First things first : get out of debt

Here’s a question I saw online in a financial discussion forum:  

“I would like to ask some advice from you. I have recently came into a small windfall of money to the sum of £3K and wondered what best to do with it. Not a lot I know, but for my salary its quite a bit.

Initially my thoughts were to either:

– Invest into a stockmarket tracker fund?; or

– Start saving towards a deposit for a flat?

…but then I wondered whether I should use it to pay off my credit card debt or my student debt?”

This is a bit like someone asking what type of garden furniture they should be buying when their roof is on fire.

Often in personal finance there is no right or wrong answer, its down to individual preferences. But here there is a correct answer and it goes something like this:

Why are you talking about investing in the stockmarket or buying a house?

First things first…you have CREDIT CARD DEBT and that is an EMERGENCY. You need to pay that off, right now!

This was a mild case. The windfall was enough to clear the credit card debt, problem solved. But the fact that someone was even asking the question made me realise how much financial illiteracy confusion there is out there.

I’m sure you realise that debt is a trap, but perhaps you could forward this article to someone (especially a young person) that needs to know this?

First things first

Let’s say you’ve locked down your spending and have some money to throw at your debts / savings / investments. Where should it go?

Well, first things first…there is a hierarchy of priorities:

  1. First you pay off payday loans and bank overdrafts (typical interest rate ~40%).
  2. Next you pay off credit cards (typical interest rate 20-30%).
  3. Next you build up an emergency fund of 3-6m expenses in cash in an instant access bank account.
  4. Next, have you cleared all expensive consumer debt? (excluding a mortgage but including personal loans, hire purchase, car lease payments etc)
  5. Now (and only now) you can invest in the stockmarket.

[Note: I have excluded UK student debt which is more like a graduate tax that depends on earnings and so depends on individual circumstances.]

Getting out of debt is an emergency

This is an emergency. You must get out of all expensive debt as soon as possible. Credit cards and overdrafts are the most common ways that people dip into debt at the end of the month.

The annual interest rate on most UK overdrafts is about 40% per year. Based on the interest alone, the amount you owe will more than double within 2 years at 40% interest. The interest rate on credit cards is something like 25%. This means that the amount that you owe them will more than double within 3 years.

Who will tell it like it is?

The problem with that is that people in debt often don’t have good role models around them.We all have a money blueprint and for most of us the biggest influence on this would have been our parents. What if we never had people around us that warned us to stay away from debt?

It would be easy to avoid this subject. Most people (including me) don’t want to be seen telling people who are struggling with debt what to do. But that leaves a gap filled by the advertisers, marketers and credit card companies.

No blame, no shame

I actually think the older generations have let down young people. We used to teach young people to prepare for a life with struggles, a life that would test them in all sorts of ways. Now our we sell young people instant gratification via stuff they don’t need on credit cards then pretend its fine because everyone is a rational, well-informed economic agent.

Well, that doesn’t work because you are a habit machine. Once you are in the habit of being in debt and spending above your means, you need a period of cold turkey (see Monk Mode below) to break those habits.

If you are young and in debt, I’m not saying it’s your fault but it is your responsibility. I’m not interested in blame or why anyone came to be in debt in the first place. This is not a moral judgement and I’m not interested in the past or in reasons, rationalisations or excuses. We are where we are and all that matters is what we do from this point onwards.

Acknowledge reality

The hardest thing is often acknowledging your reality. The best way to do this is to create a spreadsheet that records how much you owe, to whom and what interest rate you are paying on the debt.

The interest rate is the speed at which your compounding machine is running backwards.  The higher the interest rate, the more rapidly your net worth is shrinking. The APR stands for the annualised percentage rate, the effective interest rate you are paying. Banks and credit card companies have to show this to allow you to compare different debts on an apples to apples basis.

You can then rank the debts by interest rate (highest first) to show you where your repayment priorities should be.

Get help

If you need someone to talk to, there are sources of free and independent debt advice out there:

  • The Citizens Advice Bureau
  • Stepchange
  • National Debtline

These guys can give you free and impartial advice about the law and your rights. Avoid private sector debt consolidation / debt advisory services. For all I know, some may be offering a valuable service. But will people in debt problems really be able to tell the good from the bad? Probably not.

Debt makes you fragile

The problem with student loans is that they have normalised debt for an entire generation of young people. Debt is OK where it funds a productive asset (a house or medical training to become a doctor). But if you start your adult life running up debt for a degree that doesn’t get you a job, for buying a car or for buying “stuff”…well that’s like starting a football match 3 -0 down.

The problem is that debt makes you fragile. If you are living paycheck to paycheck and juggling credit card balances, then one day something will happen that could bring the house of cards down. Bad things happen. Exhibit A: CV-19. This is why I don’t recommend having balances on 0% deals that you shuffle every 6 months. This is like spinning plates; one day a plate will drop. Clear all credit card balances.

Monk Mode

In Monk Mode you spend NO MONEY other than needed for food and utilities. In Monk Mode you work, you think and you sleep. Then you repeat.

If this sounds extreme,then consider this. Everything in moderation…including moderation. When you are you are digging your way out of a hole, the sooner its done the better.

A lot of people think that debt is their problem. But debt is just a symptom of an underlying problem (either spending too much or earning too little). Monk Mode is a way of breaking the pattern, addressing the underlying problem and creating new habits.

Being debt-free gives you most of the benefits of financial independence

For me, the main value of the financial independence movement is what it offers everyone. I’m talking about the realisation that debt is a trap and keeping up with The Joneses is a mug’s game.

Everyone can use the tools, techniques and mindset of FI to improve their own situation and – most important of all – get out of debt.

Not all debt is bad of course. A cheap mortgage currently costs less than the 2019 inflation rate of 1.8%. This is a perfectly sensible way to finance the purchase of a flat / house / apartment and build capital as you pay down the debt. If you use leverage for a smart investment (e.g. buying low, fixing up an old flat or house and then selling high) you can make out like a bandit.

If you have paid off all your non-mortgage debt, have >40% equity value in your property, are on a cheap mortgage rate, have an emergency fund of 6m cash and are working flexibly, then you already have most of the benefits of full financial independence.

If you have cleared your mortgage as well, then I conservatively estimate that you already have ~80% of the benefits of full financial independence. 

Debt is the barbed wire fence around The Prison Camp. And being debt free is like clearing the fence. It’s a beautiful feeling.


  1. My Dad always taught me to ‘never put something on credit you couldn’t immediately pay off in full’, before you start paying fees, if you needed to, and I’ve stuck by that with my credit card throughout my 20s. I know for some they might not have a choice, but if you have the option I’ve always found that a good mantra to live by.

    Or better still, save and pay in cash.

  2. ladyaurora · · Reply

    I dont do debt ,never have. Hardly use my credit card. only to book a holiday. Paid mortgage off early use cash to buy car.
    I owed £165 on my credit card last month. I always pay it off the day it arrives. But the other week I’d deducted from my accounts but forgot to log on and pay it off .
    A week later I got a text saying outstanding payment! ,I couldn’t believe it! And £4 intrest! For 1 week owing £165
    I so begrudge paying that £4 what a waste of money. . So what the hell are those with 20k or 30k debt paying in interest.?

  3. Heretical point of view: I have a ‘comfortable’ level of debt. It’s actually a little over £5000 personal loan which will be repaid in 2.5 years. I have more than enough cash to repay it immediately.

    Instead however, I’m adding the cash to a deposit on a btl property which when let, will show a return of 25% pa.

    1. Conor · · Reply

      Returns of 25%pa on a BTL? Someone’s been selling you porkies. You’re doing well if you see 5-6%.

  4. Great blog post, as always.

    It would be interesting to hear your thoughts on the best approach to take to progress towards FI for those who are debt free, with the exception of their mortgage.

    Should those people focus on overpaying their mortgage first before they explore investing?

    1. Sarah · · Reply

      I’d like to hear the escape artists thoughts on that too!

    2. I’d also love to hear your thoughts on this too. Especially in the case of leasehold property, when extending the lease can be very expensive. In this situation, it’s still a diminishing asset.

    3. Ron Cameron · · Reply

      “Should those people focus on overpaying their mortgage first before they explore investing?”

      Financially, it likely makes sense to invest every dollar that would otherwise be used toward the mortgage principle. But…

      Behaviorally, it makes more sense to invest and get the habit in place. There’s no right or wrong answer, but if you wait to pay off your mortgage before you start investing you may be going a long time not investing! We FIRE’d a couple years ago and decided to pay off our mortgage, because as TEA said “Debt makes you fragile”, which is well put. As long as you’re pushing full steam ahead towards either goal I think you’ll be satisfied!

  5. Ben O · · Reply

    Barney, Please ignore my last question about platforms as I realise monevator already has a guide to this. However I do have another question for you. As Alan donegan suggested he was going to do, do you think it is possible to become F.I. without owning a property? Would love to hear your views on this and whether it could make sense for some people. Cheers! Ben

  6. Interested in the final paragraphs, as I don’t see how paying off debt provides most of the benefits of financial independence. It’s an important step, and reduces pressure for sure, but FI to me means being free to choose whether you work. Perhaps this is alluded to in your ‘and are working flexibly’ comment? If you have to work and don’t want to, that doesn’t feel like freedom. FI only seems possible to me if you’ve built up enough income-producing assets, but to reach this point seems just as much of a challenge as paying off debt? Keen to hear your thoughts, especially if I’m missing a trick and could be speeding up the process.

  7. Having been a fan of your work for the better part of 7 years…it’s nice to see you recognized as a pioneer in the FIRE space from “across the pond.” It also appears that you “married up” a notch or two. Very well done, Sir. 🙂

  8. · · Reply

    I agree with the final paragraph of this post. I was fortunate enough to think that way about debt from before I was old enough to incur any of it. It gives you a head start.

  9. […] TEA reminds us of the importance of clearing debt first (32) […]

  10. Knowing the reality and facing them is often the best move in Life. “The hardest thing is often acknowledging your reality. The best way to do this is to create a spreadsheet that records how much you owe, to whom and what interest rate you are paying on the debt.”

  11. […] advice of some reputable names, be it financial bloggers (including Monevator‘s The Investor, The Escape Artist and The Frugal Cottage), authors (such as Andrew Craig and Tim Hale), podcasts (such as Meaningful […]

  12. […] 100 per cent of my income every month was not, in fact, a very smart way to live. I decided I needed to pay off my overdraft and build up some savings. A plan to make some extra money online was […]

  13. Jillian Ashby · · Reply

    This was a great post and I really appreciated your analogy.

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