Are you trying to pay down your debt? The good news is that you’re not alone. Household debt in America now exceeds $13 trillion. That’s a lot of money owed to a lot of people. Whether you feel you’re drowning in debt or you’re just trying to find firmer financial ground, here are 4 steps you can take to pay off your debt.
1. Understand Debt
When you borrow money and agree to repay it, that’s debt. Debt includes things like student loans, car loans, medical debt, credit card debt, payday loans, mortgages, and home equity loans. These types of obligations are different than variable monthly expenses like utilities, insurance, taxes, groceries, etc. Unless you use your credit card to pay for these expenses or you fail to pay them altogether, these aren’t considered debt. Unlike variable expenses, outstanding debt usually accrues interest and payments can compound quickly
2. Know What You Owe
Take inventory of your outstanding debt by adding up the total amount you owe for each obligation. This will give you an idea of what you’re dealing with and how you can take action to reduce your debt. Use an online debt calculator to help you with the math. And look into the current interest rates you have on each of your loans. Once you have the total amount you owe and an understanding of the interest on each loan, you can make a specific plan of attack to start reducing your debt.
3. Make a Budget
The best debt reduction strategies are those that help you change the way you save and spend your money. And that means making and sticking to a budget that will help you reduce your debt. Make a plan for every dollar you take home. Follow the 50/30/20 rule to dedicate 50 percent of your income to needs, 30 percent to wants, and 20 percent to savings/debt reduction. Many financial experts advise including minimum payments on your credit card, car payments, and other debt payments in your “needs” category. Then you can use the 20 percent to save for emergencies, retirement, and to make extra debt payments.
4. Find a Debt Reduction Strategy
There are a lot of debt reduction strategies out there. Some suggest paying off your largest debt first or the one with the highest interest rate. But one of the more interesting debt reduction approaches is called the snowball method. Start by listing all your non-mortgage debts from smallest to largest. Make minimum payments on all your debts, but focus as much money as possible to pay off the smallest debt first.
When you have it paid off, use the money you were dedicating to your smallest debt and roll it into your next largest one. Repeat this method until you have all your debt paid in full. Other smart ways to pay down your debt include dedicating extra money like work bonuses and tax refunds to pay off your loans. Or, get in the habit of paying more than the minimum balance on all your debts each billing cycle.
Whether you’re up to your eyeballs in debt or just tired of wading through more minor money obligations, follow these steps to get grounded in good spending and saving habits and eliminate debt in your life.