As a child, my parents talked a lot about debt. I was often involved in discussions about how they planned to fund our family’s needs, including housing, cars, my sister’s and me’s education, vacations, etc.
I will always remember those discussions because they sounded intense. Since then, I have been eager to learn as much as I can about debt so that when it comes time to pay off my own, I am ready.
Having debt is stressful because it gets in the way of your financial security and freedom. In fact, 42% of American adults report that financial problems and debt resolution have negatively impacted their mental health, leading to a host of problems such as anxiety, stress, and depression. With total US household debt surpassing $16 trillion in the first half of 2022 and continuing to rise, now is the perfect time to better manage your debt.
Here’s how.
1. Understand the psychology of debt
Source: Tenor.com
Getting into and out of debt is not just a numbers game; it’s also about how you think about spending and saving.
If you want to pay off your debt, you need to have the right mindset and come to terms with the emotions like guilt, anxiety, or denial that usually come with being in debt.
Everyone’s financial situation and reasons for going into debt are different, but the sooner you can come to terms with your current situation and quench unproductive feelings or the internal narrative that you will never be debt-free, the sooner you can actually begin your journey debt reduction.
Read more: The relationship between your money and your mind
2. Strive for debt reduction
Now that you have the right mindset, it’s time to commit.
Every debt reduction journey should be based on a set of clear, time-bound goals that have personal meaning. Imagine yourself without the emotional and financial overhang of your debt. Imagine how much more money and peace of mind you would have if your debt were reduced or eliminated.
It is a good practice to write down how you would feel and what you could do if a smaller portion of your earnings went to pay off debt. This is the future you want to create.
After writing down your goals and what you look like in the future, post it somewhere for you to see every day. This will keep your goals in the first place.
3. Understand your duty
At the beginning of 2022, the debt of the average American was about $155,000. Most of this debt was concentrated in mortgages, but many Americans also have credit card debt, student loans, auto loans, home loans, and other debts such as personal loans.
Source: New York Fed.
Knowing where to go in your debt reduction strategy starts with knowing where you are. Create a spreadsheet of all your outstanding debts and document:
- The amount of outstanding debt to the creditor
- What interest rates
- Interest rate type (fixed or variable)
- Payment Frequency
- Payment period
- Minimum payment amounts
- Any commissions/prepayment limits
Don’t overlook any debt, including any “buy now, pay later” obligations (it’s still debt). This list will serve as a foundation to move you where you need to focus, keep you committed, and help you celebrate quick wins as you top up your balance.
As you make your list, also classify your debt as good and bad:
- good debt has a manageable interest rate and is tied to an asset such as a house or business.
- Bad debt This is consumer debt on high-interest financial products such as a credit card or unsecured personal loan that has been used to fund things like vacations or large material purchases.
Be sure to tick off anything that surprises you, as this can reveal spending habits that need to be cut.
4. Understand your expenses
Since debt is a function of spending, find out where your money went during the period you accumulated your debt.
Debt can sneak up on you unexpectedly and hit you with a wall, so this is an important step. Knowing where you spend your money also lays the foundation for how much income you can use to pay off your debt.
When doing this analysis, pay attention to:
- Emotional or impulsive spending (especially in e-commerce)
- Often orders or eats out
- Excessive holiday spending
- Alcohol consumption
- Frequent big nights
- Unused Subscription Services
- Penalties for late payments on debts
- Overdraft fee
- Living in housing you can’t afford given your salary
- Luxury car financing
With this information in hand, start thinking about where you can cut spending to get more money to pay off your debt.
Read more: 22 bad financial habits everyone should get rid of
5. Earn more
Unfortunately, life is worth a certain amount and seems to be worth more every day.
While most financiers advise you to focus mostly on the spending side of the debt reduction equation, one of the most effective ways to pay off debt faster is to make more money.
If you can, try selling things you don’t need or start doing something you love. The more you earn, the more you will have to invest in debt.
Read more: Side Job Ideas: 25 Ways to Make Money on the Side
6. Get professional help
When you are struggling with debt, it is helpful to enlist the help of a professional debt counselor. Debt counselors teach money management and debt reduction skills so people can make future financial decisions about budgeting, credit, and debt management.
Debt counseling agencies are usually non-profit organizations and offer free or low-cost advice. The initial consultation may be free, but there may be an entry fee or a monthly fee after the consultation, depending on the assistance requested. Most agencies create free debt education materials; however, other services, such as debt management and repayment plans, must be paid for.
Individual work with a consultant will not affect your credit score, but what you do. after working with a consultant can.
While debt counseling can bring negative associations, you don’t have to be in poor financial shape to enlist his support. They can be a useful resource for proactively managing your financial health.
Some popular government-approved debt counseling services include:
Please note that if you are filing for bankruptcy in the US, you are required by law to work with a credit counselor.
7. Focus on high-interest debt
Now that you know what your debt is and where your money went, prioritize debt repayment based on your most expensive type of debt.
This debt repayment strategy is called an avalanche strategy and aims to make minimum payments on outstanding debts while allocating more to high-interest debts (such as a credit card).
As you move forward, you can take the money you previously budgeted for the highest interest rate debt and allocate it to the next highest interest rate debt.
The avalanche strategy often saves money on interest compared to the snowball approach, which focuses on reducing debt with the smallest balance sheet first.
Read more: snowball vs. Avalanche: What’s the Best Debt Repayment Method?
8. Pay more than the minimum
To quickly pay off your debts, invest as much as possible in this debt. Each additional amount can make a big difference.
For example, if you have a personal loan of $15,000 with an interest rate of 5% and a minimum monthly payment of $300, it will take you over 4.5 years to pay off that balance. However, if you increase your payment to $500, you will repay this loan in 2.7 years.
Also, making more than just the minimum payment lowers your overall debt utilization rate, which in turn can improve your credit score.
Read more: What is your credit utilization rate?
9. Research Debt Consolidation
Debt consolidation involves taking out a new loan to pay off multiple loans. This is usually done with an unsecured personal loan. Exploring this option can help you cut down on monthly payments and extend the time you need to pay off your debt.
This strategy may work for some, but personal loans often have higher interest rates than asset-backed loans, and many types of personal loans, such as payday loans or other high-value short-term loans, should be avoided.
Read more: The Best Way to Consolidate Debt: The Complete Guide
10. Debt settlement negotiations with creditors
Source: Giphy.com
Debt settlement is a type of debt relief that involves the work With to your creditors (those to whom you owe money) to reduce your total debt. The goal is to come to an agreement on what will eventually be paid. After all, some pay is better than none.
While debt settlement can help reduce overall debt, avoid bankruptcy, and pay off debt sooner, it can significantly affect your credit score, make it harder to get credit in the future, and cost thousands of dollars. In addition, any repaid debt may be subject to tax in the coming tax season.
The choice of debt settlement should be made based on your own financial situation, but this is often seen as a last resort. A debt advisor can often help in negotiations with creditors.
Putting it all together
Paying off debt is not a one-size-fits-all endeavor, but if you approach it with the right mindset, goals, perseverance, and consistency, it can be done.
By knowing why you got into debt and what type of debt you have, you’ll be well equipped to start developing a repayment strategy that works for you.
Just keep remembering why you started your debt reduction journey and end the game. The future will thank you.
Featured image: Douw de Jager/Shutterstock.com
