If you have regular payments for credit cards, student loans, car loans, or other debt, it might be hard to see a financial path forward. But if you use the right strategies, you may be able to get out of debt for good and save a small fortune on interest and other debt-related costs.
Following a debt payoff strategy can help you set a debt payoff deadline and on a realistic, attainable schedule for debt freedom. The path to financial freedom can seem daunting, but by following this simple guide you can be well on your way to eliminating your debt.
To get started, you need to understand the current status of your debt. Use a pen and paper, a spreadsheet, or a favorite budgeting app to list out all of your outstanding loans. If you don’t know who or where you owe, you can get a copy of your credit report for free from an app or the government-mandated site annualcreditreport.com.
When listing out where you have taken loan or credit, make a column with a name or nickname for the account, the current total balance, the minimum monthly payment, and the interest rate. This is a basic roadmap that shows you exactly what you need to pay and when, at minimum, to maintain your credit and avoid fees. The last thing you want while paying off debt is more debt.
But in the next step, we’re going to get on track to help you save on interest too.
According to the numbers, you should focus on the debt with the highest interest rate first and then work your way down the list. Even if the loan with the highest interest rate has a lower monthly payment or lower balance than some other debts, the highest interest loan is costing you the most per dollar borrowed. So while the balance may be low, it increases far more rapidly than your other debt.
That’s why you should focus on paying it off first. Finance experts refer to this as the “debt avalanche” technique.
This isn’t the only path to success, however.
Another way to financial stability is to pay off the debt with the lowest balance first. The reason is that while this may add a little time and cost to your total payoff, it can give you an early win in having something paid off. The satisfaction of paying off a small portion will keep you dedicated and motivated to pay off the rest. This technique is called the “debt snowball” payoff method.
Whether you decide to avalanche or snowball, you now have a plan on which debts to tackle in which order. That takes you one step closer to debt freedom!
Starting now, make a schedule and stick to it.t Make sure to pay the minimum on every account every month except for the loan you are currently focused on at the top of the list. Put every dollar you can to use towards paying off your top priority loan and watch the balance drop to zero.
When that loan is paid off, move that large monthly payment on to the next loan on your list. The extra payments you make should grow as you pay off more accounts. Eventually, you’ll really start to feel the progress as you save on interest each month. With lower interest and debt comes more money in your pocket towards saving for your future.
If you struggle to make those minimums, look hard at both your budget and income to see if there is any room for improvement. Cutting recurring expenses like cable or a car lease can save you a huge amount of money over time. The more you save, the more you have to put into your loans and the more you’ll have each month once those loans are finally paid off.
When it comes to your personal finances, life happens. Hopefully, you have some sort of emergency fund to help you navigate any unexpected medical, car, or home repairs, among other emergencies. But if not, you may have to adjust course on your debt payoff.
But just like Marie Kondo shares in her popular book on decluttering your home, you need to stick with a regular system to reach your goals in the long-term. A slight speed bump shouldn’t throw off your debt payoff strategy. It might change your schedule, but you should always stay focused on the big benefits of your future debt payoff.
If you want to know how to get out of debt, you’ve probably noticed that ignoring your debt won’t make it go away on its own. Whatever obstacles you run into along the way, staying focused and keeping a positive outlook go a long way in helping you reach debt payoff success.
PayActiv is a partner in helping you reach your financial goals. Through early access to earned wages, budgeting and savings tools, and educational resources, and other benefits offered by PayActiv, you can take charge of your money and get on track to build a solid savings account and reach other money goals.
If you’re ready to take a more active role in your finances and pay off debt, PayActiv is here to help. Get started on your debt payoff action plan today.
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