Society today runs on credit, and that’s not a bad thing. Very few people can afford to pay cash upfront for things like cars, homes, or a college education. Access to credit and loans allows you to achieve major milestones and improve your financial position.
However, with such easy access to credit, many find themselves over-relying on it. And if a financial setback were to occur, such as unplanned medical bills or a job loss, too much debt can strain your finances and become costly.
While eliminating debt can often feel impossible, many are surprised to learn they have more control over the situation than they believe. If you’re ready to tackle debt head-on, the following guide is perfect for you.
Stop Adding More Debt
Credit cards and short-term personal loans cause many people to get in over their heads. They’re easy loans to get approved for, and spending the money is even easier. Getting a handle on these higher-interest loans is crucial to becoming debt-free.
The first step is to stop using your credit cards. While that might sound obvious, it can be a difficult transition. People unknowingly live beyond their means because they rely so much on credit. The best way to limit your dependency on credit cards is to make a budget.
Create & Follow a Budget
To pay off debt, you need money and the best place to find money is with a budget.
People think they know how much they spend monthly, but their assumptions are usually way off. It can be eye-opening or even jaw-dropping once you see how much you spend and where your money is going.
Use the following steps to create a basic budget:
List all your recurring monthly incomes.
Itemize your monthly expenses.
This step tends to be challenging since some bills or expenses occur quarterly or annually (vacations, birthdays, etc.). It helps to review several months of account and credit card statements to identify all your costs.
Subtract your expenses from your monthly income.
If your expenses are too high, look for areas to cut. Your goal is to end the month with money left over so you can use it to pay off debt.
Schedule a time monthly to balance your budget.
Don’t beat yourself up if you make mistakes. Instead, learn from them and keep going.
If you need help budgeting, check out our resources in our Financial Toolbox or try one of these popular budgeting methods:
Zero-Based Budgeting: Add up your income to the last penny. Then, list your expenses and add them up. Cut spending until your total monthly income equals your total monthly expenses. Try to trim as much spending as possible so you have leftover money to allocate towards your debt or savings.
Envelope Budgeting: Break your spending into categories, such as loans, groceries, insurance, utilities, etc. Then, assign a specific amount of money to each section. For example, $350 to spend on groceries. Your goal is to stay within the amount you allocate to each category. It’s a simple way to keep your spending in check. Make sure to dedicate one section to extra debt payments.
50/30/20 Budgeting: For this method, break your income up as follows: 50% goes toward needs (rent, utilities, groceries, etc.), 30% for wants (vacations, clothes, entertainment), and 20% for savings and debt repayment. For more details on this approach, check out this resource.
Build a Repayment Plan
Once you have a working budget, it’s time to determine the best way to repay your existing debts. Three popular strategies include:
Prioritize Debts: Itemize your debts by which are the most pressing or stressful. Pay the minimum amount due on your loans, with extra going toward the top priority debt. For example, if you’re behind on your car payment, you’ll want to focus there first to prevent losing your car.
Snowball Method: Think of a snowball rolling down a mountain. It starts small and is huge at the end. This repayment strategy involves you making the minimum payments on all your loans. Then, put extra money toward your smallest debt. As you pay off small debts, you build confidence and momentum while progressing toward larger balances.
Avalanche Method: This strategy focuses on paying off your debt with the highest interest rate first. It’s savvy because this debt costs you the most in interest. Once you eliminate the highest debt, move on to the next highest rate balance.
Debt can often feel overwhelming – even if you’re using a debt repayment plan. If you have multiple credit cards or personal loans, it can be tough keeping track of everything. And high-interest rates can make it feel like you’re never getting ahead.
Consolidating debt sounds complex and expensive, but it’s the opposite. Debt consolidation simply means you’re transferring several credit card balances or personal loans into a new loan. And, it provides two key benefits - You only have one loan to manage instead of multiple and the interest rates are generally much lower – saving you money.
There are two popular ways to consolidate debt:
Debt Consolidation Loan: Outstanding credit card balances and personal loans are consolidated into a new, short-term personal loan.
Credit Card Balance Transfer: Existing credit card balances are transferred to a new, lower-rate credit card.
Both options will help you save money, simplify repaying outstanding debt, and relieve stress.
If you’re facing a financial setback, such as a job loss, reach out to your lenders. Most are understanding and have solutions available to help you get back on financial track. For example, you might be able to skip a loan payment for one month or make a partial payment.
However, it’s important that you reach out to your lender before your payment due date. The sooner you contact them, the more options they’ll typically have to help you. And many solutions might not impact your credit history or score.
Eliminating high-interest debt feels amazing – like a giant weight was lifted off your shoulders. To get there, start by creating a budget and working on a plan to repay your outstanding balances. If you have several credit cards to repay, consider consolidating debt to give your efforts a head start.
If you’re interested in learning how much you could save by consolidating high-interest loans, we’re here for you. Please stop by any of our convenient branch locations or call 248-322-9800 extension 5 to speak with a team member today.
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