Hahna: What mindset and support is needed to get out of debt successfully?
Melanie: Yeah, I think it's really important to have an accountability partner.
Hahna: I love accountability partners. I have one for everything.
Melanie: Yes. Yes, yes, yes. I started my blog as a way to keep myself accountable. In January 2013, I just felt at the bottom of my rope. I was like, “I don't know what to do. I need to figure things out. I have to pay off debt.” I said, “You know what, I'm keeping this blog to keep myself accountable. I am going to pay off my debt in 4 years. I don't know how it's going to be possible since I was making $12 an hour at the time, but I'm going to do it.” I was able to pay off my debt in 3 years instead of 4.
Hahna: That is amazing.
Melanie: I attribute a large part of it to my blog and because of my readers because they held me accountable. They were supportive of me. They believed in me. I found a whole other community of people that were cheering me on. You know, beforehand, I had felt so alone. I felt like, “I'm the only one in debt. No one understands my struggle,” blah blah blah. Totally not true.
Hahna: The dark side of debt.
Melanie: Loads of people are in debt. You know, having a community of people to cheer me on was so awesome. Finding an accountability partner is so important. I also think it's crucial to understand that your net worth is not your self-worth.
Hahna: Oh, that is so good.
Melanie: For a long time, I had equated my debt with my self-worth. I just thought, “I'm in debt, I can't find a job, I'm useless.” It really affected my self-esteem. I think it really hindered my money-making abilities, and also my confidence. Once I realized that I wasn't a bad person because I was in debt, I wasn't someone that messed up my whole life, you know, that this was something that I could work on and that I wasn't alone, that really helped me shift into productive mode instead of just feeling stuck.
Hahna: I can say, as a reader of Dear Debt, during my debt journey, so I graduated June 2010 with my Bachelor's and Master's and then paid it off in 4 years, but during that time, countless number of times I was going to Dear Debt just for support and to know that there are other people with similar ambitions. I'm not the only crazy person in the world. There are other people who are in my situation. Just having that support, especially if you're not getting it from, say, your immediate family or your inner circle of friends, there is a community out there to support you and who will be cheering you on. Dear Debt does an excellent job at that.
Melanie: Thank you. Yeah, it's really grown as a community of people that are supporting each other. You know, it's not just me anymore. It's people that are all working together to really support each other in this similar mission to debt freedom.
Hahna: Let's dive into how people can destroy their debt effectively and quickly. What's the first step to destroying your debt?
Melanie: The first step to destroying your debt is to list out all of your balances and your interest rates and your due dates and your lender. Then also look at what caused it. If it was like me, student loans, it was education. Or, if it's a credit card debt, was it a shopping problem, was it an income problem? List that out also. It's really important to look at all of your debt in one place. I know that a common symptom of being in debt is denial. I always say that you sort of go through the 5 stages of grieving with debt, and the first one is definitely denial at first because you just don't want to accept that you're in debt or how much debt that you have.
I never really knew exactly how much debt I had, and then once I saw it in black and white, it was a huge, painful realization. You can mourn for a little bit and just be like, “Ah, oh my god.”
Hahna: I can't believe this, but it's real.
Melanie: Once you have it all listed, create a plan of action. What worked for me was doing the Avalanche method of focusing on high-interest debt first. I know a lot of people in the personal finance community do the snowball method, which is focusing on the smallest balances, but for me and my situation with my 2 different degrees and the various interest rates, I had a much higher balance at a much higher rate. For me, it made sense mathematically to save that money on interest and focus on the high-interest debt first.
Having all of your loans and interest rates listed, you know, you can create a plan of action. Are you going to focus on high interest first or low balance first? Or, something completely different. Pay off the balance that pisses you off the most. You know, like if you have a car loan or a credit card bill from a shopping binge that you went on, if that really upsets you like every single day or something, pay off that one first because anger is a good motivator.
You know, I calculated my daily interest on my student loans, and I realized I was paying $11 per day towards interest. It just made me so angry. I just felt like I was flushing $11 a day down the toilet, right?
Hahna: Right, exactly.
Melanie: I thought, “I have to get out of debt.” That really inspired me to keep going. I would recommend either highest interest, smallest balance, or focus on the debt that makes you the most angry, while of course paying the minimum on the rest. It's important to always at least pay the minimum and continue to be in good standing on your debt so that you can protect your credit.