Reduce Personal Debt to Zero: How and Why

Updated on February 20, 2020
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Stephen Bush is a writing coach, business writer and consultant based in Ohio. Steve obtained his MBA from UCLA and is a Navy veteran.

Debt is trending in the wrong direction.
Debt is trending in the wrong direction.

The Wrong Direction: Household Debt Keeps Going Up

Using the vocabulary of social media, debt is trending. In early 2020, household debt increased for the 22nd consecutive quarter (covering 5.5 years) — reaching a record level of $14.2 trillion. Mortgages now exceed $9.6 trillion and student debt has expanded to $1.5 trillion.

Taking this to an individual level, each American household has an average of $140,000 in debt — up from a median of $51,000 in 2000. Excluding home mortgage balances, personal debt averages about $40,000.

The strategies shown below represent several practical ways to reverse societal trends and reduce debt — ideally to zero.

Get rid of debt now.

— Suze Orman
Reducing debt to zero is a winning strategy.
Reducing debt to zero is a winning strategy.

1. Do Your Best to Avoid New Debt

Lenders are not your friend when it comes to reducing debt and avoiding new debt. For example, I recently received a promotional offering that said, “You may be wealthier than you think” on the outside of the envelope. Inside was the message that I could easily get the cash to splurge on home renovation or other purchases by borrowing from a home equity line of credit.

Online credit applications mean that prospective borrowers can usually add new debt without leaving the house. A “stop creating more debt” mentality will require a longer-term view when making short-term spending (and new debt) decisions. Setting up an emergency fund is one way to provide an alternate source for paying unexpected expenses instead of relying on debt.

2. Reduce Non-Essential Spending

Improving the “bottom line” for both individuals and businesses requires either increasing income or reducing expenditures (or both). In the absence of a healthy pay increase, borrowers can still reduce debt by decreasing expenditures for non-essential items.

Determining what qualifies as non-essential can involve both easy and difficult choices. For example, “cutting the cord” from cable companies can save $100-200 per month even after alternative entertainment sources such as streaming services are added. It is not unusual for a typical monthly cable bill to exceed $200. Monthly viewing packages for economical choices like Acorn TV, BritBox and Disney+ can be found for $7 or less. A pleasant side-effect of streaming is eliminating commercials — a time-saving option that can reduce viewing time by 15-25 minutes per hour. At current prices, potential cord-cutting savings can exceed $50,000 over 25 years.

When reducing expenses in any household category, be careful to avoid new hidden costs. Our family cut the cable cord about six years ago, and we have never regretted the decision. The smartest part of this choice has proven to be a Roku streaming media player that does not involve separate monthly costs beyond the streaming providers. Options are routinely available for less than $100 when buying versions compatible with modern HD, HDR and 4K broadcasts.

Another prime example of a reduced monthly spending opportunity is covered below (keeping vehicles longer). Additional alternatives include fewer visits to expensive restaurants, moving to a smaller house or apartment and relocating to areas with a lower cost of living.

3. Reduce Debts: Start with the Highest Interest Rate

This approach is often referred to as the debt stacking or debt avalanche method. It is one strategy to consider when choosing which debts to reduce first.

With any debt-reduction strategy, you should start by keeping all debts in a “current” status by making the minimum required payment each month. But then what? With the debt avalanche or debt stacking approach, devote any remaining funds to the debt with the highest interest rate. If you have credit cards with unpaid balances, this debt category will probably represent the highest interest rates in your debt portfolio — the average credit card rate is currently 19 percent and many lenders charge more whenever possible.

If monthly credit card bills range from 12-25 percent, devote the maximum possible payment to the highest rate (25 percent in this example) when using the debt stacking method. This will reduce interest charges on the next monthly bill, and the immediate savings will be more than they would be if you instead chose to make more than the minimum payment for cards with lower interest rates. In this scenario, choose the debt with the next-highest interest rate once you have paid off the one with the highest rate — and repeat the process until your total debt is zero.

First, pay off your high-interest debt.

— Sallie Krawcheck

4. Reduce Debts: Start with the Smallest Debt

This strategy is also called the debt snowball method. As with the debt avalanche approach discussed above, this provides another logical rationale when deciding which debt to eliminate first — in this case by starting with whatever represents the smallest debt.

The underlying theory with the debt snowball approach is to provide the borrower with more motivation for continuing the repayment process by providing a series of tangible early achievements in the form of individual debts that are reduced to zero — keep moving to the next-smallest debt as balances are eliminated.

5. Buy New Vehicles Less Often

While the average age of all vehicles on the road is 11.5 years, the average length of time that individuals keep their new vehicle is 6 years. This period is even shorter for leased vehicles — 24 to 48 months (2-4 years). The average car payment ranges from $400 for used cars to $550 for new vehicles (lease payments average $450).

For those who buy a new car every 4-6 years, it is not unusual to keep rolling from one loan to another — often buying a new vehicle as soon as the old one is paid off. An alternative approach to consider is to pay off each car loan as soon as possible and then keep the vehicle for several more years. In our family, we have owned the same Honda Odyssey for 15 years and only recently sold a Honda CR-V that was 13 years old.

The potential annual savings that accrue from this strategy can easily reach more than $5,000 for each vehicle — cash flow that can be redirected to paying off debts as each individual chooses.

6. Keep Mortgage Debt as Short as Possible

When buying a house or condominium, very few individuals can afford to pay cash for the entire purchase amount — making some debt the only practical choice. However, keeping this debt for a shorter period will produce substantial savings by reducing interest costs.

One way to do this is to obtain a 15-year mortgage instead of a 30-year loan. This will shorten the payment period and will usually decrease the interest rate as well. Down payment requirements are likely to be the same for either choice. Using an example of a $250,000 purchase price and a 20 percent down payment, monthly payments of principal and interest would be approximately $1,500 with a 15-year term and $990 for a 30-year mortgage (using prevailing interest rates in early 2020). These projected amounts do not include property taxes, homeowner association dues and mortgage insurance.

Total interest expenses will be reduced from about $150,300 with a 30-year term to $65,500 with a 15-year loan — resulting in a savings of $85,000 that can be dedicated to paying off other debts.

More Debt Reduction Strategies
Avoid Double-Digit Interest Rates
Reduce Credit Card Usage
Negotiate Lower Interest Rates
Review Bankruptcy and Debt Settlement
Cash Out Life Insurance Policies

For a growing number of retirees, the golden years are awash in red ink … one in seven bankruptcy filers is 65 or older.

— Eleanor Laise

The Goal: Reduce Debt to Zero

It doesn’t matter how slowly you go, as long as you do not stop.

— Confucius
Why? Reducing debt has multiple benefits.
Why? Reducing debt has multiple benefits.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2020 Stephen Bush


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    • paramarora profile image

      Parampreet Singh Arora aka Param Arora 

      4 months ago from New Delhi, India

      Great Article. Good Insights.

    • bhattuc profile image

      Umesh Chandra Bhatt 

      4 months ago from Kharghar, Navi Mumbai, India

      Good article. Useful tips.


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