If you have a lot of debt to pay off but don’t know where to start, this article is an all-inclusive guide on how to pay off debt. Follow this write-up to explore the tips and tricks to repay your debt faster and in a seamless way.
Debt-free life almost seems like a dream. It isn’t alarming if you ask any stranger walking down the street whether they are debt-free or not, and they give you quite a stare. Debt is something that stays in the back of your mind at all times, making you stick in your past and robbing you of your future. However, the way you pay off your debt can affect a lot and if you do it the right way, it can become much easier to repay mounting loans seamlessly. So that is some good news.
Debt has now become such a huge part of our lives that it seems normal. Every average American has taken out loans at some point in their life and is now struggling to pay off the debt. The loan journey that starts from student loans can go a long way in people’s lives. However, it is up to people to either continue this debt journey forever or strategize it to make things easier in life.
If you have to pay off debt, you are not alone. Student loans, mortgages, credit cards, and car loans are some of the loans people take out. According to the Federal Reserve’s latest research, the total national household debt stands at a whopping $14.56 trillion. An average American has almost $90,000 in debt, and this amount doesn’t even include house mortgages yet. Even if you carefully manage your finances, some unexpected debts such as medical bills can mount up the total debt amount.
Mostly when people are worried about their debt, the only thing they do is look at just one number – the total amount they owe. If you are also doing this, paying off debt might not be an easy task. There are some strategies that, if followed, can help in the long run and stream towards a debt-free life. This article will explore all the possibilities on how to pay off debt quickly and you will learn some tips and tricks to become debt-free easily.
If you’re here, wondering about how to pay off debt, you might already know what debt is. But let’s start with a quick reminder.
A primer on debt
Debt is the money that you have borrowed and now owe to someone else. From student loans to home mortgages, every big or small amount that you owe makes for the debt. When you take out a loan, the loan amount becomes a debt on you until you repay it, with all the terms and conditions met. The total debt amount can vary, depending on the total loans you have taken out. And not just the loan, debt also includes the interest, insurance, or other charges included in a loan.
Sometimes, credit cards are one of the reasons for huge debt collections. With the use of credit cards, the debt rate and life span have increased among the borrowers who, without thinking twice, like to spend as much money as they like, which keeps on accumulating as debt. According to research from the UK, almost 1.4 million credit card holders use more than one card and don’t pay off their entire balance every month. Researchers from England have also found out that people overwhelmingly choose ineffective strategies for paying off their debt.
There are many reasons why people borrow money from individuals or financial institutions like banks or nonbank organizations. Life independence starts at the age of eighteen; that is when students take out student loans to pursue higher studies. And this loan journey continues way ahead in life. If you want to buy a car, you can take out a car loan. Similarly, if you want to buy a house, home mortgages can help you with that.
Student loans, car loans, credit cards, medical debt, home equity loans, payday loans, personal loans, IRS and government debt, etc., are some of the examples of loans other than home mortgages. Not every money you owe is a debt. For example, the electricity, water, and utility bills are not considered debt. The same goes for finances like home insurance, car insurance, medical insurance, taxes, groceries, and childcare.
However, the way you pay for these routine expenses can easily turn them into debt. If you are choosing to pay for groceries or bills through credit card finances which you will be unable to repay on time, you are on your way to piling up a mountain of debt that takes forever to repay. A home loan or mortgage is also a kind of debt, but you can make it less of a hassle as long as you stick to it and make the monthly repayments on time.
If you owe any amount to someone and pay it off with payments from time to time, you are in debt. But it doesn’t have to stay this way forever. Try to repay your debt as quickly as possible to have a stress-free financial life. Simply stressing over the huge amount you owe won’t land you anywhere. You need to make a strategic plan for not just simply paying off your past debt but also avoiding unnecessary and unexpected debts in the future.
Paying off your debt can be a long and stressful journey. And if you are not motivated enough, then this journey can prolong even further, and the soared amount can be scary sometimes. So it is best to start paying off your debt when the total amount to be repaid is still less. Another important thing is to not let the debt shoot up by only taking out loans and not repaying them for a long time.
Why must you pay off your debt?
Although it might seem an unimportant question, people sometimes need answers to why paying off debt is important and what can possibly happen if they don’t repay on time. Well, the answer is simple, paying off debt is important for a peaceful financial life. When you know you owe money to someone, the thought constantly lingers in the subconscious of your mind. So, paying off debt is the ultimate key in order to have complete peace of mind.
Some people have the habit of spending consistently without thinking twice about their financial expenses. On top of that, they don’t even make their credit card payments or other monthly loan payments on time. Although the financial institutions give certain reminders to pay off the debts, it is important to start taking your debts seriously before the debt collectors take some serious actions, which might even include going to court if the debt remains unpaid for a longer period of time.
Apart from just peace of mind, there are many other reasons to seriously start thinking about paying off debt. If you have a lot of debt to repay, you might get behind on other financial goals such as building an emergency fund, taking a vacation, or adding to a retirement account. Debts can limit your financial freedom and you might have to cut off certain dreams which can be quite awful sometimes. One thing that can save you from all this hassle is paying off debt on time and not letting it linger around all your life.
How much debt do you owe?
This is the most important question that you must ask yourself when in debt. No more hiding from the truth that you have to eventually face. When you’ve taken loans, it is necessary that you start thinking of repayment strategies to get yourself debt-free as soon as possible. For this purpose, you will have to sit down, take a deep breath, and open the loan records with some strong thoughts that you can definitely do it.
A good rule of thumb is to tally how much debt you owe before you start to pay it off. You can open your loan or due payment bills and start taking notes of each debt. There are some important things about your debt payments that you need to jot down. Here is a list of the details you need to know about each debt.
- Debt name/account: This will help you in identifying each debt.
- Type of debt: Jot down the type of debt, for example, student loans, credit cards, mortgages, etc. Writing down the debt category will help you in analyzing where you have spent the most.
- Balance: You must take notes of how much debt you have paid off and how much is still left.
- Interest rate: Some debts are more expensive and have a higher interest rate than others.
- Payment terms/lengths: You need to be aware of each debt’s payment term or length so that you can strategize your pay-off plan accordingly. Obviously, debts with shorter terms are a priority over longer-term debts.
- Minimum monthly payment: Although it is better to not just simply stick to the minimum, you must keep a record of the lowest monthly payment for each debt.
Once you have all the above details from every debt, calculate the total by summing up the balance from each debt. Okay, so now that you have your total, you must not let your heart sink even if it is a huge amount. The best thing to do now is to stay calm and start planning strategies to pay off the debt amount. For that purpose, you can take the help of any financial advisor who can advise the best repayment strategy according to your circumstances and choices. Or you can just look for some effective strategies online. Although you will find many of them on the internet, it is difficult to find the most reliable and effective ones.
However, for your ease and convenience, we have gathered some of the most effective strategies to pay off loans quickly. Go through the strategies down below for smoothly paying off your debts and live a debt-free life.
How to pay off debt?
Paying off debt is not an easy task. Maybe you are aware of the buzz surrounding all the quick ways to clean up your debt, but if it sounds too good to be true, then it probably is. There is no such approach that can magically help you clear all your debt in no time. However, there are some strategies that, if followed consistently, can practically help in shortening the life span of the debt. Though, consistency is the key.
It may have taken just a short time of excess spending to get into debt, but it will likely take much longer to pay it off. Time and money both fly when spending the loan but when it comes to paying it off, things happen quite slowly. That’s why it’s important to commit to a plan and not get discouraged by any setbacks. Remember, slow and steady wins the race.
Regardless of how you got into debt, you must have a plan to pay it off. You can dodge it all you want, but you won’t ever get ahead if you are spending more than you are earning each month. If you want to start winning with money, you need to make a plan with a zero-based budget and tell every single dollar where to go. Consider these strategies to help you get started with debt payment.
- Pay more than the minimum balance
- Target one debt at a time
- Use a debt payment strategy
- Stick to a budget
- Get a side hustle
- Change your habits
It might be a little difficult at first, but don’t give up! It takes some time, maybe months, to get into a regular rhythm and get all the kinks worked out. But in the end, it’s worth the effort. The budget is what helps to keep you on track as you work towards paying off your debt. Having a budget gives you peace of mind knowing exactly where your hard-earned money is going. Down below, we have described how you can follow the above-mentioned strategies to work toward a debt-free life.
Pay more than the minimum balance
In order to have a real impact on your debts, you need to think about the bigger picture and break free from the minimums. Managing debt and repaying loans with high-interest rates, like that in the case of credit cards, can be difficult. And if you keep on paying the minimum balance on your credit card or other loan repayments, it will take a long time to pay off the debt.
For this purpose, you need to analyze how much you are currently paying each month towards debt and if you can temporarily trim a few budget items to put even extra towards debt. Paying more than the minimum balance can not only cut off the lifespan of the debt but also lower the interest overall.
Target one debt at a time
Do you have more than one debt that is left to be paid off? Or do you use more than one credit card? If so, make sure you pay off each and every debt and clear every balance. But it is impossible to tackle every debt at the same time. Dealing with all the debts simultaneously can result in utter confusion. Whereas, dealing with one debt makes the payoff process way easier, better, and much less confusing.
So, you need to organize all your debts separately and focus on one debt or one card balance at a time. You can choose which debt to start from and then pay off the balance accordingly. You can either start from the most expensive debt first or you can decide to start paying off the smallest debts.
Use a debt payment strategy
To make it easy for people to pay off their debts, financial experts have provided some useful strategies that can help people pay down or pay off debt more efficiently.
This strategy, known as the debt snowball method, requires the borrowers to tackle the smallest debts first. This way, when the debt repayment starts, the momentum gets built up, like rolling a snowball across the ground. When people use this method to pay off debts, they begin by paying off from the smallest to the largest.
The first step is to always list down the balance of each debt and start with the smallest amount. But that doesn’t mean that you have to leave the other debts hanging around. Make sure to pay the minimum balance on all other debts. But pay extra cash to the debt with the smallest balance until it is paid off fully. When the smallest one is done, repeat this strategy with the left ones. As you will go further in paying off balances, you will free up more funds for other debts.
One big benefit of the debt snowball method is that the progress is visible and encouraging and you are able to keep on track by seeing more debts vanishing and the debt list cutting down. People like this strategy because it is a confidence booster and a quick win as well. And it provides you with just the right motivation you need to continue forward on your debt repayment journey.
However, with the debt snowball method, it can take longer to become completely debt-free. The longer the life span of the debt, the more interest you have to pay on it. So, sometimes, the debt snowball method might turn out to be expensive.
This strategy, known as debt avalanche, takes a similar approach but instead tackles the most expensive debts first, the ones that have the highest interest rates. Paying off a big debt with a big interest can boost a feeling of control and relief. This strategy is suitable if your priority is to get rid of the bad interest and you are motivated to get out of debt quickly.
The first step is to list down all the debts and order them from the highest interest rate to the lowest. Like the first strategy, make sure to pay the minimum balance on all other less expensive debts while paying extra cash to the most expensive debt with the highest interest rate until it is paid off fully. This way, you can cut back on the amount you are paying in interest, which also frees up more cash to pay down other debt. The debt avalanche method is good for budget-oriented people and can help you save money in the long run.
If you think you are not able to keep up with various payments and due dates, you can go for the debt consolidation strategy, which combines all your debt balances into a single account. Although the new combined interest rate may be higher than some of your other bills, the debt consolidation method can be of great help if you have taken a lot of debts that are becoming more of a fuss to manage due to missed or late payments.
So, instead of focusing on multiple debts at a time, you can focus on just one big debt that combines all your due payments. While using this strategy, you must avoid any other debt and refrain from using credit cards while you work to pay off what you owe. Keep in mind to control your spending to avoid racking up new debt on top of the debt you have consolidated.
Although it can give a little peace of mind to focus on only one debt, debt consolidation might not be the best strategy in some cases. For example, if the combined interest rate of all your loans is less than the interest rate of a debt consolidation loan, then this strategy is not suitable as it might get your extra cash. So, it is important to always figure out your situation and calculate your total interest rate from all the debts. If it is higher than the debt consolidation loan interest rate, then you are good to go with this strategy.
Stick to a budget
When you start off your debt payments, a good rule of thumb is to track your income and expenses with a monthly budget. Making a budget is an easy way to get organized at the start of your debt repayment journey. You can dodge it all you want, but you will not be able to make it to a debt-free life if you spend more than what you earn every month.
A budget can keep you on track as you work towards paying off your debt. Having a budget gives you peace of mind while knowing exactly where your hard-earned money is going. You will be able to know where each and every penny is going, which can help you identify areas where you should cut costs and save money. Once all your income and expenses are laid out in front of you, you can effectively start planning for how to pay off debt.
Creating a budget is not a complex process. You can start by writing down all your expenses in a spreadsheet file or you can use enhanced ways, like a student loan monthly payment calculator, and budgeting apps to closely track every expense and debt payment.
Get a side hustle
Having a side hustle has become very common nowadays. People like to maximize their leisure time to work on a side hustle or a part-time job to earn some extra cash. Selling homemade food items, pet sitting a neighbor’s pet, or working at a restaurant are some of the options that are common as a side-hustle. And don’t you just love it when that extra cash goes into something purposeful and important like a debt payment. It is no surprise that the more you earn, the earlier you can get rid of your debts.
If you have got some hobbies or special skills that can help you monetize, you can find a way to secure extra cash flow and apply those earnings to pay off debts. Freelancing can also help increase the income stream and eventually, repay your debts earlier.
Change your habits
According to Colin Moynahan, financial planner and founder of Twenty Fifty Capital, overspending and accumulating large debts are often connected to one’s behavior. In order to get to a debt-free point early in your life, you must be honest with yourself about your daily habits and expenses. Only then, you will be able to make the necessary lifestyle changes to start paying off your debts.
Expenses can be necessary and discretionary. If you need to avoid debt, you need to change your priorities and focus solely on necessary expenses like food, shelter, and health. You need to forget about the discretionary stuff at least for the time being, or until your debts are fully paid off. When spending, ask yourself questions like “Is this a necessary expense or just discretionary stuff?”. You would be surprised to know how much discretionary spending you do.
Apart from simply changing your habits, you must maintain good spending habits to stay debt-free after you have reached your goal. Make sure to keep insight into your financial life and debt journey in order to avoid going there again. Once you know what made you go into debt so deeply, work on those habits, or else the debt is going to come right back.
The bottom line
Your debt has worried you enough so now, it is time to crush your debt, take control of your money, and start planning for your future instead of being stuck in the past. Whether you have just started to pay off your debt or you are a few years in, this article is a detailed guide to answer your queries about “how to pay off debt”.
Paying off debt and saving money is no secret. It just requires discipline, consistency, and a well-executed plan. Depending on how much the debt is, you might have to go through several avenues for getting out of it. However, taking the time to plan everything out and follow some effective strategies will definitely pay off in the long run.
Getting rid of debt is not just necessary but it’s also beneficial for a stable financial life. Paying off debt improves your credit score, making way for big-ticket expenses like buying a home or a car, etc. When you clear your debts, you are actually making a way to free up funds for other things, like savings or investments. And clearing debts isn’t much of a struggle if you follow the strategies mentioned in this article with consistency and discipline.