If your bills give you anxiety and your debts are getting in the way of other dreams, it may be time for you to follow a different pathway. If you and your partner are collectively in debt, they’ll need to be on board as well.
In a spreadsheet, list all your debts, balances, interest rates and minimum payments – and find out the total of what you owe.
Knowing your minimum payments will help you budget, and having your interest rates will help you decide on your debt repayment strategy.
List your debts in order of highest-interest rate to lowest.
If you’re eligible for 0% balance transfers, see if it makes sense to transfer your credit card debt. If the 0% offer only lasts six months, be sure you can pay that debt off within that timeframe.
If your main debt is a mortgage, look into refinancing.
In order to pay down your debt, you’ll need to find ways to free up the money you already have.
If the sum of your necessary expenses is greater than 50% of your take-home pay, it might be hard for you to pay off your debts in an expedient fashion.
Work your debt and discretionary expenses into your budget. Now, calculate what percentage of your take-home pay your minimum debt payments are. If your necessary expenses are 50% or less, aim to put 20% of your take-home income toward your debt. If your minimum payments are less than 20%, you’ll be able to put more than the minimum toward your debt each month. From your monthly take-home, subtract your necessary expenses and your projected 20% debt payment. If not, get the numbers to a ballpark range that feels doable, even if it means not hitting that 20% debt repayment goal.
Make a decision, and head into the next step knowing what you’ll be paying toward your debt every month. Now that you have a monthly debt repayment target, go back to your debt spreadsheet.
Pay the minimums on every debt except the highest-interest rate debt. Put the rest of your debt repayment money toward that debt every month until it’s gone. Cross it off the list and do the same for what is currently the second-highest interest rate debt.
If that top debt has a huge balance and you’re worried your motivation will flag, then you can try the “Snowball” method, in which you start with the smallest balance and then use the momentum from paying that off to continue on to the rest.
The only way you’ll be able to pay off your debt is if you don’t keep adding to it.
You could then put the accumulation toward your debt payment every month.
If you feel comfortable doing so, tell friends and family about your debt repayment goal so they understand why you’re suggesting more Netflix nights rather than nights out.
Earn more money, and put gifts and windfalls toward your debt.
Finally, one of the best ways to get out of debt is to earn more money. While cutting costs might free up a few hundred every month, a solid side gig could give you an extra $1,000 or more to put toward your debt. If this gives you another $500 to work with every month, you’ll be able to pay off that debt more quickly.
If, as you’ve been reading the cost-cutting suggestions, you have a sinking feeling you have no fat to cut from your budget, then earning more will be your ticket out of debt.
If you receive a large sum, put the vast majority, if not all of it, toward your debt.
If your monthly debt payments are $600, and you receive a gift of $5,000, putting $4,800 of it toward your debt will get you to your goal a full eight months earlier.
Finally, every time you reach a debt repayment milestone, celebrate! Doing so will give you more motivation to keep going and help your progress feel tangible.
Your Financial Planner can help you create a plan to get out of debt. Speak to them today.