She just finished paying off $20,000 in federal student loans. “I honestly never thought that student-loan forgiveness would ever happen,” Ms. Dao says. She hopes to eventually get back the nearly $6,000 she has repaid since March 2020, when the government suspended student-loan debts.

Now she has turned to her credit-card debt. She tries to live frugally and packs a lunch almost every day. She’s trying to cut back on going out and online shopping. She is even pausing contributions to her workplace Roth 403(b) retirement-savings plan to dedicate more money to the debt, although this means she misses out on a company match of up to 3%.

She is using what’s called the “snowball” method, paying minimums on all three credit cards, then sending whatever’s left in her budget each month to the card with the lowest balance. She hopes to have all the credit cards, with interest rates ranging from 21% to 25%, paid off by December 2023 at the latest.

Ms. Dao makes about $66,000 a year with overtime before taxes (her base salary is about $62,700). She has about $12,000 in the Roth 403(b). She has $1,000 in an emergency savings account. Her take-home pay of about $3,600 a month covers her household expenses of about $2,180 a month. They include $925 for rent plus utilities, $500 for her car payment and insurance, and $150 for a gym membership. She currently has about $150 budgeted for groceries and $175 for restaurants monthly. She has health insurance through her employer.

Ultimately, Ms. Dao says, she would like to buy a house in either Houston or her hometown of Austin, but hasn’t yet started saving a down payment. She would also like to travel. 

Ms. Dao has already made big progress toward becoming debt free, says Mitch Reiner, CERTIFIED FINANCIAL PLANNER™ from Capital Investment Advisors in Atlanta.

He says what Ms. Dao has already learned about overspending and credit-card debt will change her behaviors, habits and principles around money for decades to come. “The fact that she’s so young in this situation ends up being a blessing.”

While the “snowball” method of paying down high-interest debt is psychologically satisfying, offering some small wins early, Mr. Reiner usually recommends the “avalanche” method in which the credit card with the highest interest rate is paid off first, reducing long-term costs. In Ms. Dao’s case, he says, the credit card she is currently targeting has both the smallest balance and the highest interest rate, so both methods are working in her favor. 

Clearly, any refund she receives for student-loan payments made during the pandemic pause should all go to the credit-card debt. “What an incredible windfall and opportunity,” he says.

Despite Ms. Dao’s laudable focus on debt, Mr. Reiner recommends she resume contributions to her Roth 403(b), putting in 3% to get the full company match. By December 2023, when she had hoped to have her credit cards paid off, her contributions plus the match could total more than $5,000, he says. With a Roth 403(b), employee contributions are posttax dollars, so earnings grow tax-free. On the other hand, the employer’s matching contribution is pretax; it is held separate by the employer and is taxed when withdrawals are eventually made. Still, Mr. Reiner says, the company match is essentially free money, and beats all other financial considerations.

Once the credit cards are paid off, the planner would like Ms. Dao to concentrate on emergency savings, to boost that account to $10,000 or so, enough for three to six months of expenses. He recommends keeping the funds in a high-yield savings account and using them instead of credit cards for unforeseen expenses.

Going forward, Mr. Reiner says, if Ms. Dao can commit to limiting her spending to 50% of her gross pay, her financial future will be bright. “When you have good habits,” he says “then that allows things like career changes, salary increases, decisions around spending, all those things are going to be materially better and that’s a really good outcome of this.”

Ms. Gallegos is a news editor for The Wall Street Journal in New York. She can be reached at Demetria.Gallegos@wsj.com.

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