Paying Off Your Debts: A Practical Guide
Life happens - and so does debt.
Whether you carry debts on credit cards, medical bills, or long-term loans like car payments, somehow you’ve found yourself in that all-too-familiar hole. Don’t panic! There are a few smart ways to get that debt down.
*Note: Not all debt is “bad debt”! We covered the differences between “good debt” and “bad debt” in this recent article; take a peek.
The Snowball Concept
Don’t let its icy nickname freeze you out. This easy concept simply helps you take steps to get out of debt. There are just a few steps to understand:
List all of your debts from smallest to largest.
Make a minimum payment on all debts EXCEPT the smallest.
Pay as much as you can toward the smallest.
Once that debt is gone, hit the next on the list.
Use the money you put toward the now-paid-off debt toward the next smallest.
Continue until all your debts are paid.
By focusing on debts in order from smallest to largest, you can begin to work down the number of debts you have, thus reducing the amount of interest you’re paying, in the process. By crossing the lenders off one by one, you can lower the number of debts more quickly.
Avalanche Method
This method might have another wintry name, but it won’t freeze up your budget. Instead, this routine will allow you to focus on paying one debt down at a time, much like a snowball concept, but this time focusing first on those with the highest interest.
To try the avalanche method, you will make a list similar to the snowball method. But, instead of the smallest loan amount listed first, you will list your debts by the highest interest rate to the lowest interest rate.
Once you’ve created your list, follow the snowball steps, putting the most you can on the debt with the highest interest rate. Once it is paid, put the money you used toward paying that debt toward your next debt. Proceed until each is paid down.
Debt Consolidation
As its name implies (and finally a less chilly-sounding nickname!), consolidating debts means putting multiple debts into the same “pile.” Calculate all that you owe, from all the debts that you want to pay off.
From there, you can seek a few options to obtain a single loan with a lower interest rate or find a credit card with a term of 0% interest. Putting all debts under one umbrella allows not only one lower rate of interest, but also can buy you some time to make a real dent in the “pile.”
Cut Back on Spending
Another option to lower your debts is to cut back on other areas of your household budget. Saving here and there, wherever you can, allows you to put more down on your debts. When you use this method, instead of making just minimum payments, you can put more funds toward your debts each month.
Some ideas to help you save might include:
Try public transportation instead of driving your own car
Reduce your subscriptions to streaming or entertainment services
Skip that coffee drive-thru and make your beverage at home
Pack your lunches for work instead of opting for take-out
Clip coupons and shop sales on groceries and household goods
Talk to your partner and kids about ways you can work together to reduce spending
Even small sacrifices can add up, leaving you more money to pay down debts. While discretionary spending might seem like “small change” (literally and figuratively), every penny helps. This helpful blog includes some additional tips for saving money every month.