Module 4: Debt Management

Taking Control of What You Owe

Introduction

Welcome to Module 4! Let's talk about debt – something millions of people carry, yet few truly understand.

Here's the reality: debt isn't inherently good or bad. It's a tool. Used strategically, it can help you build wealth. Used carelessly, it can hold you back for decades.

In this module, we'll cover:

Understanding different types of debt
Good debt vs. bad debt (yes, there's a difference)
How interest rates really work
Proven strategies for paying off debt
Smart credit card usage
When to prioritize debt payoff vs. saving
How to avoid getting back into debt

Whether you're drowning in debt, carrying a manageable amount, or debt-free and want to stay that way, this module has actionable strategies for you.

Let's take control of what you owe.

Part 1: The Debt Landscape

First, let's understand what you're dealing with.

Types of Consumer Debt

Secured Debt (backed by collateral)

Mortgage: Loan for buying a home (house is collateral)
Auto loan: Loan for buying a car (car is collateral)
Home equity loan/HELOC: Borrowing against home value

If you don't pay: Lender can take the collateral

Unsecured Debt (not backed by collateral)

Credit cards: Revolving credit for purchases
Personal loans: Fixed loan from bank or online lender
Student loans: Loans for education
Medical debt: Bills from healthcare
Payday loans: Short-term high-interest loans (avoid!)

If you don't pay: Damages your credit, collections, possible lawsuit

Average U.S. Household Debt (2024 snapshot)

Debt Type	Average Balance
Credit cards	$6,500
Auto loans	$22,000
Student loans	$38,000
Mortgage	$220,000

If you have debt, you're not alone. About 80% of Americans carry some form of debt.

💡 Exercise 4.1: Your Debt Inventory

Time for an honest look at what you owe. Get out all your statements.

List ALL your debts:

Creditor/Lender	Type	Total Balance	Interest Rate (APR)	Minimum Payment	Due Date
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____

Totals:

Total debt: $__________
Total minimum payments per month: $__________
Highest interest rate: ________%
Lowest interest rate: ________%

How do you feel seeing this number?

Remember: Awareness is the first step to change. You can't fix what you don't acknowledge.

Part 2: Good Debt vs. Bad Debt

Not all debt is created equal. Let's distinguish between debt that can help you and debt that hurts you.

"Good" Debt Characteristics

✅ Low interest rate (typically under 6%)
✅ Finances an appreciating asset (increases in value)
✅ Builds wealth or earning potential
✅ Has tax benefits (mortgage interest deduction, student loan interest)
✅ Manageable payment relative to income

Examples:

Mortgage: Buying a home that appreciates, tax-deductible interest, builds equity
Student loans: Invests in education that increases earning potential (when done strategically)
Business loans: Funds a business that generates income
Low-interest car loan: If needed for work and the loan is reasonable

"Bad" Debt Characteristics

❌ High interest rate (typically 10%+)
❌ Finances depreciating assets (loses value immediately)
❌ Used for consumption (things you use up)
❌ No tax benefits
❌ Payment strains your budget

Examples:

High-interest credit card debt: 18-29% APR on purchases that lose value
Payday loans: 300-400% APR (predatory!)
Car loans for expensive vehicles: High payments for depreciating asset
Personal loans for vacations/shopping: Paying interest on consumed experiences

The Gray Area

Some debt doesn't fit neatly into good or bad:

Car loans (necessary)

Bad: Financing a $50,000 luxury car at 7% for 7 years
Better: Financing a reliable $15,000 car at 4% for 4 years
Best: Buying a reliable used car with cash

Student loans

Bad: $100,000 debt for a degree with low earning potential
Better: $30,000 debt for a degree with strong job prospects
Best: Minimizing loans through scholarships, community college, working

The key: Context matters. Debt is a tool – use it wisely.

💡 Exercise 4.2: Classify Your Debt

Look at your debt inventory from Exercise 4.1. Classify each debt:

Good Debt (low interest, builds wealth):

_______________ ($_______ at ___%)
_______________ ($_______ at ___%)

Bad Debt (high interest, consumption):

_______________ ($_______ at ___%)
_______________ ($_______ at ___%)

Gray Area:

_______________ ($_______ at ___%)

Priority for payoff: Focus on bad debt first, especially highest interest rates.

Part 3: How Interest Really Works

Understanding interest is crucial to understanding debt. Let's break it down.

APR (Annual Percentage Rate)

What it is: The yearly cost of borrowing, expressed as a percentage

How it works: You pay interest on your remaining balance

Example:

Credit card balance: $5,000
APR: 18%
Monthly interest rate: 18% ÷ 12 = 1.5% per month

Month 1:

Balance: $5,000
Interest charged: $5,000 × 1.5% = $75
New balance (if you make no payment): $5,075

The Minimum Payment Trap

Credit cards require a minimum payment (usually 2-3% of balance or $25, whichever is higher).

Here's why minimum payments keep you in debt forever:

Scenario: $5,000 credit card debt at 18% APR

If you pay only the minimum (2% of balance):

Time to pay off: 21 years
Total paid: $10,243
Interest paid: $5,243

If you pay $200/month:

Time to pay off: 2.5 years
Total paid: $6,141
Interest paid: $1,141

Difference: 18.5 years faster and $4,102 saved!

Compound Interest (Working Against You)

With debt, compound interest makes your balance grow.

Example: Credit card debt left unpaid

Starting balance: $3,000
APR: 20%
Making no payments

After 1 year: $3,600
After 2 years: $4,320
After 5 years: $7,464

Your $3,000 debt more than doubled in 5 years just from interest!

The lesson: Interest never sleeps. The longer you carry debt, the more you pay.

💡 Exercise 4.3: Calculate Your Interest Cost

Pick your highest-interest debt. Let's see what it's really costing you.

Debt details:

Balance: $__________
APR: ________%
Current minimum payment: $__________

Use an online debt calculator (search "credit card payoff calculator") to find:

Paying minimum only:

Months to pay off: _______
Total interest paid: $__________

Paying minimum + $50 extra:

Months to pay off: _______
Total interest paid: $__________
Money saved: $__________

Paying minimum + $100 extra:

Months to pay off: _______
Total interest paid: $__________
Money saved: $__________

Eye-opening, right? Even small extra payments make a huge difference.

Part 4: Debt Payoff Strategies

Now for the good part – how to actually get rid of debt.

Strategy #1: Debt Avalanche (Best Mathematically)

How it works:

Pay minimums on all debts
Put all extra money toward the highest-interest debt
When that's paid off, roll that payment to the next-highest rate
Repeat until debt-free

Pros:

Pays least interest overall
Fastest payoff mathematically
Most efficient use of money

Cons:

May take longer to see a debt eliminated
Can feel less motivating

Best for: People motivated by math and efficiency

Example:

Debt	Balance	Interest Rate	Minimum Payment	Order
Credit Card A	$3,000	22%	$90	1st
Credit Card B	$5,000	18%	$150	2nd
Car Loan	$12,000	5%	$300	3rd

Strategy: Pay minimums on all ($540), plus extra $200 toward Credit Card A (highest rate).

Strategy #2: Debt Snowball (Best Psychologically)

How it works:

Pay minimums on all debts
Put all extra money toward the smallest balance
When that's paid off, roll that payment to next-smallest balance
Repeat until debt-free

Pros:

Quick wins provide motivation
Psychological boost from eliminating debts
Simplifies your finances faster

Cons:

May pay more interest overall
Takes slightly longer mathematically

Best for: People who need motivation and quick wins

Example (same debts):

Debt	Balance	Interest Rate	Minimum Payment	Order
Credit Card A	$3,000	22%	$90	1st
Credit Card B	$5,000	18%	2nd
Car Loan	$12,000	5%	$300	3rd

Strategy: Pay minimums on all ($540), plus extra $200 toward Credit Card A (smallest balance).

Strategy #3: Debt Consolidation

What it is: Combining multiple debts into one loan with a lower interest rate

Options:

Balance transfer credit card: 0% intro APR (typically 12-18 months)
Personal loan: Fixed rate (typically 6-15%)
Home equity loan/HELOC: Uses home as collateral (typically 4-8%)

When it makes sense:

You have good enough credit to qualify for lower rates
The new rate is significantly lower than current average
You have a plan to pay it off
You won't accumulate new debt on the old cards

When it doesn't:

You'll rack up more debt on the freed-up credit cards
Fees outweigh interest savings
You're turning unsecured debt into secured debt (home equity)

Example:

Current situation:

3 credit cards: $15,000 total at 20% average APR
Minimum payments: $450/month
Payoff time (minimum only): 10+ years
Total interest: $14,000+

After consolidation:

Personal loan: $15,000 at 9% for 4 years
Monthly payment: $373
Total interest: $2,904
Savings: $11,000+ in interest

Strategy #4: Balance Transfer Card

How it works: Transfer high-interest credit card debt to a card with 0% APR intro period

Typical offer: 0% for 12-18 months, then 16-24% APR

Balance transfer fee: Usually 3-5% of transferred amount

When to use:

You have good credit (660+)
You can pay off the balance during the 0% period
The fee is worth the interest savings
You won't use it for new purchases

Example:

Transfer $5,000 from 20% APR card
New card: 0% for 15 months, 3% transfer fee ($150)
Pay $350/month for 15 months
Result: Paid off in 15 months, paid only $150 in fees vs. $800+ in interest

Warning: If you don't pay it off before the intro period ends, the high rate kicks in!

💡 Exercise 4.4: Choose Your Debt Payoff Strategy

Based on your debt inventory and personality:

My chosen strategy: ☐ Avalanche ☐ Snowball ☐ Consolidation ☐ Balance Transfer

Why this one:

My debt payoff order:

_______________ ($______ at ___%)
_______________ ($______ at ___%)
_______________ ($______ at ___%)
_______________ ($______ at ___%)

My extra debt payment amount per month: $__________

(From your budget in Module 2 – what can you afford beyond minimums?)

My aggressive payoff amount (if I cut discretionary spending): $__________

💡 Exercise 4.5: Create Your Debt Payoff Plan

Focus Debt (first to pay off): _______________

Current balance: $__________

Interest rate: ________%

Minimum payment: $__________

My payoff plan:

Total monthly payment (minimum + extra): $__________

Using an online calculator, this debt will be paid off in: _______ months

Payoff date: _______________

Total interest I'll pay: $__________

Once this is paid off, I'll roll the $______ payment to: _______________

Create a visual tracker:

☐ Make a thermometer chart showing progress
☐ Use a debt payoff app
☐ Create a spreadsheet with monthly projections
☐ Color in a debt-free chart as you pay it down

Visualization keeps you motivated!

Part 5: Credit Cards – Using Them Wisely

Credit cards aren't evil. They're tools. Used properly, they offer benefits. Used poorly, they create expensive debt.

Credit Card Benefits (When Used Responsibly)

✅ Build credit history (needed for mortgages, car loans)
✅ Rewards/cash back (1-5% back on purchases)
✅ Consumer protections (fraud protection, purchase protection)
✅ Convenience and safety (better than carrying cash)
✅ Track spending (digital records of all purchases)

Credit Card Dangers (When Used Irresponsibly)

❌ High interest rates (18-29% APR)
❌ Easy to overspend (doesn't feel like "real" money)
❌ Minimum payment trap (decades of debt)
❌ Fees (late fees, annual fees, cash advance fees)
❌ Credit score damage (from high balances and missed payments)

The Golden Rules of Credit Cards

Rule #1: Pay the FULL balance every month

No exceptions (unless emergency)
This way you pay $0 in interest
You get rewards without paying for them

Rule #2: Never spend money you don't have

If you can't pay cash for it, don't charge it
Credit cards are for convenience, not loans

Rule #3: Stay under 30% of your credit limit

Better yet, under 10%
High "utilization" hurts your credit score
Example: $5,000 limit → keep balance under $1,500

Rule #4: Set up autopay for at least the minimum

Prevents late payments (which destroy credit and cost $40 fees)
You can always pay more manually

Rule #5: Review your statement monthly

Check for fraud or errors
Ensure you recognize all charges

💡 Exercise 4.6: Credit Card Health Check

For each credit card you have:

Card 1: _______________

Current balance: $__________

Credit limit: $__________

Utilization: (Balance ÷ Limit × 100): ________%
☐ Under 30% (good) ☐ Over 30% (work to pay down)

Do I pay in full monthly? ☐ Yes ☐ No

Interest paid last year: $__________

Rewards earned last year: $__________

Net benefit: $__________ (rewards minus interest)

Annual fee: $__________

Should I keep this card?

☐ Yes – I use it responsibly and get value
☐ No – It's costing me more than it's worth
☐ Maybe – I need to change how I use it

Card 2: _______________

[Repeat same questions]

Summary:

Total credit card debt: $__________

Total interest paid last year: $__________

Total rewards earned last year: $__________

Am I winning or losing the credit card game?

When to Close a Credit Card vs. Keep It

DON'T close a card if:

It's your oldest card (helps credit history length)
It has no annual fee (helps your available credit)
Closing it would hurt your credit utilization

DO close a card if:

High annual fee and you don't use the benefits
You can't control spending on it
It's costing you money

If closing, keep your oldest card open even if you don't use it.

Part 6: Staying Out of Debt

Getting out of debt is half the battle. Staying out is the other half.

Common Reasons People Go Back Into Debt

No emergency fund → unexpected expenses go on credit cards
Lifestyle inflation → earn more, spend more
Not budgeting → lose track of spending
Emotional spending → using shopping as therapy
Keeping up with others → comparison spending
Not planning for irregular expenses → holidays, repairs "surprise" you

Strategies to Stay Debt-Free

Strategy #1: Build an emergency fund (Module 6 covers this)

Even $500 prevents most debt emergencies
Work up to 3-6 months of expenses

Strategy #2: Use cash or debit for problem categories

If you overspend on dining out, use cash only
Can't overspend what you don't have

Strategy #3: Wait 48 hours before purchases over $100

Prevents impulse buying
Gives time to check budget
Often you'll realize you don't need it

Strategy #4: Track your spending

Awareness prevents overspending
Use app or spreadsheet from Module 2

Strategy #5: Plan ahead for big expenses

Holidays, birthdays, car maintenance
Set aside money monthly (sinking fund from Module 3)

Strategy #6: Celebrate debt-free status

Remind yourself why you paid off debt
Don't take going back lightly

💡 Exercise 4.7: Your Debt-Free Maintenance Plan

How will I prevent going back into debt?

My weak spots (where I tend to overspend):

My plan to address them:

My "never again" triggers:

I will NOT go into debt for:

I will ONLY consider debt for:

My accountability:

Who will help keep me accountable? _______________________________________________

How often will I check in about spending? _______________________________________________

Part 7: Debt Payoff vs. Saving – What to Prioritize?

This is a common dilemma. Here's a framework:

Priority Order:

1. Pay all minimum payments (avoid late fees and credit damage)

2. Save $500-$1,000 starter emergency fund (prevents new debt from small emergencies)

3. Get full employer 401(k) match (if available – this is free money, don't leave it!)

4. Pay off high-interest debt (anything over 7-8% APR)

Credit cards
Payday loans
High-interest personal loans

5. Build full emergency fund (3-6 months expenses)

6. Pay off medium-interest debt (4-7% APR)

Most auto loans
Some personal loans
Private student loans

7. Invest for retirement beyond the match

8. Pay off low-interest debt (under 4% APR)

Federal student loans
Mortgages
Low-rate auto loans

9. Save for other goals

The Math vs. Psychology Debate

Math says: If your debt interest is lower than investment returns, invest instead

Example: Student loan at 4% vs. stock market averaging 10% → invest

Psychology says: Debt is stressful; the peace of mind from being debt-free is worth something

The answer: It depends on you

Anxious about debt? Pay it off for mental health
Comfortable with debt and good at investing? Split your money
High-interest debt? Always pay that first

💡 Exercise 4.8: Your Priority Plan

Based on the priority framework:

My Step 1: ☐ Done ☐ In progress

Pay all minimums: $________/month

My Step 2: ☐ Done ☐ In progress ☐ Not started

Save $500-$1,000 starter emergency fund

Currently saved: $________

Monthly contribution: $________

Goal date: _______________

My Step 3: ☐ Done ☐ N/A (no employer match) ☐ In progress

Get full employer 401(k) match

Current contribution: ________%

Match: ________%

My Step 4: ☐ Done ☐ In progress ☐ N/A (no high-interest debt)

Pay off high-interest debt (over 7%)

Target debt: _______________

Monthly payment: $________

Expected payoff: _______________

Once Steps 1-4 are complete, I'll move to Step 5 and beyond.

Common Mistakes to Avoid

❌ Paying off debt while neglecting emergencies
→ Build a small emergency fund first
❌ Missing payments to pay extra on other debts
→ Always pay minimums on everything
❌ Closing credit cards immediately after payoff
→ Can hurt credit score; leave them open (but unused)
❌ Not addressing the root cause
→ If overspending is the problem, debt payoff alone won't fix it
❌ Consolidating debt without changing habits
→ You'll just end up with the consolidation loan PLUS new debt
❌ Ignoring spouse/partner's debt
→ Work together; separate finances doesn't mean separate problems
❌ Being too aggressive and burning out
→ Extreme frugality isn't sustainable; find a balance

Key Takeaways

✅ Not all debt is equal – prioritize high-interest debt first
✅ Understanding interest rates shows why paying more than minimums matters
✅ Choose a payoff strategy that fits your personality (Avalanche vs. Snowball)
✅ Credit cards are tools – powerful when used responsibly, destructive when misused
✅ Pay off high-interest debt before aggressive saving/investing
✅ Staying debt-free requires planning, budgeting, and healthy money habits
✅ Build an emergency fund to prevent going back into debt

Quick Wins You Can Do Right Now

Call your credit card company and ask for a lower interest rate (it works more often than you'd think!)
Set up autopay for minimum payments on all debts (prevents late fees)
Calculate one extra payment – what if you paid an extra $50/month on your highest-interest debt?
Unsubscribe from retail emails – less temptation = less spending = more debt payoff money
Put your credit cards in a drawer or freeze them (literally, in ice!) while paying off debt

Before You Move to Module 5

Make sure you've completed:

✓ Exercise 4.1: Created your debt inventory
✓ Exercise 4.4: Chosen your debt payoff strategy
✓ Exercise 4.5: Created your debt payoff plan
✓ Exercise 4.6: Completed credit card health check
✓ Exercise 4.8: Mapped out your priority plan

Reflection Questions

How do you feel about your debt situation now compared to before this module?

What surprised you most about how interest works?

What's your #1 commitment to yourself about debt going forward?

Looking Ahead

In Module 5, we'll talk about credit scores – what they are, how they're calculated, how to build and maintain good credit, and why it matters for your financial life.

Understanding debt is step one. Building great credit while managing or eliminating debt is step two!

Additional Resources

Debt Payoff Calculators:

unbury.me (debt payoff visualization)
creditkarma.com/calculators
bankrate.com/calculators

Debt Consolidation:

Personal loan marketplaces: LendingClub, Marcus, SoFi
Balance transfer cards: Compare at NerdWallet, Bankrate

Help with Overwhelming Debt:

National Foundation for Credit Counseling (NFCC.org)
Financial Counseling Association of America (FCAA.org)
InCharge Debt Solutions

Books:

"The Total Money Makeover" by Dave Ramsey (Debt Snowball method)
"Your Money or Your Life" by Vicki Robin (mindful spending to eliminate debt)

"A man in debt is so far a slave." – Ralph Waldo Emerson

"Debt is normal. Be weird." – Dave Ramsey

"Too many people spend money they earned to buy things they don't want to impress people that they don't like." – Will Rogers

Module 4: Debt Management

Taking Control of What You Owe

Introduction

Welcome to Module 4! Let's talk about debt – something millions of people carry, yet few truly understand.

Here's the reality: debt isn't inherently good or bad. It's a tool. Used strategically, it can help you build wealth. Used carelessly, it can hold you back for decades.

In this module, we'll cover:

Understanding different types of debt
Good debt vs. bad debt (yes, there's a difference)
How interest rates really work
Proven strategies for paying off debt
Smart credit card usage
When to prioritize debt payoff vs. saving
How to avoid getting back into debt

Whether you're drowning in debt, carrying a manageable amount, or debt-free and want to stay that way, this module has actionable strategies for you.

Let's take control of what you owe.

Part 1: The Debt Landscape

First, let's understand what you're dealing with.

Types of Consumer Debt

Secured Debt (backed by collateral)

Mortgage: Loan for buying a home (house is collateral)
Auto loan: Loan for buying a car (car is collateral)
Home equity loan/HELOC: Borrowing against home value

If you don't pay: Lender can take the collateral

Unsecured Debt (not backed by collateral)

Credit cards: Revolving credit for purchases
Personal loans: Fixed loan from bank or online lender
Student loans: Loans for education
Medical debt: Bills from healthcare
Payday loans: Short-term high-interest loans (avoid!)

If you don't pay: Damages your credit, collections, possible lawsuit

Average U.S. Household Debt (2024 snapshot)

Debt Type	Average Balance
Credit cards	$6,500
Auto loans	$22,000
Student loans	$38,000
Mortgage	$220,000

If you have debt, you're not alone. About 80% of Americans carry some form of debt.

💡 Exercise 4.1: Your Debt Inventory

Time for an honest look at what you owe. Get out all your statements.

List ALL your debts:

Creditor/Lender	Type	Total Balance	Interest Rate (APR)	Minimum Payment	Due Date
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____
_____________	_____	$______	_____%	$______	_____

Totals:

Total debt: $__________
Total minimum payments per month: $__________
Highest interest rate: ________%
Lowest interest rate: ________%

How do you feel seeing this number?

Remember: Awareness is the first step to change. You can't fix what you don't acknowledge.

Part 2: Good Debt vs. Bad Debt

Not all debt is created equal. Let's distinguish between debt that can help you and debt that hurts you.

"Good" Debt Characteristics

✅ Low interest rate (typically under 6%)
✅ Finances an appreciating asset (increases in value)
✅ Builds wealth or earning potential
✅ Has tax benefits (mortgage interest deduction, student loan interest)
✅ Manageable payment relative to income

Examples:

Mortgage: Buying a home that appreciates, tax-deductible interest, builds equity
Student loans: Invests in education that increases earning potential (when done strategically)
Business loans: Funds a business that generates income
Low-interest car loan: If needed for work and the loan is reasonable

"Bad" Debt Characteristics

❌ High interest rate (typically 10%+)
❌ Finances depreciating assets (loses value immediately)
❌ Used for consumption (things you use up)
❌ No tax benefits
❌ Payment strains your budget

Examples:

High-interest credit card debt: 18-29% APR on purchases that lose value
Payday loans: 300-400% APR (predatory!)
Car loans for expensive vehicles: High payments for depreciating asset
Personal loans for vacations/shopping: Paying interest on consumed experiences

The Gray Area

Some debt doesn't fit neatly into good or bad:

Car loans (necessary)

Bad: Financing a $50,000 luxury car at 7% for 7 years
Better: Financing a reliable $15,000 car at 4% for 4 years
Best: Buying a reliable used car with cash

Student loans

Bad: $100,000 debt for a degree with low earning potential
Better: $30,000 debt for a degree with strong job prospects
Best: Minimizing loans through scholarships, community college, working

The key: Context matters. Debt is a tool – use it wisely.

💡 Exercise 4.2: Classify Your Debt

Look at your debt inventory from Exercise 4.1. Classify each debt:

Good Debt (low interest, builds wealth):

_______________ ($_______ at ___%)
_______________ ($_______ at ___%)

Bad Debt (high interest, consumption):

_______________ ($_______ at ___%)
_______________ ($_______ at ___%)

Gray Area:

_______________ ($_______ at ___%)

Priority for payoff: Focus on bad debt first, especially highest interest rates.

Part 3: How Interest Really Works

Understanding interest is crucial to understanding debt. Let's break it down.

APR (Annual Percentage Rate)

What it is: The yearly cost of borrowing, expressed as a percentage

How it works: You pay interest on your remaining balance

Example:

Credit card balance: $5,000
APR: 18%
Monthly interest rate: 18% ÷ 12 = 1.5% per month

Month 1:

Balance: $5,000
Interest charged: $5,000 × 1.5% = $75
New balance (if you make no payment): $5,075

The Minimum Payment Trap

Credit cards require a minimum payment (usually 2-3% of balance or $25, whichever is higher).

Here's why minimum payments keep you in debt forever:

Scenario: $5,000 credit card debt at 18% APR

If you pay only the minimum (2% of balance):

Time to pay off: 21 years
Total paid: $10,243
Interest paid: $5,243

If you pay $200/month:

Time to pay off: 2.5 years
Total paid: $6,141
Interest paid: $1,141

Difference: 18.5 years faster and $4,102 saved!

Compound Interest (Working Against You)

With debt, compound interest makes your balance grow.

Example: Credit card debt left unpaid

Starting balance: $3,000
APR: 20%
Making no payments

After 1 year: $3,600
After 2 years: $4,320
After 5 years: $7,464

Your $3,000 debt more than doubled in 5 years just from interest!

The lesson: Interest never sleeps. The longer you carry debt, the more you pay.

💡 Exercise 4.3: Calculate Your Interest Cost

Pick your highest-interest debt. Let's see what it's really costing you.

Debt details:

Balance: $__________
APR: ________%
Current minimum payment: $__________

Use an online debt calculator (search "credit card payoff calculator") to find:

Paying minimum only:

Months to pay off: _______
Total interest paid: $__________

Paying minimum + $50 extra:

Months to pay off: _______
Total interest paid: $__________
Money saved: $__________

Paying minimum + $100 extra:

Months to pay off: _______
Total interest paid: $__________
Money saved: $__________

Eye-opening, right? Even small extra payments make a huge difference.

Part 4: Debt Payoff Strategies

Now for the good part – how to actually get rid of debt.

Strategy #1: Debt Avalanche (Best Mathematically)

How it works:

Pay minimums on all debts
Put all extra money toward the highest-interest debt
When that's paid off, roll that payment to the next-highest rate
Repeat until debt-free

Pros:

Pays least interest overall
Fastest payoff mathematically
Most efficient use of money

Cons:

May take longer to see a debt eliminated
Can feel less motivating

Best for: People motivated by math and efficiency

Example:

Debt	Balance	Interest Rate	Minimum Payment	Order
Credit Card A	$3,000	22%	$90	1st
Credit Card B	$5,000	18%	$150	2nd
Car Loan	$12,000	5%	$300	3rd

Strategy: Pay minimums on all ($540), plus extra $200 toward Credit Card A (highest rate).

Strategy #2: Debt Snowball (Best Psychologically)

How it works:

Pay minimums on all debts
Put all extra money toward the smallest balance
When that's paid off, roll that payment to next-smallest balance
Repeat until debt-free

Pros:

Quick wins provide motivation
Psychological boost from eliminating debts
Simplifies your finances faster

Cons:

May pay more interest overall
Takes slightly longer mathematically

Best for: People who need motivation and quick wins

Example (same debts):

Debt	Balance	Interest Rate	Minimum Payment	Order
Credit Card A	$3,000	22%	$90	1st
Credit Card B	$5,000	18%	2nd
Car Loan	$12,000	5%	$300	3rd

Strategy: Pay minimums on all ($540), plus extra $200 toward Credit Card A (smallest balance).

Strategy #3: Debt Consolidation

What it is: Combining multiple debts into one loan with a lower interest rate

Options:

Balance transfer credit card: 0% intro APR (typically 12-18 months)
Personal loan: Fixed rate (typically 6-15%)
Home equity loan/HELOC: Uses home as collateral (typically 4-8%)

When it makes sense:

You have good enough credit to qualify for lower rates
The new rate is significantly lower than current average
You have a plan to pay it off
You won't accumulate new debt on the old cards

When it doesn't:

You'll rack up more debt on the freed-up credit cards
Fees outweigh interest savings
You're turning unsecured debt into secured debt (home equity)

Example:

Current situation:

3 credit cards: $15,000 total at 20% average APR
Minimum payments: $450/month
Payoff time (minimum only): 10+ years
Total interest: $14,000+

After consolidation:

Personal loan: $15,000 at 9% for 4 years
Monthly payment: $373
Total interest: $2,904
Savings: $11,000+ in interest

Strategy #4: Balance Transfer Card

How it works: Transfer high-interest credit card debt to a card with 0% APR intro period

Typical offer: 0% for 12-18 months, then 16-24% APR

Balance transfer fee: Usually 3-5% of transferred amount

When to use:

You have good credit (660+)
You can pay off the balance during the 0% period
The fee is worth the interest savings
You won't use it for new purchases

Example:

Transfer $5,000 from 20% APR card
New card: 0% for 15 months, 3% transfer fee ($150)
Pay $350/month for 15 months
Result: Paid off in 15 months, paid only $150 in fees vs. $800+ in interest

Warning: If you don't pay it off before the intro period ends, the high rate kicks in!

💡 Exercise 4.4: Choose Your Debt Payoff Strategy

Based on your debt inventory and personality:

My chosen strategy: ☐ Avalanche ☐ Snowball ☐ Consolidation ☐ Balance Transfer

Why this one:

My debt payoff order:

_______________ ($______ at ___%)
_______________ ($______ at ___%)
_______________ ($______ at ___%)
_______________ ($______ at ___%)

My extra debt payment amount per month: $__________

(From your budget in Module 2 – what can you afford beyond minimums?)

My aggressive payoff amount (if I cut discretionary spending): $__________

💡 Exercise 4.5: Create Your Debt Payoff Plan

Focus Debt (first to pay off): _______________

Current balance: $__________

Interest rate: ________%

Minimum payment: $__________

My payoff plan:

Total monthly payment (minimum + extra): $__________

Using an online calculator, this debt will be paid off in: _______ months

Payoff date: _______________

Total interest I'll pay: $__________

Once this is paid off, I'll roll the $______ payment to: _______________

Create a visual tracker:

☐ Make a thermometer chart showing progress
☐ Use a debt payoff app
☐ Create a spreadsheet with monthly projections
☐ Color in a debt-free chart as you pay it down

Visualization keeps you motivated!

Part 5: Credit Cards – Using Them Wisely

Credit cards aren't evil. They're tools. Used properly, they offer benefits. Used poorly, they create expensive debt.

Credit Card Benefits (When Used Responsibly)

✅ Build credit history (needed for mortgages, car loans)
✅ Rewards/cash back (1-5% back on purchases)
✅ Consumer protections (fraud protection, purchase protection)
✅ Convenience and safety (better than carrying cash)
✅ Track spending (digital records of all purchases)

Credit Card Dangers (When Used Irresponsibly)

❌ High interest rates (18-29% APR)
❌ Easy to overspend (doesn't feel like "real" money)
❌ Minimum payment trap (decades of debt)
❌ Fees (late fees, annual fees, cash advance fees)
❌ Credit score damage (from high balances and missed payments)

The Golden Rules of Credit Cards

Rule #1: Pay the FULL balance every month

No exceptions (unless emergency)
This way you pay $0 in interest
You get rewards without paying for them

Rule #2: Never spend money you don't have

If you can't pay cash for it, don't charge it
Credit cards are for convenience, not loans

Rule #3: Stay under 30% of your credit limit

Better yet, under 10%
High "utilization" hurts your credit score
Example: $5,000 limit → keep balance under $1,500

Rule #4: Set up autopay for at least the minimum

Prevents late payments (which destroy credit and cost $40 fees)
You can always pay more manually

Rule #5: Review your statement monthly

Check for fraud or errors
Ensure you recognize all charges

💡 Exercise 4.6: Credit Card Health Check

For each credit card you have:

Card 1: _______________

Current balance: $__________

Credit limit: $__________

Utilization: (Balance ÷ Limit × 100): ________%
☐ Under 30% (good) ☐ Over 30% (work to pay down)

Do I pay in full monthly? ☐ Yes ☐ No

Interest paid last year: $__________

Rewards earned last year: $__________

Net benefit: $__________ (rewards minus interest)

Annual fee: $__________

Should I keep this card?

☐ Yes – I use it responsibly and get value
☐ No – It's costing me more than it's worth
☐ Maybe – I need to change how I use it

Card 2: _______________

[Repeat same questions]

Summary:

Total credit card debt: $__________

Total interest paid last year: $__________

Total rewards earned last year: $__________

Am I winning or losing the credit card game?

When to Close a Credit Card vs. Keep It

DON'T close a card if:

It's your oldest card (helps credit history length)
It has no annual fee (helps your available credit)
Closing it would hurt your credit utilization

DO close a card if:

High annual fee and you don't use the benefits
You can't control spending on it
It's costing you money

If closing, keep your oldest card open even if you don't use it.

Part 6: Staying Out of Debt

Getting out of debt is half the battle. Staying out is the other half.

Common Reasons People Go Back Into Debt

No emergency fund → unexpected expenses go on credit cards
Lifestyle inflation → earn more, spend more
Not budgeting → lose track of spending
Emotional spending → using shopping as therapy
Keeping up with others → comparison spending
Not planning for irregular expenses → holidays, repairs "surprise" you

Strategies to Stay Debt-Free

Strategy #1: Build an emergency fund (Module 6 covers this)

Even $500 prevents most debt emergencies
Work up to 3-6 months of expenses

Strategy #2: Use cash or debit for problem categories

If you overspend on dining out, use cash only
Can't overspend what you don't have

Strategy #3: Wait 48 hours before purchases over $100

Prevents impulse buying
Gives time to check budget
Often you'll realize you don't need it

Strategy #4: Track your spending

Awareness prevents overspending
Use app or spreadsheet from Module 2

Strategy #5: Plan ahead for big expenses

Holidays, birthdays, car maintenance
Set aside money monthly (sinking fund from Module 3)

Strategy #6: Celebrate debt-free status

Remind yourself why you paid off debt
Don't take going back lightly

💡 Exercise 4.7: Your Debt-Free Maintenance Plan

How will I prevent going back into debt?

My weak spots (where I tend to overspend):

My plan to address them:

My "never again" triggers:

I will NOT go into debt for:

I will ONLY consider debt for:

My accountability:

Who will help keep me accountable? _______________________________________________

How often will I check in about spending? _______________________________________________

Part 7: Debt Payoff vs. Saving – What to Prioritize?

This is a common dilemma. Here's a framework:

Priority Order:

1. Pay all minimum payments (avoid late fees and credit damage)

2. Save $500-$1,000 starter emergency fund (prevents new debt from small emergencies)

3. Get full employer 401(k) match (if available – this is free money, don't leave it!)

4. Pay off high-interest debt (anything over 7-8% APR)

Credit cards
Payday loans
High-interest personal loans

5. Build full emergency fund (3-6 months expenses)

6. Pay off medium-interest debt (4-7% APR)

Most auto loans
Some personal loans
Private student loans

7. Invest for retirement beyond the match

8. Pay off low-interest debt (under 4% APR)

Federal student loans
Mortgages
Low-rate auto loans

9. Save for other goals

The Math vs. Psychology Debate

Math says: If your debt interest is lower than investment returns, invest instead

Example: Student loan at 4% vs. stock market averaging 10% → invest

Psychology says: Debt is stressful; the peace of mind from being debt-free is worth something

The answer: It depends on you

Anxious about debt? Pay it off for mental health
Comfortable with debt and good at investing? Split your money
High-interest debt? Always pay that first

💡 Exercise 4.8: Your Priority Plan

Based on the priority framework:

My Step 1: ☐ Done ☐ In progress

Pay all minimums: $________/month

My Step 2: ☐ Done ☐ In progress ☐ Not started

Save $500-$1,000 starter emergency fund

Currently saved: $________

Monthly contribution: $________

Goal date: _______________

My Step 3: ☐ Done ☐ N/A (no employer match) ☐ In progress

Get full employer 401(k) match

Current contribution: ________%

Match: ________%

My Step 4: ☐ Done ☐ In progress ☐ N/A (no high-interest debt)

Pay off high-interest debt (over 7%)

Target debt: _______________

Monthly payment: $________

Expected payoff: _______________

Once Steps 1-4 are complete, I'll move to Step 5 and beyond.

Common Mistakes to Avoid

❌ Paying off debt while neglecting emergencies
→ Build a small emergency fund first
❌ Missing payments to pay extra on other debts
→ Always pay minimums on everything
❌ Closing credit cards immediately after payoff
→ Can hurt credit score; leave them open (but unused)
❌ Not addressing the root cause
→ If overspending is the problem, debt payoff alone won't fix it
❌ Consolidating debt without changing habits
→ You'll just end up with the consolidation loan PLUS new debt
❌ Ignoring spouse/partner's debt
→ Work together; separate finances doesn't mean separate problems
❌ Being too aggressive and burning out
→ Extreme frugality isn't sustainable; find a balance

Key Takeaways

✅ Not all debt is equal – prioritize high-interest debt first
✅ Understanding interest rates shows why paying more than minimums matters
✅ Choose a payoff strategy that fits your personality (Avalanche vs. Snowball)
✅ Credit cards are tools – powerful when used responsibly, destructive when misused
✅ Pay off high-interest debt before aggressive saving/investing
✅ Staying debt-free requires planning, budgeting, and healthy money habits
✅ Build an emergency fund to prevent going back into debt

Quick Wins You Can Do Right Now

Call your credit card company and ask for a lower interest rate (it works more often than you'd think!)
Set up autopay for minimum payments on all debts (prevents late fees)
Calculate one extra payment – what if you paid an extra $50/month on your highest-interest debt?
Unsubscribe from retail emails – less temptation = less spending = more debt payoff money
Put your credit cards in a drawer or freeze them (literally, in ice!) while paying off debt

Before You Move to Module 5

Make sure you've completed:

✓ Exercise 4.1: Created your debt inventory
✓ Exercise 4.4: Chosen your debt payoff strategy
✓ Exercise 4.5: Created your debt payoff plan
✓ Exercise 4.6: Completed credit card health check
✓ Exercise 4.8: Mapped out your priority plan

Reflection Questions

How do you feel about your debt situation now compared to before this module?

What surprised you most about how interest works?

What's your #1 commitment to yourself about debt going forward?

Looking Ahead

In Module 5, we'll talk about credit scores – what they are, how they're calculated, how to build and maintain good credit, and why it matters for your financial life.

Understanding debt is step one. Building great credit while managing or eliminating debt is step two!

Additional Resources

Debt Payoff Calculators:

unbury.me (debt payoff visualization)
creditkarma.com/calculators
bankrate.com/calculators

Debt Consolidation:

Personal loan marketplaces: LendingClub, Marcus, SoFi
Balance transfer cards: Compare at NerdWallet, Bankrate

Help with Overwhelming Debt:

National Foundation for Credit Counseling (NFCC.org)
Financial Counseling Association of America (FCAA.org)
InCharge Debt Solutions

Books:

"The Total Money Makeover" by Dave Ramsey (Debt Snowball method)
"Your Money or Your Life" by Vicki Robin (mindful spending to eliminate debt)

"A man in debt is so far a slave." – Ralph Waldo Emerson

"Debt is normal. Be weird." – Dave Ramsey

"Too many people spend money they earned to buy things they don't want to impress people that they don't like." – Will Rogers