There are five key stages to handling debt, and then a heap of strategies. The basics, however, are below.
- Figure out how much debt you owe.
- Assess which debt you should pay-off first and form a plan.
- Identify your debt-building habits.
- Automate your debt payments each month.
- Allocate extra funds at the end of the month to your debt priority.
If you have moderate to manageable debt — student loans, a few credit cards, perhaps a car or home loan — then the first step to planning for travel is to gain a deep understanding of your debt situation. It’s not the scope of this page to delve into the myriad of techniques, programs, and ways to resolve very serious debt. Instead, if you are severely in debt, I recommend that you dedicate the majority of your current efforts to that process. Once you have it under control, you can use my How to Save for Travel page and How Much Will Your Trip Cost? guide to begin planning your long-term travel.
Figure Out How Much Debt You Owe
Scour your finances and pull together every piece of debt. Spare no debt in this calculation, even debt traditionally considered “good debt,” like a home mortgage. Include: credit card debt, student loans, car loans, home mortgage, medical debt. In addition to writing the type and amount of debt, log the interest rate for each piece of debt too. For things like car and home loans, this is a fixed-rate debt. For credit cards, these carry variable interest rates so log the current rate for each card.
All you need is a notebook to complete this step. Once you have it all listed, tally the figures and come up with a total.
Assess Your Debt
No matter the total, it’s possible to move forward from here and save for travel. Some debt will hold you back from saving right away, whereas other debt will be weighed for its impact on your travel plans and then adjusted based on your current needs.
First assess home and car loans. For those planning long-term travel, consider what you will do with your home while you’re on the road. Will you rent out your house? This is effective and the route many travelers use when they know they will return home at the end of the trip. For open-ended trips, a home can be an unnecessary burden. Then you may look at options like selling your home. This could even be an ideal way to downsize your current life into a smaller home or an apartment as a way to save money for long-term travel.
Car loans should follow a similar line of thought. While you may clearly need a car while you are working, is your current car the best option? Consider if you could use public transport, or car-share if you’re in a couple. If you’re financially solvent and want to keep your car and home loans, that, of course, is also totally OK. This section is more about looking closely at the options and finding areas where you feel comfortable reallocating money into a travel fund.
Credit card debt is the largest obstacle for many planning a trip. If you have maxed out cards, or if you feel like you’re drowning in too much debt to ever see how travel is a possibility, then it’s time to drill down into your debt and come up with a timeline. It’s possible to get out of debt in any situation, but it might take time. Using the list you made, order your credit cards from the highest interest rate to the lowest. This is the order in which you will pay them off. This is called the Debt Avalanche method and it’s the only one that makes mathematical sense. Credit card companies can change your rate at any time, and many times you’re offered a special introductory rate that ends without you realizing. For this, and many other reasons, credit card debt is rarely a good thing.
If you have a savings account but you are in debt, then there might be a better way to use your money more effectively. Savings accounts never pay interest rates anywhere close to the interests you are paying to hold your debt with a credit card company. Keep some of that money as an emergency, safety net fund (there is no glory in getting further into debt if you have a sudden car repair or health emergency).
All of the rest of your income and extra savings account funds should go toward paying off the debt with the highest interest rate. Make all of your minimum payments as soon as you are paid — debt is your priority. If you create a travel fund and carry debt with 15% or 20% interest rate, that vacation you’re planning will cost you as much as double in the long-term. It’s far better to get a handle on the high interest rate debt before you even begin thinking about the travel fund.
The Debt Avalanche is superior to other methods that prioritize balance size over interest rates. The idea here is that your travel plans are the motivating force for getting out of debt. Advice to pay off your smallest debt first, regardless of interest rate, assumes that you need to feel the motivation of small success to continue with your debt repayment program.
But from a financial standpoint, it’s just not as good of a choice to leave high-interest debt in favor of paying off lower-interest debt. You bought this book because you have a dream and a goal to travel the world. That is your motivation. It’s with that motivation in place that you must start paying off the debt that is gaining you the most additional debt each month.
Going forward, you should always make your minimum payments each month on every card and on your loans. Then, allocate all extra money to paying off the first debt on your list — the one with the highest interest rate. Other sections will discuss where to cut expenses for your travel fund. If you’re in debt, use those same ideas to pull extra money from your paycheck each month to use toward your debt.
With all debt, open a line of dialogue with your lenders. This works particularly well with credit card debt. Call your credit card companies and ask for a lower interest rate. Call every single one. It won’t work for them all, but they often have a degree of discretion in lowering your rate, and even one percentage point makes a huge difference. And if the first person can’t help you, ask to speak to a manager or supervisor. Instead of directly asking for a lower interest rate, to which you give them an easy “no,” open a dialogue by asking how you can work with them to lower your rate. Or ask if there are any programs in place or actions you could take to lower that rate. These more open questions give the person on the phone the opportunity to share with you information beyond your narrow question.
Then, think about your timeline. If you have many forms of debt and many cards, it’s hard to know how long it will take to pay off the debt, even using the Debt Avalanche. For that, use an online calculator. I highly recommend using an online debt calculator and automated tools to get a look at your timeline for paying off each type of debt. Many will recommended minimum payments, too, and allows you to see how much sooner you can pay off debt by doing things like doubling your minimum, paying off an extra $50 each month, etc.
Identify Your Debt-Building Habits
This step is as important as any of the other steps — perhaps even more so. By taking time to identify the habits, patterns, and emotions that have contributed to your debt you can better manage them in the future. For many, debt builds upon itself. It may start as a small splurge or a perhaps you use a credit card to bail yourself out of a difficult financial situation. But then, somehow, the debt gets out of control. There was a point when I lived in L.A. that I felt helpless against my compounding debt. I left college with a small student loan and within two years I had amassed credit card debt, medical debt, and I hadn’t yet paid off my student loan.
In the midst of my overwhelm, I lost sight of even the possibility that I could dig myself out of a hole that big. And because it felt hopeless, I just stopped tracking my spending and I stopped budgeting. I had an emotional relationship with my debt that only worsened my situation.
Money is a complicated subject, and many of us learn patterns and behaviors from our families. We watch how our parents spent money growing up. Perhaps you had fantastic money role models. Or maybe you didn’t. Either way, that’s in your past and this is the time to examine how your family thinks about money and how that has impacted your own life choices.
We learn about money from the media too — from the advertisements and from celebrity stories. While I will talk a lot about consumption habits later, the media also sends more subtle information about what is normal and appropriate money behavior. Movie characters continue to normalize credit card debt in the dialogue Hollywood feeds us on screen. The most popular on-screen heroes and heroines rarely discuss how they actually afford these fabulous lives. And celebrities take massive sponsorship deals and are loaned gorgeous couture for the red carpet. Their behavior and appearance further normalizes a lifestyle even they couldn’t (or wouldn’t) afford.
With all of these complex factors affecting our relationship to money, sometimes we just accept that we make bad money decisions, and we resign ourselves to that rate. For a myriad of reasons we have formed a habit. But psychological research tells us that habits are malleable throughout our lives. It’s not too late to change habits that aren’t serving your larger life goals.
Here are a few common debt-building habits and spending triggers that I’ve seen in friends over the years who struggle to eliminate debt. Until they addressed these issues, they also struggled to reach their big financial goals like saving for a downpayment on a house, or buying a car.
- Using credit cards for non-essential purchases.
- Spending when they are feeling emotional; for example shopping or eating out as a reaction to a stressful day.
- Overdrafting their account for non-emergencies.
- Budgeting too zealously at first and losing steam.
- Spending to keep up appearances with friends, families, co-workers.
- Justifying and rationalizing a splurge that’s not in their budget.
- Hanging out with others who don’t value financial fitness.
It wouldn’t do much good to just identify the negative habits, but you also need to replace them with positive habits. Let’s look at the positive money habits that you can form as you pay down your debt.
- Set financial rules for yourself. Perhaps it’s as simple “I will wait 24 hours before buying any splurge purchases.” Or, “I can only use cash to pay for non-essential bills.”
- Catch yourself before you rationalize a reason to break your rule or set aside your goal. Habits form quickly, and it you’ll drag yourself down a rabbit hole if you allow yourself to jump of the budgeting bandwagon on a whim. Psychological research shows that the first decision, even if it seems minor, has a lasting impact on future decisions and habits.
- Know your personal spending triggers and have a rule in place to help you break that habit. Spending triggers vary for each person, but they always have a reward that we crave at the time, even if we later regret it. It’s a positive money habit to have a rule that disrupts your spending trigger/reward pattern so that you can break the habit. Perhaps a stressful conversation with a parent sends you to Amazon every week. Or maybe you consistently underestimate your hunger at work and end up buying lunch instead of eating what you pack. Get honest with yourself and identify habits you can put in place to replace the action that follows a trigger.
- Spend less than you earn.
- Maintain money in an emergency fund.
- Create a list before any shopping trip (food or non-food) and stick to it.
- Budget within reason; create a balance of tracking your spending while also living your life. Those who approach budgeting with serious intent but steady follow through have more success than attacking the problem with short-lived energy.
- Take no action if you’re faced with indecision. If you’re waffling between two options then it means you don’t love either. Take indecision as a sign that you should step back and reassess if you need either one. This applies to everything from clothes shopping to picking a restaurant for dinner.
Only once you have truly looked at the whys of your personal situation can you have more control over your spending and debt building habits. Get curious about why you have certain money habits and dig deeper into how your debt habits make you feel. We often engage in debt-building behavior as a part of a larger scenario. Identify your unique relationship with money and then begin replacing negative habits with positive ones from the second list.
Changing your relationship with money takes time, but it’s the only way that you will see the fruits of your labor when you begin budgeting and paying down your debt.
Automate Debt Payments
You should have two forms of debt repayment each month. Automate the process of paying the minimum balance for each debt. Schedule these for as soon as your paycheck clears your bank each month. You should also automatically pay more than the minimum each month on your top priority card.
Then set aside one day every month to assess and allocate extra funds to your priority debt. Make a second payment each month with the extra money that you have saved with frugality or side hustles. Again, don’t allow this money to sit in your account — it’s too easy to spend — instead, watch that high interest rate debt shrink as you aggressively tackle those debts. Anything with a variable interest rate can charge enormous fees for a missed or late payment, and automation is the key to keeping your interest rates as low as possible while you repay debts.
Debt and Travel
There is a lot more that could be said about the debt repayment process. Entire websites share the best theories and ideas for staying out of debt. Consider this an overview of the process and please seek other advice if you are seriously in debt. Now that we have a high-level look at your debt, it’s time to consider the relationship between debt and travel.
Although I think travel is transformative and a wonderful experience, I don’t believe that you should go into credit card debt for a trip. It’s much better to plan for your travels and take a long-term approach to how this travel will integrate into your life. Compound interest is a concept that works very well for those saving for retirement, or it severely hurts your long-term financial health where debt is concerned. When you pay interest on interest, this begins to spiral out of control over the long-term. Many credit card companies compound interest on a daily basis. That means every day you’re that traveling, your credit cards are digging you deeper into the financial hole.
Please use this section to look at your debt and understand how it impacts your life. If the debt repayment timeline is long, then consider other ways to up your monthly repayments, such as reducing expenses or making more money through second jobs and side hustles (which we cover in just a moment).
All of that said, you can pay down debt while you travel. I decided to pay off my credit card debt by selling my car and possessions in the months before I left to travel. I also took extra client work and aggressively hurled this money at my high interest rate credit cards. When I left to travel, I had paid off my three credit cards but I still had student loan debt. I made the choice to factor this low-interest rate debt into my long-term travel budget. And, it turns out, my online work, coupled with the low-cost of traveling in South and Southeast Asia, allowed me to pay off this debt even faster than I could have back in Los Angeles.
Money and debt are highly personal, but taking the time to understand your situation and your values is important to planning. For those who have very little high interest rate debt, you may decide to pay off your student loans at the minimum for the next 20 years, and begin saving for travel immediately. Or if you are in medical debt, again, that could take years and it may be worth it, in your situation, to continue paying off the debt, but to also begin your travel fund. That’s a values and lifestyle decision that is highly personal to each person and each specific scenario.
No matter your choice or situation, you should have a clearer idea of how much debt you have, which debt is serious and should be addressed before you leave to travel, and how long it will take you to pay off the serious debt.
Only once you have your debt situation mapped out should you look at the ways to actively save for world travel. You can also use the savings advice as a way to pay down your debt or build your safety net fund.