Paying Off Debt? 5 Tips to Help You Make More Progress
Paying off debt is never easy, but it can be done. Plus, the feeling of relief when you’ve finally paid down your balances is like no other. With that in mind, if you are serious about getting your finances under control once and for all, read on below.
How to make substantial progress in finally paying off debt
1. Include debt payments in your budget.
When it comes to managing debt, one of the biggest mistakes that often trips people up is adhering to the minimum payment required by their lender. In truth, if you only make the minimum payment, you will be in debt for a lot longer than is necessary.
Instead, take a closer look at your normal budget and decide how much you can afford to put towards your debt payments each month. While you do want this amount to be substantial, it’s important that you also still have the ability to pay for all of life’s necessities.
Additionally, although it may seem counterproductive, do your best to leave a little room in your budget for discretionary spending. Put simply, if you try to go without spending on anything enjoyable for too long, you will get tired of budgeting quickly. By giving yourself a little wiggle room, you are essentially ensuring that you have a better chance of sticking to your budget and paying off debt.
2. Choose a strategy for paying off debt.
Once you have figured out how much you can afford to spend on your debt payments each month, the next thing to do is to choose a payoff strategy. In other words, a payoff strategy is a game plan for how you intend to attack your debt. In the world of personal finance, there are two main strategies that you can follow:
The Avalanche Method
With the avalanche method, you essentially decide to pay off your highest-interest debt first. Here, you make the minimum payment on all of your other debts and then funnel the rest of your disposable income into paying off the debt with the highest interest rate. The biggest advantage of using this method is that you will pay less interest over time. However, it may take you longer to see real progress.
The Snowball Method
The snowball method for paying off debt is essentially the opposite of the avalanche method. In this case, you pay off your smallest debt first by funneling all of your disposable income there and making the minimum payment on the rest of your debts. With this method, you’re essentially setting yourself up for a bunch of small wins that will hopefully help you to keep moving forward as you encounter larger balances. That said, you may end up paying more in interest overall.
3. Set up automatic payments.
After you’ve chosen a payoff strategy, the next step is to set up automatic payments with your lenders. The beauty of automatic payments is that they remove the temptation to spend your excess cash on other expenses. Once it leaves your bank account, the decision is out of your hands.
That said, if you’re going to go this route, it’s a good idea to make sure that you’ve set your automatic withdrawal for a day when you know that you will have a sufficient amount of cash in your bank account. Otherwise, you could end up facing hefty overdraft fees that will put you even further behind with your financial goals.
4. Consider consolidating your debt.
If you have debt that is coming from quite a few different sources (especially those that are higher-interest) it may be worth considering getting a debt consolidation loan. At its core, a debt consolidation loan is a personal loan that is used to combine all of your debts into one source.
The major benefit of going this route is its ease. In this payoff scenario, you will only have to worry about making one debt payment each month. Additionally, since interest rates are currently at historic lows, you may even save some money on interest charges while you’re paying off debt.
5. Start changing your spending habits.
The last key to paying off debt is often the hardest to wrap your head around — it’s absolutely crucial to take a hard look at your budgeting and spending habits. After all, it’s only through changing your habits that you can avoid running up another balance in the future.
If you need help altering your spending habits, consider consulting a financial advisor. They can help you look at the specifics of your financial situation and give you suggestions on how to move forward in a way that makes sense for you.