5 Key Concepts For Managing Debt And Reducing Stress

Timo de Groot Dec 2017 - 12 min read

Debt is an everyday part of most people’s lives. But we rarely like to talk about it. Advertising encourages us to spend more and think about the consequences later. While getting a degree and buying a house are almost impossible without taking on debt.

The average U.S. household has a staggering $132,000 to pay until they are debt free. Including mortgages. Those with credit cards owe $16,000 on average (just on the cards alone). Which means they could be paying at least $1,000 a year in interest alone.

Given these high numbers, it’s not surprising that many people are stressed about debt. But what can you do about it? This guide details 5 key concepts that will help you with managing debt. So you can take action and secure a debt-free future for you and your family.
Managing debt - When Should You Pay Off Debt

Key Concept 1: When Should You Pay Off Debt?

There is a damaging misconception held by a large number of people that debt can wait. That the right time to pay it off hasn’t happened yet. We just need to get that promotion, secure the perfect job, or find our future spouse. Then we’ll start paying it off.

Unfortunately, debt doesn’t work that way. The longer you take, the more painful it is. The best time to start paying off debt is almost always immediately.

For most people, delaying paying back debt in favour of investing or spending on other activities is going to be a mistake. This is because the interest you pay on debt is almost always higher than the interest you will receive from investing the same amount of money. This is almost always true for credit card debt.

How debt affects net worth

We can illustrate why you should pay off debt first with a simple example:

Bob has $5k in credit card debt on which he is currently paying 14% interest. He receives a windfall of $10k and now he wants to pay off some of his debt. But he has also been offered an investment opportunity that will give him a return of 10%. He knows this is a good return and is keen to invest all his money. What should he do?

Let’s break this down into a simple scenario:

Bob has $5k of credit card debt (liabilities) and $5k in cash (assets). If he invests his cash and gets a profit of 10%, but pays 14% interest on the same value of liabilities? Then he makes a net of minus 4% on his $5k.

He would have been better off paying off his debt and achieving 0%. Instead of a net loss of 4% of $5k to interest ($200 a year).

This scenario is oversimplified, but the concept holds true as a general rule. Psychologically, many people would rather invest their money than pay off debt. Because then it feels like their money is ‘doing something’ rather than simply disappearing. But this is a clear mistake if you look at the big picture. Investing money anywhere it receives a lower return than your debt demands will damage your net worth.

Debt makes you vulnerable

Another reason to pay off debt quickly? It makes your finances more vulnerable to further problems or shocks. This is the case even if you’re not paying interest on your debt, such as in an interest-free overdraft.

Many people are comfortable living from their overdraft. As they treat it as a natural extension of their own funds. This is easy to do. After all, interest-free overdrafts aren’t costing you anything. But what happens when your car or boiler breaks down? Or if you lose your job?

Because you’re already in your overdraft, you have no access to cheap credit. Now you need to borrow from somewhere else at a higher rate. If your income has been reduced? This could be the start of a spiral into debt that may be hard to recover from. You must also remember that your bank could reduce or remove your overdraft if it wishes too. Which would leave you in a tricky spot. Using all your credit, even if interest-free, makes you vulnerable to financial emergencies.

Debt harms your credit score

Credit reference agencies calculate a credit score based on your spending and credit. Some of the biggest ones are CallCredit, Experian, and Equifax. But there are others, including local ones specific to just one country. They all provide a credit score that is used by lenders to help them decide how risky it will be to lend to you. You want this score to be good because then you are more likely to get better rates in the future.

When you are in debt and using a large amount of your available credit? Your credit score is damaged. Which reduces the likelihood that other lenders will choose to loan money to you. Additionally, even if you do get a loan, it’s likely to be at a worse rate. Paying off debt helps improve your credit score. So you can access better rates and offers in the future.

Always make your minimum payments

Maybe you’ve read through this article so far and decided you don’t yet need to pay off your debt yet. Because you can get a better interest rate investing your money? You’re nowhere near your credit limit? And you’re not worried about your credit score? Then you probably should be reading one of our other guides instead of this one.

But regardless of your financial situation and attitude towards debt? You must always make your minimum payments. Failing to make these payments, will lead to fines and penalties. That can cause your debt to quickly snowball into something unmanageable.
Managing debt - Drop the denial, commit, and embrace accountability

Key Concept 2: Drop the denial, commit, and embrace accountability

It is not uncommon for people with a large amount of debt to experience denial. They refuse to accept or ignore the truth about their finances. As a defense mechanism to protect themselves from stress.

A consequence of this is that most people don’t even know what they owe. A 2015 New York Fed report found that the average American underestimated the level of credit card debt they had by an incredible 37%.

Paying off a large amount of debt is difficult, but not impossible. What it does require is a long-term commitment to taking actions that will improve your net worth. Many of these will be hard work and require sacrifice. But the long-term benefits to your financial well-being will be substantial.

Take stock of your debts

Ditch the denial and do a stock-take on the debt that you owe. You’re going to need the following information:

  • Debt amount
  • Who you owe it to
  • Your minimum payments
  • The interest you pay

If the total is larger than you thought, that’s not unusual. Even large debts can be paid off over time; the important thing is to get started.

You’ll want to focus on your spending by first paying any minimum payments. Your next priority is to completely pay off the debt with the highest interest. Once that’s done, move on to the next one, paying off each debt in turn in order according to how quickly it is growing.

Tell someone

Telling someone about your debt can help reduce stress and keep you accountable for paying it off. It’s a lot harder to ignore your debt when someone else knows. And having someone to encourage you to keep going on what can be a long journey is helpful.
Managing debt - Budgeting your way out of debt

Key Concept 3: Budgeting your way out of debt

Most people get into debt not because of large, one-off purchases. But because of a long-term habit of spending a bit more money than they receive in income each month. It is unlikely that you will receive a large windfall of cash that will take you out of debt. You have to get out of debt the same way you got in. Slowly and gradually over time.

Tracking your spending with budgeting software

Before you start budgeting, you must understand where you are currently spending money. In the past, this would have involved a lot of paperwork. But with online banking, it is quite easy. Especially if you rarely use cash (although as we’ll see later, cash has its uses).

You don’t have to track your spending in a spreadsheet, or on paper. There are budgeting programs that remove much of the work for you. Features vary. But most of them allow you to:

  • Import transactions from your online bank account
  • Manage multiple accounts
  • Set budgeting goals and track your progress

Some of the most popular options are:


YNAB, or You Need a Budget, is one of the most popular budgeting programs with a wide range of features. It has a free 34-day trial but then costs $50/year. Unless you are a student in which case you can get it free for 12 months with proof of enrollment.


Mint is a free, web-based tool which comes with high-quality apps for Android, iOS, and Windows Phone. It doesn’t cost anything but will suggest financial products to you.


GnuCash is open source, which means it’s completely free (and will be forever). It doesn’t look quite as modern as some of the more commercial options. But it has a wide range of robust features that will help you manage your finances.

All these choices will help you manage your finances and choose whichever one you find easiest to use.

Necessities first, then debt, then luxuries

Once you’ve started tracking your money, you should be able to see where your money is going each month. If you’re using a budgeting program? Download the last three months from your bank accounts and add your credit cards and other debts. This way you can get an idea of what you’re spending on each item per month.

If you’ve never tracked your finances before? You may have a shock when you see your net worth as the budgeting program calculates it. It can be easy to forget or ignore certain debts when we calculate this ourselves. But there’s no hiding from a budgeting program.

Once you’ve got all your information, it’s time to make your first budget.


First, assign money to your necessities:

  • Rent or mortgage
  • Bills for gas, electricity, water and groceries
  • Some money for transport

If your income does not cover these basic bills, you will need to look at and act on Key Concepts 4 and 5 below with some urgency.


Next, we want to assign money to pay off debt. Starting first with the minimum payments. And then paying off more starting from those debts with the highest interest. Our aim here is to pay off more than the minimum. If you don’t? Even small payments will take a very long time to pay off. And it will cost you a lot of interest in the process. The more you can pay off the better.


Finally, we want to allocate some cash to luxuries if we can. These items, such as the odd takeaway, aren’t essential. But they can act as a reward at the end of the month if you’ve budgeted well. If your debt situation is particularly stressful? Or you’re barely making minimum payments? You may want to cut these items out altogether for a period.

Stick to your budget

Once you’ve set your budget, it’s up to you to keep it. Make sure everyone else in your household is on board. And understand the importance of sticking to the budget as you’ve set it. The good thing about this method? If you’ve got enough income to budget for your payments, all you have to do is keep following your budget. Until you’re out of debt.

But, if your current income does not allow you to make payments on your debt? Or you’d like to pay off your debt faster? There’s still work to go. The next three sections are your next stop: Minimising Outgoings, Maximising Income, and Other Ways to Reduce Debt. Even if you are happy with your current budget, we suggest you read these suggestions anyway. Because the quicker you pay off your debt, the better.
Managing debt - Minimizing Outgoings

Key Concept 4: Minimizing Outgoings

If you want to pay off debt faster, there are two main ways to free up more money – you’ve either got to earn more or spend less. Typically, the easiest and quickest wins will be had by decreasing your spending. Which is something you can start doing immediately.

Reducing spending on essentials

The clear majority of your spending will be on essentials. Bills like rent, groceries, and transport. Many of these are inflexible. But you might be surprised how much you can reduce your spending with a bit of effort:

  • Start grocery shopping at a cheaper store
  • Reduce your television or internet plan to a cheaper one
  • Shop around for a cheaper utilities provider
  • Walk short distances instead of driving or taking the bus

Your biggest expense will be your rent or mortgage. Downsizing, or moving in with a relative or friend might not be an option for you. But if it is you could save a significant amount of money.

Using cash to limit spending

One of the biggest problems for consumers? Debit and credit cards remove the pain from spending. Psychologically, using ‘plastic’ doesn’t really feel like spending money at all. It’s just numbers on a screen.

If this is you, it might be a good idea to start using more cash.

The idea is that at the start of the month you withdraw cash for each of the items you’d spend money on. Except for bills, which normally leave your account automatically. So, you’d withdraw cash for food, transport, and anything else you buy in person. Then allocate this cash to your different budgets that you’ve set using your budgeting program. And by using physical containers to separate the money.

By avoiding using your card, you can force yourself to stick to your budget. There’s no difference for your budget. But you’ll notice that when using cash? You’ll probably think more about your purchases and what you need. Because it’s a physical representation of your budget.

Balance transfers and mortgage refinancing

Transferring some or all the balance of your credit card to another credit card can be a good way to access lower interest rates. Typically, these balance transfer deals give you 0% or low APR for a limited period, often six to twelve months. This can be a great deal, but you also need to be wary of the small print. Often you are required to pay off the total balance transferred during the offer period. And if you don’t you’ll have to pay accrued interest? That’s all the interest you saved during the offer time. You might also find that the interest goes up higher than you were originally paying. So balance transfers can be great, but only as part of a concerted effort to pay off your debts.

Another good option is to refinance your debt. Typically, this will be your mortgage. But you can also refinance student loans and other debt. When you refinance you are replacing your old debt with a new one, and the aim is to lower your interest rate. There are some risks with refinancing. Your existing mortgage provider may charge you a fee (check the small print) for example. And you may need to pay a professional to get you the best deal and do all the paperwork.

With any debt, you have the option of calling up your lender and trying to negotiate a lower interest rate. Although this may seem like a long shot, it does happen. And you have nothing to lose.
Managing debt - Maximizing Income

Key Concept 5: Maximizing Income

If you’ve cut your budgets to the bone and you’re still unable to reduce your debts? Your next task is to increase your income. There are three obvious routes here:

Get a raise

The average annual raise is currently hovering around 3%. If you haven’t had a raise in a few years, there’s no harm in asking, and you might be pleasantly surprised.

Change your job

If your current role isn’t paying enough? Start applying for other roles in your spare time. Even identical roles in different firms can pay very differently.

Work a second job

Part-time work in the evenings or on weekends is a great way to boost your income. Although this may not be sustainable long-term.
Which, if any of these, is suitable for you, is down to your own situation and judgment.

Understand the value of your time

The one key resource you have at your disposal is your time. And understanding how to use it effectively is important for maximizing your income. For example, many people advise using couponing to reduce the spend on your weekly grocery shop.

But this is a time-inefficient activity. Spending hours collecting coupons to save a few dollars isn’t a good use of your time. You’d be better off getting a part-time job and earning more money instead. To make matters worse, a study by NYU found that people who use coupons spend more than people who don’t use coupons. That’s because coupons are often designed to encourage you to buy premium products or products you don’t need at a discount. But you’re still paying more than for a more basic version. Or if you wouldn’t have otherwise made a purchase.

Always ask yourself what the best way to maximise your income is. Are you using your time and other resources efficiently?

Be wary of ‘work from home’ offers online

When we’re in debt and feeling stressed we can get desperate. And unfortunately, there are many people who’d like to take advantage of that desperation. There are many legitimate ways to earn money working from home, but there are also a great many scams. Be wary of what you try and do a careful search for reviews of anything you find. Especially if it asks you to spend money before you start making money.


If your income is low or you have children? You may be eligible for state benefits (depending on what country you are living in). It is your right as a citizen to claim every benefit you are entitled to. And you should check that you are receiving everything you’re eligible for. Even a small amount of money can significantly increase the rate at which you are able to pay off your debt.

Dealing with unmanageable debt

If your debt is so high that it is impossible to make your payments and have a decent standard of living. You may need to seek help:


Charities such as CAP in the UK offer debt counselling for free. And they will deal with your creditors on your behalf.

Debt counsellors

They will help you achieve a workable solution but may charge fees.


Most governments offer free advice. Check online to see what is available in your country.

Finally, if your debt is making you feel highly stressed or depressed and you need to speak to someone? You can call the Samaritans (UK or USA), contact your local counselling service, or speak to your doctor.

This article is for educational purposes only and should not be seen as financial advice.
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