Build Momentum to Pay Down Your Debt
Having excessive debt can feel overwhelming. You might wish you could ignore your statements and bills by burying them deep in a stack of papers, but the best way to tackle your debt is to face it head on. Here are some steps you can take to build momentum to pay down your debt.
Get a Handle on Your Debt
The first step to managing your debt is having a clear understanding of it. Make a list of all your debts such as credit cards, home loans, auto loans, student loans and medical bills. Make note of the interest rates, due dates and minimum payments. This will help you get a holistic look at your debt and break down what you owe on a monthly basis.
Pick a Debt Pay Off Strategy
There are two popular strategies you can use to pay down your debt, the avalanche method and the snowball method. With the avalanche method, you list your debts from the highest interest rate to the lowest interest rate. You make the minimum payments on all your debts, but you put any extra funds you have toward the debt with the highest interest rate. So, if you have a $10,000 credit card balance with 19% APR and $3,000 remaining on your car loan with a 4% interest rate, you would focus on paying down your credit card debt first. The benefit of this method is you will pay less money overall because you’re paying less in interest.
With the snowball method, you also make the minimum payments on each debt, but you start by paying off the debt with the smallest balance first. Once that one is done, you move on to the next debt with the smallest balance and so forth. Using the earlier example, you would put your extra funds towards the $3,000 balance on your car loan with a 4% interest rate and then move on to the $10,000 credit card balance with a 19% APR once your car loan is completely paid off. Even though you will pay more in interest with this method, some people prefer it because of the psychological wins they enjoy each time they knock off a debt. Once you eliminate your first debt, you might have more motivation to keep going. No matter which method works best for you, stick with it, and you’ll make good progress paying down your debt.
Make a Budget
Create a budget to gain a clear picture of how much money you have coming in and going out each month. This will also show you how much you have left over after expenses that you can put toward paying down your debt. Plus, using a budget can help you from getting deeper into debt since you’ll know how much you have allocated for purchases. For example, you could plan to spend $100 on dining out each month. Once you spend $100, you can eat the rest of your meals at home instead of ordering carry out on your credit card and adding to your total debt.
Being in significant debt can be stressful, but by facing your debt, picking a payoff strategy and budgeting, you can create a pathway toward healthy finances. Once you start to make a dent in your debt, you’ll build confidence and momentum to keep going until you achieve your goals.