Debt is an epidemic in America. Almost everyone has a car loan, or student loans, or credit card debt. And many have all three.
Shopping sprees, medical bills, and emergencies can deal a fate blow to your finances. Once your debt is overwhelming, it can cripple your life.
It becomes impossible to save money to achieve your goals. You can’t save for a down payment on a house or your kids’ college. On top of that, it adds stress and anxiety, which makes the problem worse.
What you need is a game plan for getting out of debt. That’s where this post comes in handy. With a strategy in place, you’ll know what you have to do. Here’s a three-step process for paying off your debts.
Step 1: Reign in the budget
Your first order of business is to make a budget. You do this by calculating your spending and income. Then make adjustments so you spend less than you make.
Decide how you want to track your spending and income. A popular website for tracking your money is Mint. Or you can create an excel sheet on Google Sheets. If you’re more old school you can use a pen and paper.
Once you choose your method of tracking your budget, now it’s time to collect data. This can be intimidating, but it’s a necessary step. List everything you’re spending money on and where you’re money’s coming from. Get a solid idea of how much you spend and make every week or every month.
Now that you see the numbers, let’s start cutting things we don’t need. If you’re eating out too much, focus on grocery shopping and making meals at home. If you have too many bills, cut services like Netflix or club memberships.
The goal is to spend less money than you make. Remember, the less money you spend, the more money you can apply to debt.
Step 2: Apply all extra money to debt
Once your budget is in place, you’ll have spare money to apply to your loans. This step requires a lot of self-discipline. Once you free up your finances, you may be tempted to buy something. But remain focused on your ultimate goal – paying off debt.
Begin by making a list of all your loans. Make sure you include the amount of each loan and its interest rate. You can’t use the right solution without properly understanding the problem. This overview will give you good intel on how to proceed next.
Step 3: Pay off one debt at a time
The strategy here is pretty simple. Make the lowest payment on all your loans, except one. Select one loan and pay as much as you can. Which loan should you tackle first? There are two strategies:
The Snowball Method
This method was popularized by financial guru Dave Ramsey. It’s also the one I recommend. You pay off the loan with the smallest amount first. Then you work on the next smallest amount. This strategy rewards you early on. You feel good after paying off a loan. Use that emotional energy to keep paying off more debt.
The Avalanche Method
In this method, the first loan you pay off is the one with the highest interest rate. Mathematically speaking, this is the fastest way to pay off your debt. It might take time before you see or feel a difference. But once you pay off that first loan, the next one is crazy easy to pay off.
Watch your debt disappear
Paying off debt can be scary and discouraging. It becomes feasible once you have a plan in place. When you have a road map, all you have to do is take it one step at a time.
The first few months might be hard. You’ll cut your spending and apply money to loans. And it won’t feel like your debt is disappearing. But trust me – it’s working.
Eventually, that first loan will fall off your shoulders, and it’ll feel amazing. Then you’ll have more money to apply to the next loan.
Keep going and watch your debt disappear.
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