If you’ve got debt, you’re not alone. The average American has about $80,000 in debt, excluding home mortgages. But unexpected or unplanned debt such as medical bills or credit card balances can be a tipping point into financial insecurity.
If you have too many payments every month, you might get behind on other financial goals such as building an emergency fund, taking a vacation, or adding to a retirement account.
Try to make progress every month on reducing your debt. It takes a little organization up front, plus a strategy that fits your budget and your preferences. These steps can help:
I. Make a list of all your debt.
Before you start paying off debt, tally how much debt you have. Make a list with this information for each bill you owe.
The details you need to know about every debt:
- Debt name/account
- Type of debt (credit card, student loan, etc.)
- Interest rate (some debt is more expensive, i.e., has a higher interest rate, than others)
- Payment terms/length
- Minimum monthly payment
II. Figure out the maximum amount you can pay every month.
Review your budget and answer these questions:
- How much do you need to pay for necessities such as rent/mortgage, insurance, utilities, and food?
- How much do you currently pay each month toward debt?
- Can you temporarily trim a few budget items and apply the savings toward debt?
- Any extra income—tax refund, side hustle, things like that—to put more toward debt?
The 50/30/20 approach simplifies budgeting:
III. Pick a debt repayment strategy.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently.
|What it’s called||How it works||How you keep it going||Why some people like it|
|The snowball method||Pay the smallest debt as fast as possible. Pay minimums on all other debt.||Then pay that extra toward the next largest debt.||A quick payoff is a quick win and can be a confidence booster.|
|Debt avalanche||Pay the largest or highest interest rate debt as fast as possible. Pay minimums on all other debt.||Then pay that extra toward the next smallest debt.||Paying off a big debt can boost a feeling of control and gets rid of big interest, too.|
|Debt consolidation||Combine debts into a single account.||Avoid any other debt until post-payoff.||Possible lower interest and one account increases focus.|
Celebrate success and stay on top of future debt.
Sometimes debt can be good to help you build a credit score or accomplish goals—such as buying a house—that would be hard to do without a loan. But lots of extra debt can weigh down your credit score and add up to interest you didn’t want to pay. So celebrate every extra payment—and every debt paid off too!
What to do next?
- After you’ve paid off debt, focus on building retirement savings.
- Talk to a financial professional about your retirement saving strategy.
Have questions about your finances? Click on the link below to schedule a consultation.
Gowdy Financial Group, LLC., is a Fee-Only, Financial Advisory firm dedicated to helping women, from all backgrounds and income levels, get out of debt, save toward your goals and enjoy the freedom that comes with being in control of your money. We don't sell products; we provide solutions. "Your Goals. Our Solutions." Serving Clients Nationwide.