Most people will find themselves in debt at some point in their life, whether from higher education, purchasing a home, or simply struggling to manage monthly cash flow. Understanding debt is critical for keeping your finances, and your future, secure. There are several methods for paying down debt; some come a bit faster but with more risk, while others are tried and true, but all of them require patience and persistence.
Before You Start Tackling Your Debt
The first thing you need to do is get organized. Understanding your debt and debt structure will enable you to attack it strategically. How many lines of debt do you have? What are the total amounts owed? What are the interest rates? We will discuss two very popular and effective methods for paying down debt shortly, but both will require you to understand where your debt currently stands.
Get Clear About Your Budget
Next, evaluate your current income, to understand how much of it can reasonably be put towards debt. If you aren’t already using a budget, it will help to get a basic understanding of how much you’re spending in different areas such as housing, insurance, transportation, food, utilities, medical expenses, and entertainment. How much is left? If there is not enough, adjust the budget. Where can you tighten your spending, even if only for a little while? Where can you cut spending altogether?
The First Step in Paying Down Debt
There are a few simple tactics that will help you repay your debt. Firstly, stop using debt. Start working your budget and using cash or a debit card linked directly to your bank account.
Secondly, explore options for increasing your income and decreasing your expenses. Plant a garden to cut back on groceries. Take a couple of months off from using luxury personal products. Bring in some extra income by cleaning, driving for rideshare, or taking on freelance jobs.
Two Most Popular and Effective Methods For Paying Down Debt
There are two well-known methods for paying down debt. They take opposite approaches to the exact same strategy. The “snowball” method works like this:
- Gather all debts into a list
- Ignore interest rates – sort debts from smallest to the largest amount
- Pay the minimum required on all debts except the smallest debt
- Pay as much as you can (including extra money from budget tightening, reduced expenses, and increased income) toward the smallest debt until it’s gone
- Once it’s gone, put all that money toward the next-smallest debt
- Pro: quick wins and increasing payments and momentum as you go
- Con: it can take some time to feel like you’re making big progress overall
The “avalanche” method works like this:
- Gather all your debts into a list.
- Ignore totals owed – sort debts from highest to lowest interest rate
- Pay the minimum required on all debts except the highest interest rate
- Pay as much as you can (including extra money from budget tightening, reduced expenses, and increased income) toward the highest interest rate until it’s gone
- Once it’s gone, put all that money toward the next-highest rate
- Pro: pay less in the long run by attacking the most aggressive debt first
- Con: it can take a long time to break through the first level of this plan
Other options for paying down debt:
There are many other options for paying down debt, that come with greater risks and lower success rates.
- Debt consolidation: If you have a good credit score, you may be able to consolidate multiple debts into one through a personal loan or a balance transfer credit card. Be careful with this option, as low-interest rates often increase over time. If you have many different lines of debt that you can pay off quickly if all interest was paused, a balance transfer credit card could be a good option for you.
- Filing for bankruptcy is a more extreme option but can be a lifesaver for people who have exhausted repayment options and are still overwhelmed by credit card, business, or medical debt. The first step down this path should be to consult with a credit or debt counselor for more information and advice.
It’s critical that you be patient with this process; it takes time and can feel insignificant and unfulfilling when viewed on a small scale. However, with consistent effort and a little time, you can make real progress and find financial relief from paying down your debt. Set your goals and remember why you are working on this – whether to be more comfortable, to save for the future, to start a family, etc. let your goal be your guiding focus and encouragement.
