"What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?” — Adam Smith
Your debt is the chain that keeps you from reaching the surface of a wealthy life. With it weighing you down, it is extremely difficult to become a millionaire. To fix that, let's set up your finances so that you rid of your debt automatically.
Step 7: Figuring out which debt to pay off first
Let's say that John is currently $36,000 in debt, but $24,000 of that is from his mortgage. The rest of his debt ($12,000) comes from a student loan he got for his education.
As John looks at his debt-paydown page, he notices that the APR for his mortgage is 4% and his student loan is 3.2%.
This raises a good question: Should John start paying off his mortgage or student his loan first? The answer is quite simple: He needs to pay off his loan first because it has a higher APR than his mortgage.
A higher APR means that the debt John needs to pay on his student loan will increase exponentially (very fast). Currently, the APR for this student loan is 4%, meaning that his student loan debt will quickly grow bigger every year that he does not pay for it.
In contrast, the APR on his mortgage is only at 3.2%, meaning that his mortgage debt will grow 0.8% slower than his student loan debt will.
Like John, you need to find out which loan you have the highest APR. If you'd like to see the average APR on the most common loans as of @September 4, 2020, here they are in descending order:
- Credit card APR:
- Average credit card APR [1]: ~13%
- Personal loans:
- Average 24-month personal loan APR [1]: ~10.5%
- Education Loan:
- Average student loan APR [1]: ~5.8%
- Home equity loans averages:
- 10-year fixed home equity loan [1]: ~5.74%
- 15-year fixed home equity loan [1]: ~5.74%
- HELOC [1]: ~4.8%
- Auto loans:
- Mortgages:
Looking at the list above, it's clear that credit card debt is the one you'll want to get rid of first. If you don't have credit card debt, you'll want to start with any personal loans. If you don't have any personal loan debt, you'll want to start with your education loan and so on.
As an aside, it is possible to have "good" debt. For the purpose of keeping this guide short, we won't cover it here. But if you're interested in learning more, click here. But, in most cases, debt should be avoided at all costs.
Step 8: Setting up your debt timeline
Now that John knows he needs to pay off his student loan debt first, he decided to pay all $12,000 of his total student debt amount in four years. That means that he needs to save about $3000 every year to completely pay back the loan.
If your highest APR loan is bigger than John's, consider extending your timeline from four years to 5, 8, or even more years. But remember, the longer you take to pay back your loans the more you will have to pay back overall.
He—and you—need to start setting aside 1/12 of your chosen yearly amount every month. For John, that means he needs to put aside about $250 every month. To make sure that he has enough, he checks his average monthly income from his 1-Year average monthly income from the 
Since he earns just over $1544 per month, he has enough cash to save $250 a month to pay down his student loan. You will also need to make sure that your income is large enough to support your monthly debt payment!
Step 9: Automate your debt-free life
To make sure that he saves $250 every month, John set up an automatic transfer of $250 on the first day of each month (the day he gets paid) from his checking account (the account where his pay-checks go) to his student loan debt issuer.
At this point, John is automatically moving $250 from his checking account to his debt holder and will be student debt-free in about 4 years.
While he has automatic payments going to his student loan, he also sets up the minimum automatic payment to his mortgage! He only pays the minimum because he knows that once he finishes with his highest APR debt (4% student loan), he can then switch to automatically to paying his mortgage at the full amount he is able to cover.
If you have any questions about the process outlined above, click here to send them over.
Optional Step: Automate your credit card payments
This is for those of you who want to truly automate all of their finances. By automatically paying your credit card bill every month, you make sure that you will never again go into debt. Well, at least as long as you have enough to pay them down of course.
To save reading time for those of you that don't care about completely automating their finances, check out nerdwallets automatic credit card payments article if you're interested in learning more. Once you're done setting that up, come back to this page to continue reading.
Closing thoughts
Remember, high APR debt is the number 1 reason that poor people do not become wealthy. Debt will not allow you to compound your money—and as we have already covered—compounding your money is the secret sauce to becoming wealthy.
