated debt, it may be necessary to restructure your financial affairs.   At Grant Thornton Limited, we offer free and confidential consultations. During the consultation, we will review your financial situation and determine if a consumer proposal or bankruptcy might be options to consider to help you recover from the life-changing events and obtain a fresh start.

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