Debt is soul-crushing, and when you have tens or even hundreds of thousands of dollars in debt across student loans, auto loans, credit card debt, and medical debt, you may feel like you’re up the creek. In this post, I’m going to talk about what you need to do if you’re over $200k in debt and an insufficient income to pay it down fast.
1. Examine Why You’re Over $200k In Debt
You can’t get out of debt effectively if you don’t understand what got you there in the first place. Was it poor decisions when using your credit cards? Did you buy more car or home than you could afford?
Did you have a medical emergency that you couldn’t cover? Did you go to a college you couldn’t pay for?
All of these are legitimate reasons to be in some level of debt, however, when you obtain debt on a large scale, that is, over $100k – $200k in debt, you need to stop and think about what happened and what you’ll do to remedy it.
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Some proponents of a debt-free life will tell you that all forms of debt are bad. My stance is that all “bad” debt needs to go immediately, but “good” debt, such as a low-interest mortgage, is okay if you aren’t living beyond your means and are actively seeking to pay it off sooner than later.
Let’s assume you have over $200k in debt. This is combined debt between credit cards, medical bills, student loans, auto loans, and if you’ll humor me, mortgages on primary and rental properties.
What do you do? How do you dig yourself out? Let’s get it!
2. Stop Using Your Credit Cards
First and foremost, stop using your credit cards. If that means cutting them up, then cut them up. For the sake of your credit history and credit scores, do NOT close your credit card accounts.
Freeze your accounts and lock the cards away. If you close your accounts, you will negatively impact your credit scores.
Your credit cards are most likely your highest interest debts. After the cards are locked away safely, put all extra money towards your credit card payments until they’re paid off. Make sure you’re still making at least the minimum payments on all other debts.
This method is called the Debt Avalanche method, which is when you put extra money towards your highest interest debt first. If you prefer, you can use the Debt Snowball method, which is when you put extra money towards the lowest balance first, creating a snowball of available funds as you pay off debt by debt.
The debt avalanche method saves you the most money, whereas the debt snowball method frees up money quicker, which also has a psychological effect of giving you quicker wins.
3. Drastically Cut Discretionary Spending
When you have over two hundred thousand dollars in debt and no income to pay it off reasonably soon, you’ll want to drastically cut your discretionary spending. If you don’t have a budget, create one to figure out where your money is coming from and where it’s going. Budgets can be easy to make, and I cover budgets and how to track spending here.
By drastically cutting your discretionary spending, you’ll free up loads of money that you can use to pay down your debts. Why does this help you? When you pay down your debts now, you open your future to do whatever you want and on your own terms.
You may be spending more money than you even realize. Using an app like Trim will help you automatically identify all of your monthly subscriptions. Trim will then either negotiate your subscriptions for you or give you the opportunity to cancel them. My wife and I saved $1200 a year after using Trim for 30 minutes.
We often pick up a lot of debt when we’re young. Whether from student loans, poor financial decisions, or tough life situations, our lack of wealth and income at earlier ages sets us up for a higher chance of accumulating debt.
The solution to this is to sacrifice a vast portion of our “fun” money now to open up the avenue to tons more “fun” money later. Because debt grows due to interest rates, it ultimately makes sense to pay your debts off as soon as possible to cut back on how much money you’re spending.
That $20,000 auto purchase with a 2.75% interest rate over 72 months you made will cost you over an additional $1,400 in interest on top of the serious depreciation of the car’s value 72 months later when you go to trade it in. $20k invested over 30 years can get you over $220k from an index fund.
4. Have a New Car? Sell It and Do This
If you have over $200k in debt and don’t have a household income of at least $100k to support crushing that debt, then buying a brand new car is, quite frankly, a poor choice.
New cars depreciate over 10% immediately after being driven off the lot. That means if you paid $20,000 for the car, the second you leave the car lot, your car is worth LESS than $18,000. Worse, after four years, new cars have depreciated by around 50%.
Let’s assume you bought a brand new car in the past 12 months, it’s valued over $20k, and you have over $200k in debt with a household income of less than $100k.
First things first, I know you may be attached to that car, but unless you can hustle some serious money, you need to sell that new car and get a used car. This isn’t to be mean or to sound condescending. By getting rid of the $20k car and buying a used car for $5k or less, you free up over $15,000 to throw at your debts. You also protect yourself from depreciation because a $5,000 car will depreciate fewer dollars per year.
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You might think this is extreme, sell the car, but what’s more, is extreme is drowning in debt for a decade or more because you keep spending money that you don’t have. It sounds harsh, I know. But that’s okay. I want you to see that debt CAN be tackled and smashed out of existence by taking a few strict measures early on.
5. Stop Investing and Pay Off Your Debt
If you have any debt with an interest rate above 6%, these debts need to go. Let’s look at a personal loan with an 8% APR, a balance of $20,000, and a loan repayment term of 60 months. Let’s assume you only make the minimum monthly payments of $402.84. How much do you end up paying after the 60th payment?
The answer is approximately $24,170 in total loan payments. In those 60 months, you paid an additional $4,170, or 20.85% additional.
If you were to have invested over the 60 months instead of applying your investments to this particular debt, you would have to subtract $4,170 from your investments after 60 months, leaving your net return on investment to be a lot less. Can you imagine this scenario if you have over $200k in debt?
6. 401(k) – Only Contribute What Your Employer Will Match
The only avenue I still recommend investing in is your company’s 401(k) if your employer matches contributions.
Why? The math proves it to be so. If your employer matches dollar for dollar up to a certain percentage, let’s say 4%, then you are getting a 100% return on investment at no risk to you. If you contribute, for example, $2,000 to your 401(k), assuming that’s 4% of your salary, then your employer will give you an additional $2,000 at no cost to you. Why would you ever turn that down?
Now don’t get me wrong. If you keep your $2,000 and aggressively pay down debt, then there will be plenty of time to max out your 401(k) or IRA later.
So I won’t discount his opinion. I simply believe you shouldn’t give up a free 100% return on investment. Make sense?
7. Pick up a Side Hustle
When aggressively tackling your debt, grab one or more side hustles, and earn your way to more money. Use this money to smash your debt into the ground.
You CAN get out of debt, and you’ll have to work hard at it. Suffering a little now comes with amazing rewards, so keep at it and push forward. My friend spent a day a week driving for DoorDash to rake in extra cash. If driving isn’t your thing, there’s tons of other side hustles, both offline and online, that you can do.
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8. What to Do if Everything Else Fails to Get You Out of Debt
For the absolute most extreme examples, where you’re in so much debt that there doesn’t seem to be a way out – this could include drowning in student loan debt where bankruptcy won’t help – you have a few options.
- Sell assets. Make as much money as you can by selling off any assets that you may have. This could include property, investments, and more. Money will always come back, but the stress of being enveloped by debt will suck the life out of you.
- Sell your house. Absolute worst-case scenario. Only do this when you have exhausted all other options or if you have over $200k in debt with minimal to money left over each month to pay it down. By selling your house, you will (hopefully) free up capital to throw at your debt. Find a much less expensive home or place to rent while you recover.
Even in the worst-case scenario, keep a $1,000 emergency fund minimum. You need some cash-on-hand in case you have another financial hardship.
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Snowball Method vs. Avalanche Method
I’m a proponent of the debt avalanche method because it saves you the most money, however, the debt snowball method frees up more money quicker, and that might be just what you need in a financial disaster such as having hundreds of thousands of dollars of debt.
I’ve written two articles about these two methods here:
In the end, the method that you choose is entirely up to you. The snowball method may help you the most if you don’t mind losing money in the long term but need to free up money in the short term. Likewise, if you don’t need to free up money sooner, use the avalanche method to minimize your interest payments.
When All Bad Debt is Paid Off
When you’ve paid off your student loans, medical debt, credit card debt, and auto loans, take a breather. If you want to fire away money at your mortgage, that’s great! Here’s my thoughts about paying down a mortgage versus investing first.
Make sure to treat yourself to something nice. Take your significant other out to dinner or treat yourself to a day to yourself. If you’ve gotten out of over $200k in debt, you can spend a few bucks on yourself AS LONG AS you don’t end up right back where you started with poor spending habits.
One needn’t live frugally as the only means to control their spending.
How to Prevent a Reoccurrence
So, how do you prevent yourself from drowning in massive debt again? Education is part of it. Learn about personal finance. Read personal finance blogs, watch personal finance YouTube channels, and read personal finance books.
Here are two books I highly recommend for everyone struggling with their money:
- I Will Teach You To Be Rich by Ramit Sethi. This book will help you get your finances in order. It teaches you how to manage your money to make you a better, richer person.
- Financial Freedom by Grant Sabatier. You’ll get a whole new view on how money works and how to make money work for you through this book. A truly amazing read.
Here are some other ways to prevent disastrous amounts of debt:
- Never finance a brand new car – in fact, stick to pre-owned or used cars if you can until your income supports any wants to have a brand new one.
- Only buy a house if you can put at least 20% down on it.
- Do not go to a college that you can’t afford – work and pay as you go.
- Save up at least six months of living expenses in an emergency fund and place that emergency fund in a high yield online savings account such as my favorite online bank, CIT Bank, and earn money on your money.
Using these methods will help prevent you from incurring up to $200k in debt or more.
Wrapping It Up
Whew, I felt like I was lecturing a bit. My mother-in-law would have a few things to say about that. She works with someone in charge of monetary benefits, who believes that the vast majority of all people need to be told exactly what to do with their money because they can’t handle their own finances.
I disagree. While most of us don’t get a financial education growing up, we all can get one, and we can all make wonderful decisions to better our financial health.
Have you ever been in a situation where you had a lot of debt and no money to pay it off? What did you do?