Nothing beats the feeling of freedom you can achieve by being debt-free. Yet 85% of American adults have carried some form of debt—whether credit cards, mortgages, or student loans—and at times it can be a challenge to pay it off.
Everyone’s financial situation is different, and this list is not exhaustive of all existing strategies, but here’s a look at some possible approaches that can help you get on top of common types of debt.
Creating a Budget
A budget can be a good first step when figuring out how to pay off debt. After all, this is the step where you’ll identify the money you can use to make payments. And this is where you can start to figure out how to live within your means to avoid accumulating new or more debt in the future, such as credit card debt.
To start your budgeting, you can take an inventory of all of your after-tax income. If you have one job, simply look at your net paycheck and multiply the number by how many times you’re paid each month.
Next, tally up your regular necessary expenses. These might already include debt payments such as your student loans or a car payment.
They can also include rent, utilities, insurance payments, food, and so on. Subtract this total from your income and what you have left represents the money available to you for discretionary spending. This is also the money you can use to make debt payments, or even extra debt payments. In the interest of paying off debt, you may want to determine what kinds of discretionary spending you can forgo—such as eating out or going to the movies—and how much you can set aside to pay off debt.
The Snowball and Avalanche Methods
Once you’ve identified funds you can use to pay down debt, there are a number of strategies you can use to put that money to work. If you have multiple debts, you might consider the snowball or avalanche method.
If you decide to use the snowball method, list your debts in order of smallest balance to largest. You are only looking at the amount you owe, not the interest rate you are charged. Make minimum payments on all the debts to avoid penalties. Make all extra payments toward paying off the smallest debt.
Once that one is paid in full, move on to the next largest debt and so on. Use all of the money you were directing toward the previous debt, including minimum and extra payments, to pay off the next smallest. In this way, the amount you’re able to direct toward the larger debts should grow or “snowball.”
One downside to the snowball method is that while targeting your smaller debts first, you may be holding your higher interest debts longer.
However, you should also theoretically get a psychological boost every time you pay off a debt that helps you build momentum toward paying all of your debts off. And if this extra push helps you eliminate your debts, the benefits of this strategy might outweigh the extra costs.
The avalanche method takes a slightly different approach. To use this method, you would list your debts in order of highest interest rate to lowest. Once again, commit to making minimum payments on all of your debts first.
Then make any extra payments toward your highest interest rate debt. As you pay each debt off, move on to the next debt with the highest rate. The debt avalanche method minimizes the amount of interest you pay as you work to get debt-free, potentially saving you money in the long-term.
Choose the strategy that fits your personality and financial situation to increase the chances for success.
The Fireball Method
A hybrid approach to the snowball and avalanche methods, SoFi’s Fireball method asks you to first group your debts by good and bad debt. Good debts are those that help you build your future net worth, like a mortgage, business loans, or student loans.
Good debt typically carries interest rates of less than 7%. Bad debts, on the other hand, are those that work against your ability to save. Think credit cards where if you don’t pay your balance off each month, high interest rates and fees can quickly spiral into a big credit card bill.
Bad debts usually have interest rates higher than 7%, though credit card debt should always be characterized as bad debt even if you are taking advantage of a 0% interest promotion.
Now, list your bad debts in order from smallest to largest based on balance size. Continue making minimum payments on all debts, but funnel extra cash toward paying off the smallest of the bad debts.
Work your way up the list until all your bad debts are paid off. Pay off your good debts on a regular schedule while investing in your future. Once you’ve blazed through your bad debt, you may even have extra cash to help you accomplish those goals.
A balance transfer allows you to pay of debt from one or more high-interest credit cards (or other high-interest debt) by using a card with a lower interest rate. This strategy has a number of benefits. First, it helps you get organized.
Staying on top of one credit card statement might be much easier than keeping track of many cards. What’s more, this strategy helps you free up the money you were paying toward higher interest rates, which you can then use to accelerate your debt payments.
Some credit cards offer teaser rates as low as 0% for a set period of time, such as six months to a year. You may want to consider taking advantage of one of these deals if you think you can pay down your debt within that time frame.
Be careful, however, when these teaser rates expire, the card will jump to its regular rate, which could be higher than the previous rates you were paying.
Paying More Than the Minimum
Credit cards allow you to make minimum payments—small portions of the balance you owe—until your debt is paid off. While this might seem convenient on the surface, this system is stacked in the credit companies’ favor. Making minimum payments can cost you more in the long run than making larger payments and paying down debt faster.
That’s because as you make minimum payments, the remaining balance continues to accrue interest. Consider a credit card balance of $5,000 with a 15% interest rate. According to Bankrate’s minimum payment
calculator , if you only make minimum payments of $112.50 per month, it will take you 266 months (22 years!) to pay off your debt. And in that time you will have spent more than $5,700 on interest payments—more than your initial balance.
In an ideal world, you would pay your credit card balance off each month and wouldn’t owe any interest. But, if that’s not possible, consider paying as much as you can to minimize the cost of high interest rates.
Establishing Realistic Goals
It takes a lot of discipline to get debt free. Setting goals that you’re actually able to achieve can help you stay on track. An unreasonable goal might leave you disappointed when you don’t achieve it. What’s worse, in your disappointment you may feel unwilling to give tackling your debt another try.
When setting reasonable goals, it might help to work backwards a little bit. Think carefully about how much money you actually are able to put toward your debts each month. Include factors like how much spending you can reasonably cut and how much you might be able to add to your income.
Don’t factor in extra income unless you’re sure you’ll be able to come up with it. Once you settle on your monthly amount, you can calculate how many months it will take you to pay your debt off. For example, say you have $500 dollars per month to help you pay off $10,000 in credit card debt with a 14% interest.
With an online credit card payoff calculator , you can determine that it will take you 23 months to pay off your card. So, a reasonable goal might be two years to get debt free, which even builds in a little wiggle room if you can’t come up with a full $500 in one of those months.
Finding Extra Cash
Finding the cash to pay off your debt can be tough, especially if you’re looking to accelerate your debt payments. The most obvious place to start is by cutting unnecessary expenses.
For example, you might forgo cable television or a gym membership while you’re getting your debt in check. You may also want to try to negotiate lower rates for some necessary expenses such as you phone or internet bill.
Sometimes cutting expenses can only take you so far. Your discretionary income is limited since you still have to pay for your necessary expenses. You might consider starting a side hustle that can boost your income.
For example, you can get a second job, monetize your hobby by selling crafts online, or join the gig economy by driving for ridesharing apps like Lyft and Uber.
You can use windfall, extra cash from tax returns, bonuses at work, or generous birthday gifts to help accelerate your debt payments.
Rewarding YourselfPaying off debt is probably not your idea of fun. In fact, in some cases in could make you feel downright unhappy, discouraged, or even like you want to quit. That’s why it’s so important to treat yourself as you reach debt milestones.
Tethering productive behavior to rewards is a process that Wharton business school professor Katherine Milkman calls “temptation bundling .” This process can help you boost your willpower and stick to your goals.
So, choose a reward and tether it to a debt milestone like paying off a credit card, or paying off 10% of your debt. Each of these steps puts you closer to being debt-free, and that’s worth celebrating. When you reach one, indulge in your reward.
That said, you don’t want to undo any of the hard work you’ve just put yourself through, so don’t go overboard. Set a budget for your reward or find something frugal that you enjoy doing.
For example, maybe you allow yourself a dinner in a nice restaurant after paying off 10% of your debt. Your reward could also be something free that you enjoy doing. Maybe you take yourself hiking every time you hit your 10% goal.
Avoiding Taking on More Debt
While you’re paying off debt, especially if you’re trying to wrangle a bunch of high-interest debts, it’s important that you don’t add to your debt. If you’re trying to pay off a credit card, you might want to stop using it.
Otherwise, it may feel like you’re walking in sand, making a little bit of progress toward paying it off only to backslide a bit when you make new charges. In some cases, you may feel like you’re paying off your cards, but your debt payments are actually only covering your current spending.
You may not want to cancel your credit card, but consider putting it somewhere where it’s not easily accessible. That way you’ll be more likely to use it only when necessary and less tempted to use it for impulse buys.
It can also be helpful to track your spending. If the idea of busting out a spreadsheet every time you buy something has your stomach in knots, consider utilizing technology to do the work for you.
Consolidating is another strategy that makes use of lower interest rates to pay off debt. When you take out a loan, it will come with a fixed interest rate and a set term. When you consolidate your debts, you are essentially taking out a new loan to pay off debts—hopefully with a better interest rate or term.
A new loan with a lower interest rate can save you money in the long run, especially if you’re carrying a sizeable balance. You may also be able to lower your monthly payments to make a budget more manageable on a month to month basis—or you may be able to shorten your terms, which can let you pay off the loan faster. Consider a personal loan from SoFi to assist you in your debt consolidation efforts.
Do keep in mind when consolidating debts that extending the term could lead to lower monthly payments but higher interest payments in the long run.
You may want to consider consolidating if your credit score has improved since you took out your loan. A higher credit score may mean banks are more willing to trust a borrower with a loan and will give them more favorable rates and terms. Also, keep an eye on the prime interest rate set by the Federal Reserve. When the Fed lowers interest rates, banks often follow suit, providing you with a possible chance to find a loan with lower interest rates.
If you are thinking about taking out a loan to consolidate your debt, check out SoFi. SoFi offers credit card consolidation loans to help you get back in control. SoFi’s unsecured personal loans have low rates and no fees.
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