Debt may not seem like a big deal, but having debt deeply affects your lifestyle. Even small amounts of debt cause people to lose sleep, weigh on the mind, and can impact your relationships. Large debts can lead to large monthly payments which can lead to even more debt. Job loss can wipe out a debt-laden family. Even if you only have a small amount of debt, it needs to be addressed now before it becomes a big problem.
You MUST take control of your debt and pay it off as soon as possible. Otherwise, you are literally pouring money down the drain. Think about how much money you are paying in interest. You are cheating yourself out of the lifestyle you deserve. This is money that could be working for YOU instead of for the banks. Aim to cut spending everywhere possible and stop digging yourself further into debt. Cut the morning latte, cut going out to eat, cut entertainment, cut traveling, cut everything you can and knock your debt out. Use every penny you can find to pay the debt off and free yourself of the burden. Every aspect of your life will feel better when the debt is gone, and you’ll be able to enjoy luxuries so much more later on knowing you aren’t paying interest on them. This is an awesome opportunity to develop frugal habits and make permanent life changes, too.
Sometimes emergencies happen that throw a curveball at your finances. The important part is to take control and push your way through until you can knock the debt out. The best way to protect yourself against this is an emergency fund of three to six months living expenses, or a year if you are self-employed. The same rules apply for these financial setbacks too, though. Knock that debt out!
Figure out exactly what you owe. List out the balance for every credit card bill, medical bill, auto or student loan, and even your mortgage. Also figure out exactly what the monthly payments are.
Note the type of debt. Consumer debts (credit cards, medical bills, payday loans, personal loans) should be top priority to pay off because of variable interest rates. Student loans and auto loans should be next priority, depending on interest rates and whether or not they are fixed. Mortgages should be carefully considered last for repayment, based on interest rate, term length, and payment.
Make a plan to target the debt with all the cash you are no longer spending and stick with it. If you have a partner or family, get them all on board.
Debt Payoff Methods
The Snowball Method
Target your debt with your lowest balances first. Make minimum payments on all your debt except for the account with the lowest balance, in which you should funnel every extra penny. When this is paid off, all the extra money gets funneled into the second lowest balance, and so on. This method will help you secure early wins, so it can help motivate you to keep going in your debt repayment.
The Avalanche Method
Target your debt with your highest interest rate first. This is more effective because the interest rate dictates how fast the debt will grow. Make minimum payments on all your debt except for the account with the highest interest rate, in which you should funnel every extra penny. This method saves you more money in the long run, but the amount saved can be negligible depending on the actual balance and interest rates. Also, depending on the balance, it may be a while before you have an early win, and it may not feel as motivating. If you need early wins to keep going and stay on track, use the Snowball Method.
Extra Payoff Tips
Make a payment as soon as you get your paycheck. That way, the money is no longer in your account to tempt you. (I actually pay off all my credit cards in full twice a month, which helps keep my total spending in check.)
If a credit card is tempting you to spend, you can cut it up but still leave the account open to help with your credit history. You should not close the account unless it is paid off because it will throw off your credit utilization ratio.
Every time you “find” extra money – a bonus, a gift, an old bank account, or even change on the street (Count your pennies, and your dollars will count themselves!) – put it toward the debts. Use them to help knock the debt out sooner and free yourself of the burden.
Find a side hustle – driving for Uber, renting on AirBnB, lawn mowing, baby/pet/house sitting, using your writing or craft skills, etc. – and direct the extra cash flow to your debts. You might find that you enjoy it and want to keep doing it even after the debts are paid off, furthering you on the journey to financial independence.
Clean out your space and sell anything you don’t need (give away the rest – no use holding on!). Go through every single inch. You will clean out clutter which will free up mental space, free up time that was used to care for the items, see exactly what you have so that you don’t buy a second later, bring in money on things you don’t need that can be used to pay off debts which betters your life, and it prevents you from going out to spend more money because cleaning keeps you at home.
Look into debt consolidation. Sometimes it can help.
Not All Debt is “Bad Debt”
I fully support holding a low interest rate mortgage to term, because money can be better invested elsewhere when the interest rate is really low. However, if you’re not actually investing the money elsewhere, it’s not doing you any good to hold onto the mortgage and you should direct the money toward paying it off. Also, I plan to fully pay off our mortgage before I quit working, due to sequence of returns risk and a lower cash flow.
I also support 0% financing as a leveraging tool as long as it is paid off within the terms and is for a good reason, either a need or something that adds real value to your life.
However, each piece of debt you take on is one extra monthly payment, and you must be sure that whatever it is used for adds a real value to your life.
For more thoughts on conquering debt...
I recommend a google search. There are many websites devoted to debt management and repayment. There are many blogs written by people who have defeated massive piles of debt.
Once you pay off all your debts, you can start working toward financial independence and make your money work for you. That’s when the fun really starts.