Finance

How to Automate Your Finances to Pay Off Debt Fast in 2023

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  • 2022 is the second year of a long journey to pay off my student loans and credit card debt.
  • I paid off $11,024 last year using the virtual cash envelope system and automatic payments.
  • I also set up a payment plan with the credit card companies to prevent my debt from accruing compound interest.

In my twenties, I made every money mistake imaginable.

I signed the paperwork for a six-figure student loan without even reading it. I racked up over $20,000 in credit card debt, then went berserk – quit my job without a backup plan. I couldn’t afford the minimum payments on my credit cards and my bills were in default. At 27 my credit was destroyed.

I used to be so ashamed of my circumstances that I could barely check my bills, let alone make smart decisions about how to get out of the hole in the first place.

After turning 30 in 2021, I got serious about my finances. I joined a debt support group that helped me manage my emotions around debt. I stabilized my income after earning minimum wage as a basic worker and freelance writing early in the pandemic.

In 2022, I was able to pay off a total of $11,024 in debt with the following monthly payments:

In September 2022, I was able to refinance my private student loans after significantly increasing my credit score. Refinancing my student loans lowered my interest rate, which will allow me to pay off my loans faster.

Before refinancing, from January 2022 to July 2022, the minimum payment on my private student loans was $670. Mom supported me by paying $1,540 towards my loans at the beginning of 2022, on top of the $11,024 I paid off myself.

Here are the three key steps I took to pay off nearly $11,000 in debt in one year.

1. I set up a payment plan with the credit card companies

After months of missed payments, the credit card companies called me non-stop for months even though I couldn’t afford to pay the almost $1,000 monthly minimum. I dreaded answering the phone, checking my voicemail, and regular mail because they too would send the dreaded collection letters.

Finally, I called my credit card companies to set up a payment plan to pay off the debt, lower my monthly payments, and keep the debt from charging compound interest. This move hurt my credit, but my score was already in the 500s anyway after many missed payments.

My main concern was to keep my monthly payments down to a manageable amount. Between five credit cards, my total monthly payment is $332.27.

2. I use a virtual money envelope system

Using advice from Paco de Leon’s book Finance for People, I split my paychecks into three accounts:

  • A checking account for fixed expenses, such as rent, utilities and debt payments. (I leave the debit card linked to this account at home so I don’t spend the money I have set aside for expenses).
  • A checking account for variable expenses, such as food, groceries and entertainment
  • A savings account where I deposit 10% of my salary

This division is a digital version of the old school cash envelope system, which requires putting cash reserves in different envelopes to prevent overspending.

At first, it was a cold shock to realize that I only have a few hundred dollars each month for variable expenses, such as lunch with friends and going to events. But the money limits set by the virtual envelope system helped me live within my means and appreciate a slower lifestyle.

3. I automate debt payments

After opening three separate accounts, I set up automatic payments for each debt I owe on a fixed expense checking account. Again there was an adjustment period to automate my debt payments. It was a shock to see about $884.16 a month — 20% of my after-tax salary — suddenly leave my account. It took about four months to adjust.

I had to be more selective about which friends to hang out with during meals and which fun events I really wanted to attend. I didn’t have to cut back on the fun entirely, but I learned to appreciate the alone time and the care it takes to prepare meals for myself on Sundays.

It is a privilege to be in a position to pay off debt. In retrospect, I wish I had done more because $11,024 seems like a small drop in the six-figure debt bucket. In 2023, I celebrate my progress and cherish every lesson my long road to paying off debt has to teach.

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