Did you know that 80% of Americans have some form of debt?
If you’re working towards becoming debt-free, there are practical steps that you can take to help you pay off your debt quicker. By planning ahead and setting a budget, you can lower the stress and work towards reaching your financial goals.
What is Debt?
Debt is the amount of money borrowed from an individual, bank, online lender, business, or others to pay for expenses that you couldn’t otherwise afford. The stipulation of incurring debt is that if you borrow money, you’ll be held to repaying it by a certain date with interest.
Common forms of debt include student loan debt, mortgage, auto loans, and credit card debt — all of which may have different interest rates and pay off dates. To learn how to pay off your debt, record everything that you owe, including the due dates, minimum payment, and interest rates, and then consider how our 10 tips can help you reach financial freedom.
1. Create a Budget
First things first, you’ll want to put a monthly budget in place to understand how much of your income can be put towards paying off your debt. Write down the amount you pay for all of your bills, and set a budget for how much you can spend on other necessities such as groceries, gas, personal hygiene, fitness, and more.
Once you determine how much money you have remaining for the month, you’ll have a better idea as to how quickly you can pay off your debt. Additionally, by tracking your monthly expenses, you may be able to cut down on your spending to contribute even more to paying off debt.
2. Prioritize Your Debt Pay Off
Don’t treat all of your debt equally — you may want to prioritize your payments based off of the interest rate, due date, or if your loans are tax-deductible. Use these three tips to help you prioritize your debt:
High interest rate loans. Consider prioritizing paying off your loans that have the highest interest rate first. If you tackle these loans upfront, you’ll pay less in interest, which may save you money over time.
Due date. On the other hand, if paying off your highest-interest loans first means that you’ll miss a due date for another loan, you may want to re-prioritize your game plan. It can be tempting, but late payments result in late fees and can negatively impact your credit score, which could be more detrimental to your financial standings in the end. Make at least the minimum payment on all of your loans, even if it means you can’t put all of your repayment towards the highest interest loans rate first.
Tax-deductible loans. Since the money you borrow for your home or education can help your financial position, it may be tax-deductible, but it’s recommended to consult with a tax advisor to understand your own situation. That means that there is less pressure to pay them off as quickly as long as you’re making regular installments. Instead, consider to focus on the debt that doesn’t invest in your future such as credit card debt or personal loan debt.
3. Pay More Than the Minimum
If you pay more than the minimum balance on your loans, it will not only help pay off the overall balance quicker, but it may help improve your credit utilization ratio — a large factor making up your credit score. Credit utilization ratio is the amount of your credit card balance compared to your credit limit, so if this number is low, it will put you at low risk to defaulting on your loans.
Paying above what is required puts you at a lower risk in the eyes of lenders, ultimately putting you in good standing to successfully get approved for loans in the future.
4. End Your Credit Card Spending
If you’re trying to pay off your credit card debt, make it easier on yourself by ending or limiting your credit card spending. Take a look at your most recent monthly expenses and see if there are any purchases that you could have refrained from. Then, use that as motivation to limit your spending next month.
As a reminder to limit your credit card spending, you can remove all of your credit card information from online accounts and only carry your credit card with you when it’s necessary so you can refrain from any impulse purchases.
5. Sell Unnecessary Items
If you have items that you don’t use, try selling them to help pay off your debt. Peruse Ebay or Amazon to see how much your items are worth, and if possible, put time into refurbishing or cleaning them so they appear in good condition.
You might be surprised by how much you can make from something that was collecting dust.
6. Secure an Emergency Savings Fund
Even if it means contributing slightly less towards paying your debt, it’s important to secure an emergency savings fund as a security blanket.
If you contribute your income towards your debt and an emergency fund, you may put yourself at a lower risk of taking on a massive amount of credit card debt if anything unexpected happens that impacts your financial stability. If you need a replacement part for you car, your air conditioner breaks in the middle of the summer, or you can’t work due to getting sick, your emergency fund will help you avoid taking on more debt with high interest rates.
7. Use Windfalls to Your Advantage
Have you earned a bonus from work? Inherited money from a relative? Consider putting the extra income that you receive to good use. It’s easy to put windfalls towards purchasing items that distract you from your financial goals, but if you put it towards your debt, you may set yourself to make purchases in the future that are debt-free.
8. Try Freelancing
Do you have a background in design, marketing, or even data entry? Whatever your skills may be, there’s likely a freelance job that you qualify for. Adding an extra income stream to your plate may be the answer to lowering your debt even faster.
9. Set New Goals
Set realistic goals that you can reach to help pay off your debt. It’s important to hold yourself to making decisions that will only help you reach your goals. Write them down or seek moral support from family or friends that will keep you disciplined.
Identify why. If you identify reasons why you want to get out of debt, you’re most likely to stick to the plan without giving up. Are you planning on investing in property or trying to pay for your child’s education? Use these “whys” to keep you on track.
Calculate your pay off. Understanding how many months it will take you to pay off your loans will help you set up new spending goals for yourself. Figure the principal balance you owe and interest rates to see how long it will take to achieve your payoff goal.
Make it a habit. If you make your goals the norm, your routine won’t need to change just because you’re limiting your spending. Make your plan a habit.
Be realistic. It won’t happen overnight. Paying off your debt will take time, but make sure that you’re making it a priority and sticking to a plan.
10. Reward Yourself
You’ll feel even more motivated to pay off your debt if you can reward yourself in the process. Set payment milestones and prepare a reward for when you reach them. For example, if you’re saving up to purchase a car or home improvement, you could make a milestone to invest in it once you pay off $10,000 of your debt.
You could also reward yourself with something small like getting a massage once you hit one of your payment milestones. Creating these rewards will help push you towards paying off your debt.
Don’t let yourself get lost thinking about your debt all the time. Once you create a plan, paying off your debt will become a routine, leading your towards eventually becoming debt-free.