If you’re wondering how to pay off debt and get your life back, you’re not alone.
According to a study by Northwestern Mutual, one in ten Americans say they will be in debt for the rest of their lives. However, the reality is much worse. Data from credit bureau Experian shows that 73 percent of consumers had outstanding debt at the time of their death.
While carrying debt may seem like a fact of adult life, it doesn’t have to be that way. There are steps you can take to reduce your debt load and pay off your loans.
Keep in mind that getting rid of your debt won’t happen overnight. It took you years to get in debt, and it’s going to take you some time to pay it all off. The most important part is to commit yourself to the process.
Why You Should Limit Your Debt
Debt can feel like a weight around your shoulders that drags you down and affects every part of your life. It can limit your career opportunities and cause you to make certain decisions because you need money to keep paying your debt.
When you pay off your debt, you’re free to use your money however you chose. You have the option to take a job because you want to and not because you need it to pay your debt.
There’s no need to worry if you have enough money until next payday or if you can make all of your payments on time. Don’t let debt run your life. Commit to pay it off and get your life back.
Strategies for How to Pay Off Debt
Looking for strategies on how to pay off debt? We’ve got you covered. What approach you chose depends in part on how much debt you have and what type. Each strategy has its benefits and drawbacks so chose the one that works best for you – financially and psychologically.
The debt snowball, made popular by Dave Ramsey, requires that you order your debts from smallest to largest balance. It ignores the interest rate and instead focuses on the total amount of each debt.
To start your debt snowball, you make minimum payments on all of your debts except for your smallest balance. Throw all extra money toward your smallest debt until it’s completely paid off. If the debts have the same balance, start with the one with the highest interest.
Related: Who is this Dave Ramsey Guy?
Once you’ve paid off your smallest balance, move to your next smallest balance. Put all extra money toward paying this debt off, including the payments you were making on the debt you just paid off. Make sure you’re still making minimum payments on your other debts.
This strategy focuses on paying your debt one balance at a time. Getting your smallest balance knocked out first gives you a quick win and a psychological boost to keep going.
The debt avalanche, on the other hand, requires that you order you debt from highest to lowest interest rate. Similar to the debt snowball, you’ll be paying off one balance at a time. However, the payments should be focused on the debt with the highest interest rate.
Continue to make minimum payments on all other debt while throwing all extra money toward your highest interest debt. This means you’ll pay less interest in the long term and you’ll pay off your debt faster.
Keep in mind that if your debt with the highest interest rate has a large balance, getting it knocked out may take a while. It’s important to stay motivated and continue making extra payments as you work on reducing your debt load.
Another way to pay off debt that you may want to consider is debt consolidation. This strategy rolls multiple old debts into a single new one at a (hopefully) lower interest rate. Doing this usually shortens the payoff period and makes payments more manageable.
There are a few options for debt consolidation so which one you chose depends on several factors. One way is to open a card with zero percent introductory offer and move all debt there.
This requires that you stay on top of the terms of the offer and pay off the balance in full before the promotional period expires. You also need to make sure not to run up any new debt during the payoff process.
Another option is to take out a personal loan that can help you consolidate all debt into one single monthly payment. Just make sure you review the terms of the personal loan to ensure they’re favorable and will actually move your debt repayment strategy forward. Compare interest rates for a personal loan from top lenders by checking out Fiona.
Debt Management Plan
Do you have a mountain of credit card debt? A debt management plan can help you make progress. There are many non-profit credit counseling agencies that can help you regain control of your debt.
They’ll work with you on a repayment plan and may be able to lower your interest rate. Having someone else help you through the debt payoff process can be a great motivation.
How to Pay Off Debt Using a Budget
The best way to stay on track with your debt repayment plan is to create a budget. While budgets get a bad reputation, they’re really just a spending plan. They let you tell your money where you to rather than the other way around.
You’ll need to gather all of your transactions for the last 30 to 90 days. Comb through your statements and group your expenses by category. This will give you the basis for your first budget.
Make sure you include expenses that you pay quarterly, semi-annually or annually. Some examples include auto insurance, home insurance, HOA dues, annual subscription services, and so on.
Once you have a rough idea of your spending in each category, look for ways to cut back in certain areas. Use the extra cash to pay down your debt faster.
There are many different ways to stay on top of your budget. Check out this post for details on the best personal finance budget software to help you get started.
What is the Best Way to Pay Off Debt?
If you’re wondering how to pay off debt the best way, it all depends on how much you owe and what resources you have. However, there are steps you can take to get yourself on the right path to success.
Step 0: Save a Mini Emergency Fund
While this is not the official first step in the “how to pay off debt” process, it’s an important one. If you don’t have at least a mini emergency fund in place, you’re going to take one step forward and two steps back.
Here’s why: life happens. Your car may break down, you may have a leak in your kitchen, your child breaks his arm, you need some dental work, etc. If you don’t have an emergency fund, these expenses are going to end up on a credit card, sinking you further into debt.
To avoid this exact situation, save up an emergency fund with $1,000 to $2,000, which should cover most unexpected expenses. If you end up needing to use money from your fund, build it back up as quickly as possible.
Step 1: Know Exactly What Debts You Have
Step one of how to pay off debt is to fully understand your debt situation. Take an hour out of your next evening to break out your latest credit card statements, auto loan statements, student loan statements, etc. Or, if you use a program like Empower to simply link all of your online debt accounts.
However you do it, just make sure you fully understand your debts and the full balance of each one. If you think you might have some old, forgotten debts out there, you may want to get your free credit report from AnnualCreditReport.com.
Step 2: Prioritize Your Debts
Now that you understand your debt situation, step two is to apply some type of priority or ranking to the list. For me, the priority is placed on the interest rate.
That may not be the case for you. And really, it makes very little difference. The important part is to pick the debt you are most motivated to pay off. Motivation is the most important part.
Therefore, I’m motivated to stop paying so much out every month in interest charges. My auto loan is somewhere around 8%. Whereas my home mortgage and student loan debts are a bit lower and are also tax deductible.
Pick one of the four repayment strategies–debt snowball, debt avalanche, debt consolidation, or a debt management plan–and stick with it.
Step 3: Establish a Debt Payoff Plan
Step three is to set up a payment plan based on your newly established priority ranking. You may want to put all your extra money every month towards the debt with the highest priority, or you may simply want to make double payments on that debt.
Choose the method that’s right for you and your budget. Make sure you at least make the minimum payments on the other remaining debts. If you’re committed to attacking your debt and paying it off quickly, consider picking up a side gig.
There are many different options for making money on the side. Any extra money that you can throw toward your debt will expedite the payoff process.
Step 4: Make Debt Payments Automatic
The fourth step is a key one for me. Make the extra effort to set up an automatic payment from your bank account to pay off your debts. Taking the time to set up an auto payment will help to ensure the extra payments get made.
When scheduling the automatic payment, timing is critical. Schedule the withdraw for a time when you know you’ll have money in your account, such as the day after payday. This ensures that you don’t overdraw the account and that you prioritize paying off your debt.
Step 5: Track Your Progress
Staying motivated through the pay off process is critical to your success. Motivation is not constant–instead, it comes and goes. Some days you’re ready to do whatever it takes to pay off all debts and be free.
Other days you convince yourself that there’s no point to doing this since you’ll never be out of debt. One way to stay motivated is to track your progress. When you see how far you’ve come, it makes it easier to keep pushing forward.
Take the sheet where you wrote out all of your debt and organized it in whatever order works best for you. Put it up on your fridge and cross off each debt as you pay it off. Another great visual reminder is to draw a giant thermometer and fill it in as you pay off each $1,000 or $2,000 of your debt.
An accountability partner can also go a long way towards helping you stay on track.
How to Pay Off Debt For Good–the Bottom Line
The secret for how to pay off debt for good is to make a plan and stick with it. There will always be ups and downs but staying the course is what will set you free in the end. Don’t let the amount of debt bring you down and run your life.
Remind yourself that getting out of debt means freedom. When you no longer owe money to anyone, you are free to make decisions based on your values rather than a paycheck. Having less debt can help you make financial moves such as having one parent stay at home or starting your own business.
Do you have any other suggestions for how to pay off debt in the new year? If so, leave them in the comments below.