Debt can feel overwhelming at times, between the student loans, credit card payments, mortgage, and car payments. The earlier you get started with a strategic plan, the better. If you’re not sure where to start in paying off your debt, it’s helpful to first get organized and figure out what you owe.
If you can only fit minimum payments into your budget, start there then gradually work your way up. It’s helpful to keep in mind your interest rates, as compounding interest will grow your debt over time. Start with these seven simple steps to work your way towards achieving financial zen and becoming debt-free.
How to Get Out of Debt
While there’s no quick fix to get out of debt, you’ll want to create a strategic plan and stick to it. A repayment plan can help you best assess your financial situation and speed up up your repayment process. Luckily, there are simple steps you can take to make the process of paying off your debt more manageable.
1. Get Organized
If you have several accounts you owe on, start by making a list to calculate what exactly you owe. Collect the following debt repayment information for each account:
- Interest rate (APR)
- Monthly amount due
- Payment due date
You can find this information through your online account or request it directly from your creditor.
2. Prioritize Your Debt
Paying off your debt can be a long grueling journey, but the sooner you get started, the better off you’ll be. Everything you owe — personal loans, credit cards, auto loans, or student loans — should be included. Categorize what is most important to you to pay off first.
3. Lower Your Interest
Some creditors or lenders may lower your interest rate if you are in good standing, have paid on time, or missed very few payments. You may even be able to transfer your balance to a lower interest credit card, if you have good credit.
4. Make a Repayment Plan
There are many strategies to repay your debt, but the main categories for repayment are by interest rate, balance, or a combination of the two.
- Avalanche Method: You start by paying the debt that has the highest interest rate and work down from there. You’ll save money in the long run since less interest will accrue over time. Because of this, this is often the smartest method.
- Snowball Method: Make minimum monthly payments on all of your accounts, then use what you have left to pay your debt with the lowest balance. Eventually, once your smallest debt is paid off, put that previous monthly payment and what you have left towards your next lowest debt balance.
- Snowflake Method: This final debt repayment method is simply when you make small payments whenever you have extra money. You can also combine this method with either of the first two. For example, if you receive a $1,000 holiday bonus at work, you would put it towards your debt. If you don’t get paid regularly, this method still works, since small payments can add up.
In the end, you should choose which method motivates you and works best for your situation. If you are motivated by small wins, the snowball method is a good option. As long as you are making progress toward your end goal, you can shift between different methods over time.
5. Stick to a Strict Budget
You will need to cut expenses as much as possible when trying to pay off your debt. A helpful way to keep your spending in check is to use a 50/20/30 budget:
- 50% of Your Income: Put this towards the needs in life — rent, food, transportation, and utilities, or insurance.
- 20% of Your Income: Dedicate at least 20% of your income towards savings and most importantly, your debt payments. Start as early as you can and stay consistent — compounding interest will grow over time.
- 30% of Your Income: Put this amount towards your personal expenses like your phone bill or a weekend trip with friends. You may want to scale back your wants to put more towards your debt.
Depending on your expenses and debt situation, shift your budget so you can make more than your minimum payments each month to make a bigger dent in your total.
6. Track Your Progress
Debt repayment and tracking apps turn tons of numbers into a simple automated process. Consider using a budgeting tool to help you track the progress you’ve made, help motivate you when you do have victories, and evaluate how far you have to go to be debt-free.
7. Set Up an Emergency Fund
To stay on track with your repayment plan, allocate an emergency fund that you can tap into for unexpected expenses. Plan ahead to have at least $1,000 in your fund and you won’t have to add to your debt by continually adding to the total amount you owe.
Why It’s Important to Get Out of Debt
Keep the momentum in working towards paying off your debt for, most importantly, your financial security and future. With less debt, your debt-to-income (DTI) ratio will look better to lenders, which helps if you’re looking to buy a house. Learn how to calculate DTI, figure out where you fall, and see how you can reduce your ratio number.
With no debt, you’ll also be freed up to spend money on things you enjoy without the guilt. The money you may be putting towards repaying your debt now could eventually go towards retirement, investment opportunities, your family, or to pursue a passion.
Too much debt can also impact your credit score negatively. This might affect what you drive, your ability to get a mortgage, employment opportunities, and other monthly bills. Anytime you need to borrow money, your credit is evaluated, so it’s important to maintain a healthy score. Looking to check your credit report? Turbo is here to help!
Debt can cause a lot of stress to not only you, but those close to you. If you’re in constant worry of how you’ll make your next payment or bill, reduce your financial stress or anxiety by working to lower your debt.
Becoming debt-free will give you a freedom and relief to make the choices you want. You can increase your savings, put more towards early retirement, and improve your overall financial health. Without a financial burden to hold you back, you can enjoy life to the fullest.