Tips for Paying off Massive Debt

By Ismail Abdur-Rahman, CEO iVIBES

*This is the second in a series of posts about managing personal finances.

C’mere. Closer. I wanna share my dirty little secret with you. Now, this is just between us, OK?

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Not long ago, I was about thisclose to having to file bankruptcy. Yeah, I know. I was pretty depressed about it, but it can happen to anyone, especially if you don’t have a healthy relationship with money at the outset. And as I’ve mentioned before, the American school system does a horrendous job of preparing us to be financially responsible adults. However, I was fortunate enough to begin to apply the lessons I’d learned from studying business in college in order to not only improve my financial literacy but to also pay off a little more than $250,000 in debt. I’m sharing my experience with you in hopes that you can avoid the pitfalls that almost ruined my life.

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I know budget is a dirty word for many people, but the reality is that it’s a necessary evil if you have any realistic chance of paying of massive debt. Think about it like this, without a budget, you’ll spend too much time at the end of the month wondering where your money went. On the other hand, if you make an effective budget, you can direct your money to go not only to where it’s needed but also to where it will be the most useful.

There are several theories about how best to budget your money, especially when working with a limited income. While there are undoubtedly merits to each of the various budgeting approaches propagated by various personal finance gurus, it would be foolish to assume that any one approach will always be effective for every individual in need of a solution. After all, everything ain’t for everybody.

Based upon my experience, I have found the bucket list method of budgeting to be effective. What’s the bucket list method, you ask? Let me explain.

Instead of crafting a detailed budget that accounts for every dollar, I personally have found it much easier to work based on the idea of putting my money into three buckets: one for fixed expenses, one for discretionary expenses, and one for investment or financial goals.

Fixed Expenses - 50%
There are some things in life that are simply unavoidable, like rent, groceries, car payments, and utility bills. For those inescapable obligations that you’ve got to pay to avoid homelessness or imprisonment, put them in this category and make sure that they don’t exceed 50% of your monthly budget.

You might need to make difficult decisions about where you live or what kind of vehicle you drive in order to squeeze the necessities into this bucket, but nobody said this was going to be easy. Also, depending on where you live, you might be able to arranged a fixed payment schedule for your electric bills, which will help you manage this part of your budget.

Discretionary Expenses - 10 to 25%
You know what they say about the best laid plans of mice and men, right? So, since you can’t actually plan real life, and since you’re not a robot (but wouldn’t it be cool if you could do this), you need a little leeway in your budget to handle things that might come up from time to time. Also, by allowing yourself a little room to spend on things that might be wants instead of needs, you’ll hate your life a bit less as you work towards financial freedom.

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Some examples of the types of things that might be covered under discretionary expenses are a new mobile phone to replace a damaged one, a relaxing evening out, or charitable giving. Although some experts will say this allowance is too high, I believe that if your budget is too restrictive, you’ll never stick to it, and you’ll eventually end up in a worse financial position than the one you’re trying work your way out of. Think of it like giving yourself one cheat meal per week while you’re on a beach body diet. Remember, you only get a maximum of 25% of your budget here, with no exceptions, so don’t go overboard.

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Investments / Financial Goals - 25% - 40%
This category should be fairly obvious. The money that you allocate for investments and financial goals has the most significant impact on your financial position, i.e., your net worth.

Your debt payments will be accommodated in this category. Obviously, the more dire your debt situation is, the larger the allocation for this category needs to be, and the smaller the allocation to discretionary expenses. Put another way, if you’re drowning in debt like I was, you’ll want to aggressively attack the problem with the maximum 40% allocation here.

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There are several approaches for paying down debt, and they all have some merit. The two most popular approaches are the avalanche and the snowball method. A discussion of the merits of each will require somewhat of a detailed explanation, so we’ll save that for a future post. Just know that, in general terms, these strategies ask you to prioritize your debt payments according to either the interest rate or the outstanding balance.

Of course, any good financial planning strategy will ask you to create an emergency fund while whittling away at your debt. As a general guideline, you should think in terms of accumulating an amount that is the equivalent of 8 months’ of your mandatory expenses. Why 8 months? Because for people who are unexpectedly fired or laid off, it can take up to 8 months to find suitable employment to replace that income. In fact, some people suggest that one should expect to spend one month searching for a job for every $10,000 of income you desire.

With regard to investment, again, there isn’t a one-size-fits-all strategy that will be effective for everyone and every set of circumstances. The investment strategy that will be best for you as an individual will depend on a variety of factors, including your age, risk tolerance, financial goals, and investment capital.

That being said, saving money as a passive investment strategy isn’t generally a good idea because the value of money decreases with time. After you build your emergency fund, you should take an investment approach that allows your money to get in the game and make more money, not sit on the sidelines broke, busted, and disgusted.


I know there is a bunch of information floating around in cyberspace recommending would-be investors to put their money in various paper investments that pay high interest rates, such as a Roth IRA or a 401k. However, I’m not cosigning that approach. Remember the global economic collapse of 2008? The official cause is blamed on the subprime mortgage crisis, but that was just a symptom of a larger problem: financial markets, which are based on interest and inflation, are dangerous and derivatives are financial weapons of mass destruction.

A better, and far more ethical and sustainable, strategy for investing is to acquire real assets that have moderate risk and are likely to appreciate over a reasonable time horizon. Without going into detail here (we’ll save that for a later post), my preferred asset holdings are stocks, real estate, and small business ownership. In very general terms, all three of these asset classes tend to make money over the long haul if they are managed properly.

While it is true that it does take money to pursue any type of investment, you should think in terms of increasing your cash flow so that you have the liquidity to invest at some point, as this is the only way to create a sustainable increase in your net worth. If your current income barely covers your fixed expenses, then paying off your debt is going to take a Herculean effort because you have a cash flow problem that is more urgent than your debt crisis.

The most important thing to keep in mind is that the first step to crawling out from under a mountain of debt is to have an appropriate debt reduction strategy, and budgeting has to be a core component of any successful approach to financial freedom. At the end of the day, you have two choices: be enslaved to your debt, or make your money work for you.