Are you looking for some practical ways to better manage your debt? Are you starting to become overwhelmed by your monthly payments and the building interest?
Hey, I get you! Debt is something that we all deal with. Especially now with the COVID-19 pandemic and the devastating ripple effects it will have on the economy for years to come, I feel even people who thought they were doing well financially might soon have to take on more debt than they previously would have imagined.
According to Debt.org, the typical American household now carries an average debt balance of $137,063. Credit cards alone make up $8,398 of this figure. The rest of it includes all of the other usual suspects such as your mortgage, student loans, auto loans, and personal loans.
With a number like that, its not surprising that nearly 60 percent of Americans say that debt causes stress in their lives. Debt is, after all, a contractual obligation. If you don’t pay it back, there will be consequences that can haunt you for several years to come.
So what can we do about this? Is debt just another boogie-man that we should always be afraid of and try to avoid at all times no matter the cost?
Not exactly. Debt is more like fire. If you handle it properly, then it can be very helpful. In fact, most loans are designed to do just that: Provide you with a large sum of money at a time when you need it. Could you imagine trying to save up enough money to buy a house with nothing but cash? That would be ridiculous because it would take you forever.
But just like fire, handle it the wrong way, and you’ll get burned. And believe me – it doesn’t take much for debt to set your whole financial house on fire.
In this post, we’re going to explore several ways you can learn to manage your debt better. By the end, you’ll not only have several strategies that you can start using yourself, but you’ll also know where to find some additional help if you need it.
Change Your Spending Habits
Unfortunately, one of the biggest problems with debt is how easy it is for us to get into it.
You can try to blame aggressive advertising and major media for encouraging all of our terrible consumer habits. But at the end of the day, who’s the one swiping that plastic?
That’s not judgment. It’s just the reality of the situation. Just like a person can subconsciously over-eat when they’re bored and or wanting to feel good, we can do the same harm to ourselves when it comes to spending money just for something to do.
That’s why the first thing I want you to do is to change your spending habits. Break the need to buy stuff you don’t need by going on a self-imposed spending diet.
How does that work? Simple. Every time you’re about to make a purchase, take a step back for a minute and honestly ask yourself:
- Do I really need this? Why?
- What value will it bring me?
- Can this purchase wait until later?
If you can’t truly answer these three questions, then the purchase doesn’t meet the cut and no money should be spent.
What’s the reason for doing this? First of all, I want to stop the flow of money going out of your pocket. Just like a doctor needs to stop you from losing any more blood before he can try to repair the wound, you need to stop losing any more money.
Plus, this is an excellent exercise in learning self-control. If you can master just this technique, then you’ll have the discipline it takes to implement any of the next steps for sure.
Make a Snapshot of Your Debt
Have you ever seen a movie where the police or FBI are trying to solve a big crime, and they’ve got a wall full of pictures, maps, facts, and pieces of yarn connecting them altogether?
Guess what? That’s what you’re about to do!
Well … maybe not as cool. But the idea will still be the same.
Your goal here is to get a complete and brief picture of your finances; particularly when it comes to your debt. To win at this game, you’ve got to exactly who you’re dealing with and what you owe them.
To do this, I want you to make a list containing:
- Who you’re paying and what it’s for
- How much you owe in total
- The minimum required payment
- The interest rate
- How much you’re actually paying each month
That might sound like a lot of information to gather, but trust me: It’s 100% necessary. If you were to go to a financial professional, this one would be one of the first things they would try to do with you. Why? Because once you’ve got the complete picture, it’s much easier to start looking for ways to fit the pieces together.
Plus, another thing I want you to do as you’re making this snapshot: Get motivated!
Just take a look at the list and how much you owe. Doesn’t it make you upset that all that money is leaving your pocket and going to someone else? If so, what are you going to do about it?
Turn those emotions you’re feeling about your debt into a passion-driven mission to pull yourself out.
Why You Should Always Pay Your Minimum Monthly Payment
With that complete financial picture, the next thing I want you to highlight any debts where you’re not making at least the minimum payment. First and foremost, these are the targets that we need to focus our attention on.
Why? Because not making at least the minimum payment required is significantly hurting your credit score.
When you don’t pay at least the minimum, you’re not holding up to your contractual obligation with the lender. Therefore, it gets treated as a “late payment” and counts negatively against you until you’re able to pay up. Unfortunately, payment history counts for 35% of your credit score, so every day that you fail to meet your obligation will just make your score worse.
This can be especially damaging if you’ve got a decent score. For example, a person with a credit score of 793 would drop to 660 for just one 90 day missed payment. And it would stay on their report for the next 7 years. Talk about a harsh reaction!
In addition to a damaged credit score, lets also not forget that failing to make the minimum payment means even more interest, late fees, and most likely a spike in your APR.
As you can see, it’s just bad all around. So do yourself a favor: Commit to making the minimum payment. If you need help on doing that, then here’s how …
Work Higher Debt Payments into Your Budget
One of the biggest complaints most people have about paying off their debts is that they believe they don’t have enough money to put towards them. However, this is rarely the case.
Our expenses are our expenses by choice. We pay a mortgage or rent because we choose to live where we live. We pay an auto or lease payment because we choose to drive what we drive. We spend the amount on money on groceries that we do because that’s what we choose to eat.
I think you get my point …
A budget is your spending plan. And whether you realize it or not, you’ve got a budget. It just might not be the one you necessarily chose for yourself. It could just be the culmination of bad spending habits that are now draining your checking account every month.
It’s time to do something about that. Make a list of all your income and expenses over the past 6 months. Calculate how much money is actually leftover every month (if any at all).
Take a hard look at those expenses. Which ones are truly important to you? Which ones do you genuinely need or can’t live without? What are the ones that you probably could lose?
Assign a priority to your expenses and then add up only the important ones. Now compare this to your income and see how much money you’ve got leftover. If its more, than you know what you’ve got to do …
How Much Will Additional Payments Affect My Debt?
You don’t have to be a personal finance expert to know that if you’re able to send in extra money on top of the minimum monthly payment will accelerate paying off your debt. However, I think if more people were to actually see the numbers in action, it might light a bigger fire under them to get motivated.
For example, let’s say you’ve got $10,000 in debt with a credit card that has a 20 percent APR. If you’re just making the minimum monthly payment of approximately 3 percent or $300, then it’s going to take you 4 years and 2 months plus $4,718 in interest to pay it back.
However, if you can spare even just $50 extra per month to put towards this payment, your $350 would now take 3 years and 3 months plus only $3,692 in interest to pay it back.
That’s not too bad. An improvement of 11 months and $1,026 of interest saved? I’d take it!
Try out the numbers for yourself here using this free online calculator. See how much you could be saving and let that encourage you to find as many ways as possible to put additional money towards your debt payoff.
Creative Ways to Pay Off Your Debt Faster
There are two really neat ways you can tackle your debts that don’t involve rearranging your budget at all. Both are super simple and highly effective at getting results.
The Debt Snowball Method
The first is called the debt snowball method. This is where you pay off your debt with the smallest overall balance first. Once it’s paid off in full, you then roll the money you were using to pay that debt towards the loan with the next smallest balance, and so on.
Because this strategy focuses on your smallest loans first, you’ll make a lot of small wins in the beginning. That can be very rewarding and give you the confident boost you need to stay on track.
The Debt Avalanche Method
The second is called the debt avalanche method. With this strategy, you pay off your debt with the highest interest rate first. Similar to the snowball method, once it’s paid off in full, you then roll the money you were using to pay that debt towards the loan with the next highest interest rate, and so on.
Although it might take you longer you pay off your debt with the largest interest rate first, mathematically this method should save you more interest in the long run.
No matter whether you pick the snowball or avalanche method, both work because they enable you to gain momentum every time a debt is paid off. Each time a cycle completes, the money you put towards the next debt simply becomes greater and greater.
You find all kinds of success stories all over the internet about people who have used these strategies to do incredible things. For example, check out how the executive editor of Wise Bread was able to pay off a mountain of student loans and medical debt totaling $150,000 in just six years.
More Ways to Lower Your Debt Payments
Another great way to have more money to put towards your debt payments is to lower the amount you owe every month. Here are two ways you can accomplish this.
Make a Balance Transfer
A balance transfer is when you move the balance of your loan from one lender to another. Usually, this is done because the new lender is offering you a much lower interest rate for a temporary amount of time.
Credit card companies offer promos all of the time where you can transfer the balance of a loan to their card and pay little to no interest for some time (such as 12 months). When that happens, you’ve got a golden opportunity to avoid paying interest and use a technique like the debt snowball to put your entire payment towards paying down the principal of the loan.
Negotiate a Lower Interest Rate
Believe it or not, you can actually just call your lender and ask that they give you a better rate. Particularly with credit cards, this works really well as long as you’re not afraid to pick up the phone and put your negotiation skills to work.
Why would they give you a better rate? Because the credit card companies are not dumb. They know that if you’re trying to make your payments but struggling, then there’s a very high likelihood that you might start missing payments or default on the loan altogether. No one wants that!
If you tell them your situation and what you can afford to pay every month, sometimes without getting debt agencies and other parties involved the credit card company will be willing to work with you directly to come up with a resolution. It’s worth saving thousands of dollars in interest potentially to make one phone call and find out.
How to Get Help with Debt
It’s important to understand that you don’t have to face your problems with debt alone. There are lots of resources for getting help, and there’s absolutely no shame in reaching out to them.
Here are a few places you can turn to and find the support you need.
Credit counseling (or credit advisory) is a service that is generally provided by non-profit organizations. Typically, they’ll help you make that first big step towards getting a complete, big picture overview of your financial situation and then work with you to come up with personalized solutions to help fix it.
The sessions are usually free of charge and can often give you access to other helpful resources such as copies of your credit report, scores, educational materials, workshops, and lots more.
Debt Management Plan
One solution a credit counseling agency may recommend is that you consider a debt management plan. This is where the agency will roll all of your loans into one affordable monthly payment at a reduced interest rate from what you were previously paying. You then agree to the payment schedule and must stick to it for the next 3 to 5 years.
Note that with a debt management plan there is no new loan created. The agency is simply working with you to systematically pay off your loans in a way that best suits your situation. Also, there is generally a small startup fee as well as an ongoing monthly fee to participate in a debt management plan.
Debt Consolidation Services
If your credit is in relatively good standing, you may want to consider working with a reputable debt consolidation service. This is where you’re given one big loan that you can use to pay off your debts.
The new loan is usually at a lower interest rate, and so you should find the monthly payments more manageable than what they previously were. Also, because you’ve technically paid off all your other debts, this can be helpful for your credit score. There is generally a fee for this service.
Debt Settlement Services
One of the more extreme strategies you can take to battle your debt is to work with a debt settlement program. Also called “debt relief”, a debt settlement service will work with your creditors to pay off your loans by negotiating a smaller lump-sum payment than what you currently owe. Sometimes this can be as much as 10 to 50 percent less.
As part of the process, the settlement service will ask you to stop making payments to your loans. This will cause your creditors to believe that you might default on these loans and never pay them back at all. The debt settlement service will then try to use this point as leverage to convince your creditors to accept a lesser payment.
By far, this can be the cheapest option when it comes to managing your debt. However, there are some risks to be aware of:
- The debt relief agency will still require you to make monthly deposits while you’re waiting for the creditors to settle, so you’re still not off the hook for making payments.
- When you stop making payments to your loans, this can have a severe negative impact on your credit score that could last up to seven years.
- There is no guarantee that the creditors will even accept the settlement.
While there are plenty of reputable debt relief companies available to work with, unfortunately, there have been instances where some turn out to be complete scams. Consumers need to do their research before committing to one. The FTC has some resources that can help you investigate these companies.
Filing for Bankruptcy
When all else fails and your financial situation seems to have completely collapsed, then it may be time to consider filing for bankruptcy.
Bankruptcy is when you go to court and a judge decides whether or not you are still legally required to pay back your debts. This is typically done after a careful review of your assets and liabilities.
While it may sound great to have the majority of your debts discharged, bankruptcy should be considered a last resort option. Bankruptcy will stay on your credit report for the next 7 to 10 years and will make it extremely difficult to get any future credit cards, mortgages, or any other type of loan. It could even become an obstacle to finding a place to rent or getting a job.
Be sure you’ve exhausted all of your other options before choosing to go forward with bankruptcy.
Final Thoughts on Keeping Yourself Out of Debt
While there are certainly a lot of options for managing your debt, the best piece of advice is to do everything you can to keep yourself out of debt in the first place. Developing the right money habits will be key in preventing yourself from getting into debt in the future.
To do this, take responsibility for your finances. No one cares more about your money than you. Be completely aware of how much money you’re earning and how much you’re spending. Create a budget for yourself and stick to it at all times.
Again, be heavily critical of every purchase you think you need to make. Before you reach for your wallet, ask yourself: Do I really need this?
The reason we study history is because we hope to learn how to avoid the mistakes of the past. Don’t let the past repeat itself by sinking into the same bad habits and sliding right back into debt. Keep your eyes focused on becoming debt-free and before long you’ll get there.
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