It’s a New Year and if it’s your resolution to get out of debt, here are a few tips to help you follow through and take back control of your finances in 2021.
1. Know What You Owe. You have to start somewhere and a good place to start is by taking a quick inventory of what you owe and to whom. Your existing debt might include:
Credit card debt
Once you have a clearer picture of your debt, you can come up with a strategy. Seeing your debt as an exact figure, in dollars and cents, can help you understand the full impact of your situation and envision more clearly what needs to happen to become debt-free. It can also be helpful to think about how you would feel and what you could do if you were debt-free.
2. Choose a Strategy. There are several popular debt repayment strategies. By understanding how each strategy works, you can pick the one that will best work for you and your family.
Debt Snowball: The debt snowball strategy focuses on paying down your smallest debt first while only paying the minimum toward others. Once your smallest debt is paid off, you can roll the amount you had been paying toward it into the next largest. This is a good strategy if you want to start eliminating debt quickly. It can help keep you motivated to see real progress right from the get-go.
Debt Avalanche: The debt avalanche strategy focuses on putting your extra money toward the debt with the highest interest rate first. After that debt is paid off, you would then move on to the debt with the next highest interest rate. This strategy saves you more money on interest in the long run compared to the debt snowball but may not offer the emotional fuel that will keep you motived.
Debt Consolidation: When you combine multiple debts into one, this is called debt consolidation. When your debt is all in one place, it’s easier to manage and helps reduce the risk of missing a payment due date. The two most common methods of debt consolidation are:
- Balance Transfer: A balance transfer moves one credit card balance to another. Look for a card that offers a low or 0% introductory interest rate and a low balance transfer fee (usually a flat fee or a percentage of the balance you are transferring).
- Personal Loan: By applying for a low-interest rate personal loan, you can also pay off existing debt. Then, you’ll only be left with one monthly loan payment. Depending on your credit, your interest rate on your personal loan may be lower than the interest rate(s) on your existing debt.
In some cases, a debt reduction service that negotiates lower rates and balances may be necessary. However, these services will damage your credit so are best to be avoided unless really necessary. Some of these services are predatory as well so make sure to do your research on the company first.
3. Trim Your Expenses. Once you’ve decided on a strategy, begin taking small steps to help find the money you need to be successful in paying down your debt. If you’re a Starbucks addict, try to make coffee at home once or twice a week instead of going for your regular latte. If you have several paid TV subscriptions, cancel the one you can live without. By trimming your expenses here and there, you’ll give yourself a better chance at achieving your goal. Moderation is key.
4. Track Your Progress. There are several budgeting apps (Mint, PocketGuard, YNAB) available to help track your spending and progress, encourage “healthy” financial decisions and alert you when you’re straying outside the parameters you’ve set for yourself. If you can visibly see the progress you’re making just by glancing at your phone, it can help motivate you to keep going.
5. Celebrate Your Success. When you hit a big milestone – like paying off a debt that you’ve only paid the minimum toward for years – reward yourself. Take a portion of that minimum payment that is no longer slowly draining your bank account and celebrate your hard work!