Debt! It’s easy to acquire, but not so easy to pay off debt, at least that’s what many people think. As soon as you leave college, and often long before, you are offered credit cards, car loans, and personal loans. Not to mention, you probably paid for college with a student loan.
With so many companies offering to lend you money, it can be hard to refuse. And with consumers in their 30s having the highest average student loan debt, it seems that debt has become part of modern living.
That being said, when your bills exceed your income and you never seem to get ahead with your credit card bills or pay off your loans, it might feel like you’re struggling to stay afloat. We’re here to say it is possible to pay off debt.
We’re sharing a step-by-step guide, but that doesn’t mean we’ll take the steps for you. It’s all down to you to take on board what you read. Put in the hard work, make an effort, and you’ll reap the rewards. Your debt won’t go away on it’s own, but you can easily kick it into touch.
A Step-by-Step Plan For Paying Off Debt
Whether you’ve got debt of just a few thousand or many times more, it’s possible to get yourself debt free within a surprisingly short amount of time. Yes, it’s going to mean a few sacrifices, and it won’t come without a certain amount of effort and hard-work, but once you’re all paid off, you’ll look back and think it wasn’t really that bad. And when you look at what’s ahead, you’ll be excited knowing that life is without the burden of debt weighing heavy on your shoulders.
Let’s break the process down into 5 easily manageable steps.
Step 1. Change the Way You Think About Debt
When you hit your 20s and 30s, life is supposed to be full of freedom, excitement, and exploration. It’s not supposed to be filled with stress about debt. The sad fact is, that for millions of millennials or Gen Ys, their glory years have become just that.
Don’t let the stress get you down because you can turn things around. You do, however, have to look at your debt differently than the norm. The statistics normalize debt, but that doesn’t mean it has to be your reality.
Debt may have bailed you out of many different situations in the past. It may have helped with an emergency, covered the cost of putting a roof over your head, or helped you get through college. You don’t, however, have to live with the debt forever.
We’ve got to be honest here. It might feel like one of the hardest things you’ve done so far, but don’t worry. We’re here to guide you to make the process as simple as possible.
Here are some tips to get you started:
- Start building an emergency fund: As well as paying off your debt, put money aside so you don’t have to rely on your credit cards to cover unexpected expenses.
- Track your expenses and create a budget: Make a list of your current expenses and you’ll see where you can make cuts. If you need some help, there are plenty of budgeting apps you can use. Mint, Quicken, and YNAB (You Need a Budget) are just a few examples.
- Be smart with extra money: Any extra or unallocated money you’ve got left after paying bills can be used to pay off debt. Similarly, money from a tax return or bonus from work could also be funneled towards your debt. The amounts might seem insignificant, but every little bit helps in chipping away the debt.
- Increase your income: Increase the rate at which you pay off your debt with an interesting side hustle. Whether you’re looking to do small task work on the weekends or work from home with an online gig, technology has made it extremely easy to find side hustles for extra cash.
- Don’t forget to reward yourself for the little victories: There’s nothing wrong with celebrating your victories. Some of the best celebrations cost little or nothing at all.
Step 2. Determine the Amount of Debt You Have
Most Americans have more than one debt. Yours probably includes a student loan and possibly a credit card or two. The only way to start paying off your debt is to understand how much debt you’ve got.
Gather up all your statements and make a list. Include the following details:
- Total amount due: The amount will change over time and it can be very gratifying to watch it drop.
- Interest rate: This percentage shows you which debts are going to cost you more in the long run.
- Minimum payment: This is the minimum amount you have to payevery month. However, bear in mind that the more you pay, the quicker you’ll be debt free.
- Payment due date: Use this information to make a debt plan calendar.
Step 3. Debt Avalanche vs. Debt Snowball: Which is Going to Work for You?
We’ve touched on an important point above. Paying the minimum payment every month is not going to pay down your debt very quickly. In fact, it might increase the amount of debt you’ve got.
If you want to pay off your debt as quickly as possible, consider one of the following strategies.
Target Debt With the Highest Interest Rate First Using a Debt Avalanche
If you’d like to save money at the same time as you pay off your debt, this might be the strategy for you. It does, however, require a lot of discipline because you’re not going to enjoy the boost of some quick wins.
To make it work, you create a list of your debt, putting them in order according to the interest rate. Start with the highest rate and work down to the lowest. Every month, you make the minimum payment on all your debt. Any money left over must be allocated to the debt with the highest interest rate. Once that debt is repaid, you allocate left-over funds to the next debt on the list until all the debts have been repaid.
The biggest advantage of this debt repayment strategy is that you’re saving money in the long run because the debt with the highest interest rate is repaid first.
If you’re going to need constant motivation, the next debt strategy might work better.
Target Debt With the Smallest Balance First Using a Debt Snowball
The focus of this strategy is motivation rather than saving money. It works in a similar way as the debt avalanche, but your list is made according to the total amount of the debt, from smallest to largest. You allocate extra funds to repaying the smallest debts first until you’re debt free.
The only downside is that you’ll end up paying a little more in interest. It’s possible to work out the actual difference using a debt payoff calculator.
There’s nothing wrong with changing strategies part way through your debt payoff plan. Using one or the other, or a combination of them both, is far better than making the minimum payments.
Step 4. Other Ways of Paying Off Debt
Snowballs and avalanches aren’t the only options if you want to pay off your debt. They are, however, safer and more effective than anything else. That’s not to say they’re going to work for everyone. Here are some of your other options:
- Balance transfer card: You take one or more credit card balance and transfer them to a 0% balance transfer card. The aim is to pay off your debt before the APR reverts to standard.
- Home equity loan: You borrow money against a property you own, however, that property is at risk if you fail to repay the loan.
- Debt consolidation: Companies such as Credible allow you to combine your debts into one amount, often with a lower interest rate.
- Debt settlement: A third-party helps you negotiate a settlement with your lenders, for a fee.
Step 5. Planning for the Future
When you’ve paid off your debt, the aim is to avoid getting back into debt as best you can. It might mean a few lifestyle changes. You’ve probably got a few habits to break as well. Nevertheless, factor in what you’ll be able to do in the future if you don’t have to worry about paying your debt.
Here are some smart spending habits, budgeting tips, and money-saving strategies you can adopt to help you stay out of debt.
Plan Your Weekly Meals, Make a Shopping List, and Stick to It
How often do you head to the store without a clear plan in mind? It’s so easy to get distracted by all the special offers and when you get home you realize you’ve nothing for the next week’s meals.
Plan your weekly meals ahead of schedule and head to the grocery store with a list of ingredients you need. Most important of all, stick with the items on the list and don’t deviate from the plan, however attractive the latest grocery store offer might be.
Don’t Make Money a Taboo Subject
If you’re in a relationship, don’t be afraid to talk about money, even if one person tends to handle financial matters. Both of you should be involved and know what’s going on financially. Talk about your financial goals, priorities and struggles and you’ll be able to keep each other on track.
Maintain Good Credit
If your credit score is good, you can save money in many different ways, from preferential interest rates on loans and credit cards, to cable TV subscriptions, insurance policies, and cell phone plans.
Keep your credit score looking healthy by paying bills on time, keeping debt levels low, and adding a mix of credit accounts.
Use a Budgeting App
You’ve got an app for tracking your appointments, keeping fit, watching the latest movies, playing games, and keeping track of your social media feeds, but do you have one to help you budget? A budgeting app keeps you on top of how you’re doing over the month and alerts you if you’re going in the red.
Manage Your Money the Old Fashioned Way
If you want to avoid any kind of debt, the best way is to manage your money the way your grandparents did it. Only pay in cash. Keep a certain amount in your wallet and when it’s gone, it’s gone. How you spend it is up to you.
However you choose to pay off debt, the important thing is to put as much effort and time into doing it as you can spare. Both snowball and avalanche strategies are very effective for paying off debt, and when you’ve changed the way you view that debt a solution becomes much clearer. Making a list of your debt might have been scary but choosing the best strategy means you can start reducing its size. Before you know it the list will be gone and you can plan for the future.
The things you do now have a far-reaching effect on your life and how much you get to enjoy it. Repay your debt as quickly as you can and you’ll live a better financial life and enjoy the freedom it brings.