If you’re like most Americans, debt is an unfortunate fact of life for you, and thinking about how to pay off your debt, oh, sometime in this lifetime, likely occupies a good deal of brain space—and not just when it’s time to make another set of new year’s resolutions. For some perspective, and to help you feel a little less alone in your debt journey: The average American household owes over $15,000 in credit card debt]), and two-thirds of millennials have at least one source of long-term debt, like student loans (ahem, here’s why I can’t wait to pay off mine), mortgages, or car payments. But just because debt is normal doesn’t mean it feels any less intense, frustrating, scary, or even demoralizing. The good news here is that debt doesn’t have to destroy or take over your life. What makes it so intimidating is feeling like you don’t understand it or don’t have a plan to pay off your debt. The key is to form a plan for how to pay off your debt, take stock of your finances, and really understand what you’re working with. Small steps to big results, and all that—and in this case, being strategic and regimented about it can be seriously life-changing. Take things step-by-step to make 2017 the year you finally get a handle on those Sallie Mae or Visa bills. Here’s how to get started…
First, focus on getting a handle on your spending and saving…
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1. Start by keeping track of your spending so you know exactly where your money is going.
It’s surprisingly easy to go through life with no clue how much you’re spending or where your money is going each month. If this sounds familiar, try recording your habits. There are easy systems to help with this, like Mint or You Need A Budget. To get even more educated on your cashflow, read up on the 15 things a woman should know about money before she turns 30.
2. And then make a budget already!
You’ve heard this advice a million times, but it’s time to actually do it now, because you are a grownup dammit (and because budgets really work)! Caira Dean, Certified Counselor with Transformance, Inc., suggests a Zero-Dollar Based Budget, in which you’ll “allocate every dollar to a specific category in your spending plan, which does include having a savings category and a ‘blow’ category if necessary.” To help get an idea of how you want your budget to work for you, think about your short-term (in this case, anything lasting less than a year) and long-term goals (lasting or two years or more). Be aware of ways you’re spending money without even realizing it. Consider what kind of debt you’d like to pay off and how much. Write your plan down, and if you feel like you need extra accountability, Dean says, “Consider the cash envelope system to set boundaries on your spending. Spend only the amount designated for that particular envelope.”
3. Focus on cutting costs from big expenses before focusing on small ones.
Sure, cutting out your daily Starbucks run will make a difference in your debt, but sometimes sometimes it’s much easier to save more money when you make a few big cuts, rather than focusing on a lot of little ones. “My advice is focus on big wins first—housing, transportation and food costs,” says Sean McQuay, credit card associate at NerdWallet. “Bringing these down will likely make the biggest impact on your bottom line. After that, you can work on optimizing your smaller expenses. For housing, you can move to a smaller place, get a roommate or move to a less desirable (but safe!) neighborhood. For transportation, drive less and walk, bike or take public transit more. Get rid of your car if you can. For food, eat out less, cook more at home.”
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4. Once you’ve cut down your bigger bills, look for ways to trim your smaller spending habits.
Keep your eyes open for low-cost or free ways to enrich your life. Dean suggests heading to the library instead of the bookstore, and firing up Netflix instead of going to the movies. Take advantage of your local YMCA, farmers market, thrift shops, antique stores, coupons and off-season clothing sales. Transform yourself into a bargain hunter by getting hooked on the intoxicating high of snatching up clothes by pricey brands that are waiting for you like hidden treasures on a thrift shop rack—at 90 percent off.
5. Always, always save.
Even if your main goal is paying off debt, it’s important to get into the habit of stashing away cash. Whenever you’re about to make an impulsive purchase, visualize all the financial goals you’ve set to remember why you want to save. If you’re starting from square one, Dean’s recommendation is to first hustle to build up an emergency fund of $500-$1000 to fall back on. Once that’s squared away, get to work on steadily stashing about six months’ worth of income into an emergency fund, and leaving it untouched unless an actual financial crisis happens. If you’re looking for extra tips on this, check out some sneaky ways to save money without even realizing it.
6. And use every skill you’ve got to make it happen.
If you need a good side hustle to beef up those savings (here are 12 great side hustle ideas!), think long and hard about any random skills or talents you’ve got. “Consider utilizing your unused or underused talents as a way to increase your monthly income,” says Dean. “Offer your specialized expertise as a service for a fee to persons in need.”
7. If you get a raise (yay!), don’t start spending as if you got a raise. Use that extra cash strategically.
Whenever you have an increase in income, your best course of action is to live as if you didn’t get a raise at all, according to Robert R. Johnson, PhD, CFA, CAIA, President and CEO of The American College of Financial Services. Instead, you can use extra that income to pay off more debt. “Behaviorally, we get accustomed to living on a certain income,” says Johnson. “When we get a raise, we expand our spending to exhaust our new income level. If you behaviorally act as if you didn’t receive the raise, there is less pain than if you got the raise, got accustomed to that level of income, and then had to cut expenses.”
Now, it’s time to make a plan of attack on how you’re going to handle that debt…
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8. Develop a strategy for how you want to pay off your debt — here are two popular ones.
Choose a set amount of money you can contribute to your debt each month, and once you have that number in mind, take a shot at one of these tried-and-true debt strategies:
The avalanche method. This technique is all about focusing first on the debt with the highest interest rate and then moving forward from there. Kevin Gallegos, vice president of Phoenix operations with Freedom Financial Network, explains: “Make minimum payments on each debt except the one with the highest interest rate. For that, pay the minimum plus any extra you can afford. Repeat this process every month until that debt has been paid off. Then, keep paying the same monthly total – but take every dollar you were using to pay off the highest-interest debt and put that towards paying off the debt with the second-highest interest rate. Keep following this strategy until you’ve paid off all debt.”
The snowball method. This strategy suggests you pay off your smallest debt first, and work upward from that point. Start by being sure you’re paying the minimum on all debts each month. Then, according to Gallegos, “apply any remaining funds from your overall allocated amount toward paying off the debt with the smallest balance. After you pay off that debt, continue paying the same monthly amount you started with. Follow the same strategy as before: Pay the minimum on all debts, but pay all your remaining funds to knock out your second-smallest debt faster.”
If you can’t decide which method is right for you, get real with yourself about how much willpower you currently have about getting off the debt train. The snowball method isn’t inherently faster, but it brings a speedier feeling of accomplishment because you’ll be knocking off your tiniest debt first, which motivates you to keep going toward your goal. The avalanche method is great for your wallet because eliminating high interest rates is always a good move, but it can feel like it’s taking longer, so it’s better for someone who’s ready to keep at it for the long haul without much initial reassurance.
9. But if you’re not into intense strategies, just focus on paying off “bad” debt first.
When you feel like you’re drowning in debt, it’s tough to decide where to start. If you feel frozen, just start by zeroing in on “bad” debt first—there are both “good” and “bad” kinds of debt according to Eric Meermann, Certified Financial Planner and portfolio manager with Palisades Hudson Financial Group. “Good” debt includes student loan debt (hard as it is to believe in this day and age, it’s often considered a beneficial investment) and mortgage debt. “Bad” debt includes credit card debt (oof, hello soaring interest rates) and payment plans for furniture or other products. He suggests you focus on paying off the bad stuff first.
10. Go beyond the minimum payment.
Consistently paying only the minimum on your debt can be a surefire path to misery. Chris Mettler, CEO of CompareCards.com, says that even paying $10 more than the minimum payment each month on your debt can make a big difference: “Check the back of your statement to see how much you will need to pay each month to pay off your credit card bill in less than half the time it will take by paying the minimum.”
11. Lower your credit card APR.
If your APR (annual percentage rate, a.k.a the interest rate on your card) is high, you can make a go at decreasing it so you can pay less on the debt overall and knock it out faster. There are a few ways to give this a try:
Call your bank or card issuer. According to Mettler, a credit and financial literacy site, the easiest way to lower your APR is to simply call up and ask. It’s not as scary as it sounds, even if you hate talking on the phone or are intimidated by your credit card issuer. It’s not an inappropriate question, and the worst they can do is tell you no. If you have a solid history with this card company of making payments on time, you’ve got yourself a good bargaining chip.
Transfer your debt to another card. According to Mettler, “another option would be to transfer your debt to a balance transfer card that offers 0 percent APR for an initial period of time. Look for cards that accept balance transfers at no cost. Just make sure that you are able to pay off the majority, if not all, of your debt before that initial offer expires, as many balance transfer cards have fairly high APRs that will kick in after that time is up.”
12. And don’t let credit card rewards programs steal your soul.
When you’ve got the financial willpower to use a credit card as a tool rather than a life-ruiner, airline credit cards and other card reward systems can leave you rolling in perks (and help you rack up a free flight or two), so it’s easy to see why so many people use credit cards almost exclusively for their daily purchases. That said, it’s easy to start out thinking you can responsibly use your card only on expense you can truly afford in order to get more points, and end up falling right into credit card companies’ traps by getting in way over your head and ending up with a bill that’s more expensive than any plane ticket. If you don’t feel ready to take the leap into rewards card life, Mettler says, spend some time using just cash. “This way you will be able to see exactly how much you can spend, you won’t incur any more interest charges, and you can always return to using a credit card with rewards when you’re ready.”
13. And no matter what, keep your chin up.
Nobody said paying off debt was easy, but the comforting news is that it’s not easy for anyone—everyone has hang-ups about money, so don’t be afraid to experience a little trial and error, and don’t feel discouraged if you have to start small. “Sometimes budgeting is about starting over and over again in order to stay on track,” says Dean. Your budget may shift from month to month, and you may get discouraged about how little you can manage to save. Keep saving whatever you can, even if you can only afford to stash away $10 some months. Even that much adds up, and it’s all about building healthy habits.