One of the easiest ways to improve your financial health is to pay off debt. Depending on how much debt you have, it may be a long process, but the improvements it will make not only to your financial health but also your mental health is well worth it. Below are 9 easy steps you can take to help you pay off debt.
Calculate Your Total Debt
To help you start paying off your debt, you will want to gather all of your debt information to create a detailed list. Your list should include all of your credit card balances, student loans, car loans, personal loans, medical bills, etc. Information you want to write down about each of your accounts includes:
- creditor name
- total balance
- interest rate
- minimum monthly payment
- due date
Once you have all of your accounts, sum up all of your debts to understand the total amount of money that you owe. This allows you to get a complete picture of where you stand in your financial health.
Create A Budget
When you create a budget and track your expenses, you have a realistic starting point on what you can pay towards your debt each month.
One method that helps set aside a predictable amount of money each month towards debt is the percentage budget. However. if your monthly debt payments exceed the percentage that is allotted, you may find the zero-based budget helpful.
Look for areas where you can free up more money towards your debt payments, such as reducing your non-essential spending. These can include dining out, subscription services, and impulse buys.
Set A Debt Repayment Goal
Once you set your budget, and start cutting your expenses, you can determine how much extra money you can pay towards your debt each month after all of your essential expenses are covered.
When I started paying off debt, my debt repayment goal was $500 per month as the minimum payment to the debt account that was currently being tackled. Every other debt account I had got the minimum payment, and if there was extra money, it was added to that $500 payment!
Choose A Repayment Strategy
There are multiple debt repayment strategies. I’ll list a few below, but remember that the most important strategy for you to follow is the one that works for you and your situation.
Once you choose a repayment strategy, focus all you can towards paying off the debt you are focused on, while making minimum payments on the other debt accounts you have.
Debt Snowball
The debt snowball method is the most common debt repayment strategy. You list your debts from the smallest to the largest, regardless of their interest rates, and focus on paying off the smallest debt balance while paying the minimum payments on the other accounts.
When the first account is paid off, you take the amount you paid on that and add it to the amount you are paying on the second debt account; continue until all your debt accounts are paid off. This method helps you build motivation through quick wins as you progress through seeing your debts paid off.
For the above example, you would start paying Debt B until it is paid off. Then you would start paying $60 per month to Debt E until it is paid off, $135 per month to Debt D, and so on until all of your debt is paid off.
Debt Avalanche
The debt avalanche method focuses on paying off the debt with the highest interest rate first, whether it is the biggest or smallest balance. It reduces the total amount of interest you will pay over time.
Once your highest interest account is paid off, you can move to the account with the second highest interest rate, applying the amount you paid towards the first on the second account. This method works for those who want to save the most money they can over time by paying the least amount of interest.
For the above example, using the debt avalanche repayment method, you would start with Debt E since it has the highest interest rate. Once it is paid off, you would then move to Debt C or A (since the interest is the same amount), and then Debt D, and finally Debt B.
Hybrid Method
A hybrid approach has a few different strategies. You can start with the smaller balances, moving to the higher interest rates once you get a sizeable payment, or you can focus on higher interest rate debts, such as credit cards and payday loans, to get them under control.
Remember, no matter which method you choose, it has to be the method that is best suited for your situation to pay off your debt.
Consolidate, Refinance, or NEgotiate Your Debt
Consolidating Your Debts
Debt consolidation combines multiple debts into a single debt, usually with a lower interest rate. This allows you to simplify your payments and reduce your interest costs.
One popular way to consolidate your debt is to take advantage of a 0% APR balance transfer credit card. This allows you to transfer any of your high-interest credit card balances to a new card with no interest fees for a very limited time. Make sure to pay off the balance before the 0% period ends, or you will pay interest on the entire amount that was transferred.
Debt Refinance
Refinancing your high-interest loans, such as student loans, car loans, or mortgages, for a lower interest rate can help reduce the total interest that you will pay over the larger, and longer-term loans.
Negotiating Your Debts
You can also negotiate your debt with your creditors simply by contacting them and asking if they will reduce your interest rate, or work with you on a more manageable payment plan. If you have been a reliable customer, they may be willing to do this simply to keep doing business with you.
Automate Your Payments
When you set up automatic payments to pay off debt, you ensure you never miss a due date and avoid unnecessary late fees, which helps your credit score. This also allows you to prioritize your extra payments to the debt you are focused on.
Some lenders will even offer an interest rate reduction for setting up automatic payments.
Increase Your Income
One of the simplest ways to pay off debt faster is to increase your income. The most common one people think of is asking for a raise, but there are many other ways to increase your income.
Consider side jobs, freelancing, food delivery services, ride-sharing opportunities, or even selling unused items.
For those who live in rural areas, where access to some of these side jobs may not be available, one of the easiest ways to increase your income is by reducing your unnecessary and duplicate expenses. Consider doing a personal finance audit to help you reduce your expenses.
Avoid Adding New Debt
When you focus on paying off debt, you want to pause credit card use, and taking out new loans. This allows you to see the total picture of your finances, rather than forgetting about expenses that are put on credit cards.
While you pay off debt, focus on using either cash or debit cards for all purchases. Before making any major purchases, such as furniture or appliances, save up the cash for the expense beforehand. This helps you avoid falling back into the debt cycle.
As you make progress on your debt, if you don’t already have an emergency fund, you will want to focus on building one. Start small at first to cover any unexpected expenses, such as car repairs or medical bills. When you are more comfortable in your debt-free journey, you can grow your emergency fund to cover 3 to 6 months of living expenses.
You can read more about how to create an emergency fund here.
Celebrate Your Progress
Review the progress you make on paying off debt each month when you review your budget to ensure you are on track. If there are any changes to your budget, adjust your debt payoff plan as needed.
As the seasons in your life change, you should adapt. Using a raise, bonus, tax return, or other windfall to make a large lump-sum payment toward your debt will help you move faster to the end goal.
Each time you have a small win, celebrate them along the way. It could be paying off a small account, or paying off 10% of a larger debt account, like your student loan. Treat yourself to something small for paying off a particular debt, or even reaching a small savings goal within your emergency fund.
Tracking your progress visually with a debt payment tracker, or an app, helps you visualize your progress. As you watch your debt decrease, it can be incredibly satisfying and encourage you towards your end goal of financial health.
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