If you are overwhelmed by your debt, we can guarantee that you’re not alone. Research shows that debt is a way of life for nearly 80% of Americans and 70% believe it is a necessity, given the rising cost of living. This is in conjunction with climbing interest rates that throw us into the vicious debt cycle of borrowing loans to repay older debts.
While getting out of this debt trap can prove to be a herculean task, there are many ways to get closer to a debt-free life. It all comes down to managing your finances and tackling your debt head-on. Here are a few ways you can achieve this.
Make More Than The Minimum Payments
There’s no hard and fast rule on how much you should pay toward your credit cards or loan. While there is a minimum monthly balance, you can always choose to pay more than this. But make sure to pay attention to the fine details. Some banks may charge a penalty for making the payment early and the money should be used to pay the principal and not the interest.
Making more than the minimum payments can speed up the debt repayment process and also reduce the amount of the interest you need to pay on the loan over the years.
A great way to aggressively pay down your debt is with the snowball method. Like a snowball rolling down the hill, this method gains more momentum as you continue to make debt payments. For many people, the snowball method helps feed into their motivation and provides a sense of control.
The process works by using your money to pay off your smallest debts first and then the second-smallest, and so on. Given that the first debt is a reasonably small obligation, it can be paid down quickly. Once it has been paid off, the amount you had been putting toward it can be used to pay down the next smallest debt. This strategy motivates you to pay off your debts quickly.
Lower Interest Rates
The biggest roadblock to paying off your debts quickly is interest rates. It can be challenging to make progress toward a debt-free life with looming interest rate hikes around the corner. An effective way to deal with this issue is to negotiate lower interest rates.
While this may seem absurd, it is actually quite common to ask for lower rates. If you have a history of making timely payments and a good credit score, chances are your bank can approve lower interest rates. In the worst-case scenario, they could refuse to lower the rates but there’s absolutely no harm in trying!
Spend Less Money
Learning how to lead a frugal lifestyle can help you in all aspects of your financial life, not just with debt payments. There are many ways to reduce spending and any extra savings can be put toward paying off your debts.
These spending habits don’t need to be drastic, even the smallest changes can make all the difference. For instance, brewing your own coffee at home instead of buying daily Starbucks lattes can save you an upward of $60. Alternatively, making your own lunch can also have a major impact on your savings. These small lifestyle changes can accelerate your path toward a debt-free life.
Get A Side Hustle
In addition to saving more money, you can also find ways to increase your income stream. This can help you contribute more towards your debt payments. If you have a skill or talent that you want to capitalize on, consider getting a side hustle.
This can either be your own business or you can freelance for other companies. Not only is a side hustle a great way to make some extra bucks but you also get to expand your skills while doing something you love. Research shows that a side hustle can also make you more productive at your day job!
Create A Budget, And Stick To It
As you find new ways to cut your spending and increase your income, a budget can serve as a roadmap to achieving all your financial goals. Assign a set amount of cash to each of your spending categories. This can give you an overview of your expenses.
If you want to pay down your debts aggressively in the short-run, consider creating a bare-bones budget. This is where you clear your budget of any luxuries. Your spending categories will include necessities like rent, utilities, food, etc. However, this type of budget is temporary, you can modify it once you make some headway in your debt payments.
Sell Things You No Longer Need
Let’s face it, there are a lot of things lying around your house that you no longer have any use for. Consider having a garage sale to sell some of these items. Although you may not need it anymore, there’s no reason why someone else can’t make use of it.
Selling things you no longer need is not only a great way to make some extra money but can also make your home clutter-free. You can also sell your items on websites like Amazon or eBay or through a consignment store. The money can help towards paying off a portion of your debt.
Create A Debt Re-Payment Plan
Before you focus on specific ways to pay off your debt, it’s wise to create a debt re-payment plan to get an overview of where you stand and how much debt you have in each category (loans, credit cards, etc.). Any extra income you make can be given a ‘job’ in your repayment plan.
In addition to this, a plan can also help you track your spending and identify any modifications that need to be made in order to speed up the process. As a rule of thumb, the debts with the highest interest rates should be paid off first.
The exact opposite of the snowball debt payment plan is the avalanche method. Like an avalanche rolling down the hill, this technique involves tackling your biggest debt first. Since your biggest debt carries the highest interest rate, it only makes sense to pay this first.
While paying off a large debt can put a strain on your finances in the short-term, it can take the heavy weight off your shoulders, once you pay it down successfully. Biting this one first can make paying the smaller debts a piece of cake!
Lower The Debt To Income Ratio
As the name suggests, the debt to income ratio is your total debt as a percentage of your income. Having a low debt to income ratio can prove to be useful as you approach the bank for a loan because it helps determine your financial health.
If you find that your debt to income ratio is higher than 35%, then you need to work towards lowering this number. It indicates that the amount of income you bring home does not match up to your debt, in terms of credit. Automating monthly payments toward your debt can help lower this ratio.
Don’t Use Your Credit Card
When trying to get yourself out of a debt mine, taking on more credit will only lead to a deeper hole. One of the easiest ways to incur more debt is with a credit card. Hence, when trying to reduce debt, you should avoid using your credit card at all costs.
We firmly believe in “out of sight- out of mind.,” Hence, a fool-proof way to stop using your credit cards is to either lock them away or shred them. Alternatively, you could also use positive reinforcement and reward yourself for each week that you don’t use your card. You are likely to see a drop in your debt levels once you avoid credit cards.
It’s likely that a portion of your monthly income goes toward investments. Investing your money is a great financial habit but it is important to keep it to a minimum while you are aggressively trying to pay off debt.
However, this change should only be for the short-term, especially if you are following the avalanche method and tackling the bigger debts first. In the long run, your investments can help you build a healthy cash reserve that you can use to fund all your expenses. Lowering investment contributions should only be done in the event that you are struggling to pay off debt.
Refinance Your Home
If you are a homeowner, a great way to lower your debt is to refinance your home. This essentially means consolidating all of your debts into your mortgage. There are many benefits of refinancing like a shorter mortgage period and lower interest rates
By refinancing your home, the mortgage essentially becomes a debt consolidation loan. Hence, you still need to follow your budget and make monthly payments to your mortgage as you normally would. But the main benefit is that these payments now come with a lower interest rate.
Track Your Spending
Once you have a budget and debt repayment plan in place, it is important that your current spending habits align with your goals. The best way to ensure this is to track your spending on a daily basis. Create a column with your current expenses alongside your budget. This can help you understand if you are above or below the limit.
You can also follow the 50/30/20 rule when it comes to your income. This is where your necessities make up 50% of the income, 30% goes toward wants and 20% is savings or debt payments. Track your spending with these metrics in mind and you’ll be well on your way to a debt-free life!
Get A Balance Transfer Card
If you are unable to lower the interest rates on your existing line of credit, consider getting a balance transfer card which usually comes at a lower rate. As an introductory offer, many banks offer a 0% APR for the first 18 months.
For example, if you have a balance of $10,000 on your card with an interest rate of 8%, then you can transfer this amount to a balance transfer card at a rate of 0%. This could save you upward of $800 each month. However, you may need to pay a small fee to avail the privileges of a balance transfer card.
Have An Emergency Fund
We are often led to believe that paying off your debt is a good excuse not to save. However, this is far from the truth because life happens and we need to prepare for those unexpected expenses at all times. You need to be able to cover the costs if and when they arise.
Hence, it is important that you maintain an emergency fund at all times. This is money that you set aside each month to use at a time of need. As a rule of thumb, you need to have at least six months’ worth of expenses in the fund. Depending on how much money you have in your emergency fund, you can always use a part of it to pay off debt.
Get A Seasonal Job
As we approach the festive season, there’s no doubt that the shops will be bustling with activity as people prepare for the holidays. Many retail stores are likely to hire extra help during this time to meet high demands. This is the perfect opportunity to get a seasonal job and earn some extra cash to pay off your debt.
Outside of the holiday season, there are still plenty of opportunities to find part-time work. You can work as a barista or even sign up to be a Task Rabbit. If you are looking to increase your income stream, a part-time job is a perfect way to do this.
Curb your expensive habits
If you constantly find yourself debt, chances are you need to make a few changes to your lifestyle. The first step is to identify the main reason for the debt, or the expenses that make up this number. Then you need to consider if these expenses are truly a necessity or find a way to minimize or eradicate them completely.
There is no need to curb this expensive habit immediately, it’s all about taking baby steps. For example, if you like to splurge on expensive meals, start by minimizing this to just one meal a week or replace it with something less expensive.
While this is not the best way to get out of debt, a debt settlement serves as a last resort to attain a debt-free life. It involves speaking with your creditor to negotiate a lump-sum payment for your total debt obligations. This can get rid of your debt once and for all.
However, there is a downside to it. A debt settlement can affect your credit score, making it more challenging to borrow loans in the future. In addition to this, the settlement usually comes with a hefty fee and a high tax rate. This is why many people only turn toward a debt settlement when there are left with no other alternatives.
Define Your ‘Why’
Tackling your debt takes a lot of time and patience. Therefore, before you deal with your debts, it is important to consider your financial goals in the long and short-term. That is, understand why you want to pay off your debt. This can provide more perspective on what you are trying to achieve.
It could be anything from buying a home to making a large investment. Identifying this goal can help you take the best plan of action to pay down your debts. Attaining a debt-free life requires a lot of planning and sacrifice, so it is important to define your ‘why’ before you journey on your quest to a debt-free life.