I’m going to go out on a limb, and guess that many of my readers (and many people in general) have created resolutions involving money, and that one of the more popular resolutions is debt elimination. It’s certainly top on my list, after all, and if I’m doing it, I can only guess that plenty of other people have the same idea.
Of course, it’s one thing to set a goal, it’s a whole other thing to achieve that goal. That’s why an important part of creating a resolution, or really, any goal, is to figure out the steps to use for completing that resolution. So today, given my resolution for this new year, I’m going to look at these:
8 Strategies to Eliminate Debt
Before we get into the finer points of eliminating debts, let’s take a moment to clarify what we mean by ‘eliminating debts’. We’re talking about the complete removal of a debt, so that you no longer owe that money to anyone. This means no paying off one debt with another (transferring credit card debt to a new card, for instance) or consolidating your debts into one. These methods have their purpose, allowing you to cut your interest rates and/or decrease the number of debts that you have (both of which are useful techniques), but if you have the same amount of debt afterwards, it’s not really ‘eliminating’ debt. With that out of the way, when paying down debt, be sure to:
1. Make Sure to Keep Some Money Available: While I know you’re probably extremely eager to put as much money as possible towards cutting down your debt, that’s risky, at best. Unexpected things can happen at any time, and if you are unprepared for them, you can end up getting in even more debt as a result. How much money to put aside is an issue that raises more than a few debates in the personal finance arena; writers have suggested everything from $1000 in savings to eight months worth of expenses, with a variety of underlying reasons. For myself, I’d recommend basing your savings on the security of your other sources of income. You need some extra money, because sometimes things happen that you need more money than your typical monthly income to cover.
2. Review and Rank Your Debts: If you’re doing a major debt elimination project, there’s a fair to good chance there’s more than one debt to eliminate. It’s going to be good to go through all those debts, determine how much you owe and the amount of interest, and figure out the order to pay them off. As you might guess, there’s more than one method to approach your debts, such as paying off the lowest debt first or paying off the highest interest debt first. Before you go with either method though, be sure to:
3. Negotiate Your Debt: You should be sure to talk to your lenders when you start to pay down your debts. You can likely come to an agreement with your lender for lower interest rates, lower minimum monthly payments, and possibly even lower debt amounts (in areas like medical debt, at least). By doing some negotiation, you can make it much easier to pay off your debts. While not required, it will definitely speed up your debt payment process and make things easier, and isn’t that a good thing all around?
4. Pay More Than is Due: Alright, with some money set aside and your debts put in order, the next step is to pay more than you owe on the top-ranked debt. You need to keep paying the minimum on all your debts, of course; the last thing you need is penalties or late fee adding more debt. But make sure to pay more than the bare minimum required on one debt. How much more is another of those issues I can’t settle for you; it depends on how much you currently make and spend. (More on that in a moment.) I’d suggest adding at least $50 per month, if not more, but if you are able to pay down more, wonderful! For help in that respect:
5. Cut Down Your Spending: Ultimately, being in debt comes down to earning less money than you spend. One way to correct that situation is to cut down how much you spend. I realize you think that might not be possible, that you are spending the lowest amount possible while still maintaining a decent lifestyle, but a little bit of searching will allow you to find dozens of ways to cut your expenses while still leading a good life.
6. Earn Some Side Income: On the other side of the coin, you can increase your income to add more money to what is paid off each month. There are many options as to what to do for side income (with blogging being my go-to suggestion), so once again, I’ll leave that decision to you. Just keep in mind that you need to have the time and energy to turn your side project into a profitable enterprise, that you shouldn’t spend more money earning money than you actually earn and if you don’t stick with it, you’re not going to be able to make much income, period.
7. Automate Your Payments: As much as possible, you should make sure that the payments for your debts are done automatically. You’ll be able to cut down on missed payments as a result of your forgetfulness or other human errors, and reduce the time you need to spend handling your finances, to boot. Most importantly for our purposes, it helps to make sure that you aren’t tempted to cut down the additional amount you pay down; the more you can take things out of your hands, the better things will be. (I’d recommend getting a robot to run your finances, but that’s probably out of your price range, particularly if you’re trying to pay down other debts.)
8. When You Pay Off a Debt, Put (Most) of the Freed Money Towards the Next Debt: So, you paid off one of your debts; congratulations! You now have that debt elimination money available each month. While there are many things you might want to do with that money, there’s one thing you really should do: put that money towards the next debt on your list. By putting the newly available money toward your next debt, you’ll be able to pay off that debt all the sooner, and then the next one, and the next one, and the next one; there’s the debt snowball at work.
Where’s the ‘Most’ come in, you ask? Well, here’s my experience when paying down debt: trying to put everything available towards debt elimination, while admirable, is just not possible for most people. We need to have some money that we can use for fun and relaxation. Having some portion of your budget set aside for enjoyment is important, and by putting a part of the freed up money into the fun budget, you’ll make it even more enjoyable when you pay off the debt. If every debt paid off means an extra date night each month or another book you can buy, you’ll be all the more eager to pay off even more debts. (Of course, you need to have the willpower to only spend that small additional amount and not the full freed up amount, but I’m hoping if you’ve been able to pay off one debt, you’ll be able to continue in that progress.)