Debt often has a negative connotation, but there are plenty of good reasons to have it — for example, using student loans to increase your earning potential, funding an entrepreneurial venture with a small-business loan or going to the “Bank of Mom & Dad” to pay for a move across the country for a great job.
But even when you have debt for good reasons, actually being in debt doesn’t feel great—especially if high-interest rate credit cards are monopolizing your monthly paycheck. So how do you use debt to your advantage without letting it get you down? The key is to be proactive about paying it off. There are plenty of great resources and techniques to help you create your debt payoff plan—but only you will know what’s best for your unique financial situation.
While none of this is meant to be financial advice, which you should always seek out from a professional, here are a few tips to consider.
Related: Tips for becoming financially independent
Customizing Your Debt Payoff Plan Approach
The words “snowflake,” “snowball” and “avalanche” might sound like an increasingly alarming day on the mountain, but they also apply to three popular debt payoff methods, one of which may be just right for you.
As Melissa Batai from Money Crashers explains, “Snowflaking is the process of using extra money gained here and there to pay down your debt above and beyond your planned monthly payment.”
You can acquire this extra cash through things like side gigs, selling the stuff you no longer need and renting out a room in your house. The Snowball Method entails paying off your debts in order from smallest to largest, regardless of their respective interest rates.
“The benefit … comes from seeing one of your debts paid off sooner,” says Darren Wu from Wisebread. “This, in turn, can provide an emotional boost.”
It is important to remember with this method that you shouldn’t ignore your other debt while you focus on your smallest one. It’s crucial to continue making at least the minimum payment on all of the debt you owe.
But people using the debt snowball method, beware: Ignoring interest rates usually means paying more money in the long run. If savings is your main priority, you’ll probably want to look at the Avalanche Method, which has you putting more money toward your higher-interest rate debt first. Not only does this approach save you money, but it can also help you get debt-free sooner.
Trying a Debt Detox
People often compare getting fiscally fit with getting physically fit, and with good reason. Whether you’re trying to achieve financial goals or health and fitness goals, you’re more likely to succeed if you have a good plan in place, a fair amount of willpower, and a desire to change your habits.
That was the approach Anna Newell Jones of And Then We Saved took when she decided to embark on a Spending Fast. It entailed “spending money on necessities only to see what happens, how much debt I can get out of and how much I can get into savings.”
Fifteen months later, she eliminated nearly $24,000 in debt and inspired her readers to save over $320,000 by doing the Spending Fast (and its less austere cousin, the Spending Diet) right along with her.
Upping the Minimum
Another approach for a debt payoff plan is to pay more than the minimum balance each month. Whether you have student loans or credit card debt, paying more than the minimum can help accelerate your debt payoff journey.
It can be tempting to just stick with paying the minimum balance due rather than adding to it. But paying as much as you can each month (without stretching yourself too thin) can add up. To make this happen, you may have to make a few sacrifices.
Making coffee at home, cooking for yourself, or exercising at home instead of paying for a pricey gym membership are all small changes that can help save extra money each month. By increasing how much is allocated toward monthly payments, you could pay off your debt faster and therefore save on interest.
Trying a Balance Transfer
Balance transfer credit cards sometimes offer low or even 0% introductory annual percentage rate, or APR, periods for high-interest credit card debt transfers. Some credit cards offer up to 21 months of 0% interest, which can help keep you from accumulating even more debt via interest.
Reasons people apply for a balance transfer credit card include:
- Having high-interest credit card debt
- A desire to simplify payments on one card rather than managing payments on multiple credit cards
- Wanting to take advantage of a good promotional deal (for example, 21 months of 0% interest)
But it is important to remember that this debt payoff strategy is optimal if you know you can pay off your entire debt by the time the low- or no-interest period ends. Otherwise, you will go back to accruing interest on your debt after the introductory period ends.
Recalibrating Your Rate
High-interest rate debt is not only expensive, but it can also take forever to pay off. But just because your loan or credit card came with a high rate doesn’t necessarily mean you’re stuck with it forever. If you have student loans, new options for student loan refinancing have become available in the past few years. When you refinance your student loans with a private lender, you are taking out a completely new loan with a new interest rate.
You can refinance both private and federal student loans with a private lender, but understand that if you refinance federal loans you will lose access to all federal benefits like deferment, income-driven repayment plans, and public service loan forgiveness programs.
If you have an improved financial profile from when you took out your original loan, you may be able to qualify for a lower interest rate. By obtaining a lower interest rate, you could save money over the life of the loan. Or you may be able to select a shorter term with higher payments, but a quicker payoff—and save money on interest payments.
And if you have high-interest rate credit cards, you can look into consolidating them with a low-interest rate unsecured personal loan. One plus of taking out a personal loan to consolidate your debt is that personal loans are typically installment loans, which means they have a fixed repayment period. That means you’ll know exactly when your loan will be paid off.
In contrast, credit card debt is “revolving debt,” which means you can continuously add to the debt even while paying it off. That’s not an option with a personal loan. By consolidating your credit card debt with a personal loan, you could also potentially qualify for a lower interest rate, which can make your debt easier to manage.
On the flip side, a personal loan may not be right for everyone. Some personal loans come with origination fees, late fees, or prepayment penalties, which could potentially drive up the cost of your loan. When shopping around for debt payoff solutions, you may want to consider any hidden fees that could come with a personal loan.
No matter what debt payoff plan you choose, the key is to take control of your debt rather than letting it control you. Ultimately, executing a successful debt payoff strategy might help you focus on the positive outcomes that happened as a result of your debt, rather than the frustration of having to pay it back.
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6 strategies for becoming debt-free
It isn’t the $5 cups of coffee. Or the $50 a month for the gym.
It isn’t that new smartphone, or your shoe addiction, or even that pricey cable subscription. These are common things everyone likes to waggle their finger at when they talk about overspending. But it isn’t necessarily any one of those expenses that really gets people into debt.
It’s usually all of them. And then some.
According to the 2018 U.S. Financial Health Pulse survey by the Center for Financial Services Innovation, 46.5% of Americans said their spending equaled or exceeded their income in the past 12 months. 33.9% said they were unable to pay all their bills on time. And 29.5% said they had more debt than they could manage.
That’s a lot of people who are worried about money.
Though frivolous or impulsive spending can be part of the problem, the slide sometimes starts with the best of intentions — with the desire to get a college education, perhaps, or to own one’s own home.
According to Northwestern Mutual’s 2018 Planning and Progress Study, mortgages and student loans, along with credit cards, are among the leading sources of debt in the U.S.
And when the nonprofit organization Student Debt Crisis surveyed student loan borrowers in 2018, 86% said student debt is a major source of stress. Add in credit card payments, car payments, utility bills, groceries and gas, and all the other things — big and small — that take our money every single day, and it’s clear how debt can become a deep, dark hole.
Which is why it’s so important to have a plan to get back out.
If you’ve wanted to become debt-free for a while, but didn’t know how to get there, think of your plan as a rescue rope you can hold onto during the climb. Everyone’s situation is different, but here are some popular strategies you might consider on your journey to becoming debt-free.
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If you have a significant amount of debt to pay off, you’ll likely be looking to cut costs in a meaningful way. A budget can help with that. First, when you’re going through bills, it can help to determine your priorities, this information can assist you in making informed decisions about what can go and what should stay.
Later, it can create a feedback loop, as you (and your partner, spouse, or other family members) compare real-world spending to the numbers in the budget and consider whether to take corrective action to stay on track.
And over time, it also may be possible to uncover the behaviors that have been holding you back.
If the idea of bird-dogging every penny has been a barrier to budgeting, or if you’ve tried and failed in the past, it may help to keep the process simple. The 50/30/20 rule is a simplified budgeting strategy that’s gained traction because it limits the number of spending categories a budgeter must establish and then follow.
After determining net take-home pay (what’s left after paying taxes), it breaks down the spending money that’s left into three buckets: needs, wants, and savings:
• 50% of the money goes toward needs, including housing costs, utilities, groceries, transportation, medical expenses and any regular debt payments that have to be made (credit card bills, loans, etc.). From there, it’s up to whoever is drawing up the budget to determine what are the true necessities and what belongs in the wants bucket.
• 30% goes to those wants. That’s everything from grabbing takeout, to your Netflix subscription, to getting your car washed and detailed for date night. Logically, this is the portion of the budget that has the most potential for trimming, but emotionally, it might require some real effort to get everything to fit the allocated funds.
• 20% goes to savings. This money might go into an emergency fund, some sort of savings account for short- and long-term goals and/or an investment savings/retirement account. If you decide to pay extra toward your credit card or student loan debt, that expense also would go in this category.
The percentages are meant as a guideline, and they can be tweaked to fit individual needs. The key is to make a budget that’s strict but doable.
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Yes, this is easier said than done, but before rolling your eyes and moving on, consider the possibilities.
Is it time for a pay raise? If a bump is overdue, it might be time to have a talk with the boss.
Is there side-gig potential? Do you always have nights or weekends off, and would your employer be OK with your taking on a part-time or occasional job for extra money? Maybe a friend does catering, landscaping, house-painting, or some other work and could use an extra hand from time to time.
Could a hobby become a money-maker? Crafty folks can sell their wares online or at craft fairs and flea markets. History buffs can give lectures or teach classes. Animal lovers can offer dog-walking or cat-sitting services. Where there’s a passion, there’s often a way to earn income.
MARHARYTA MARKO
If that raise comes through, or you earn a bonus at work, or you get a tax refund from Uncle Sam, instead of living it up while the money lasts, consider using it to pay down some debt.
A few hundred dollars might not feel like it’s making much of a dent, but every dollar you pay over the minimum can help reduce the interest you owe on a credit card or student loan.
To get some idea of how paying even a little extra toward a bill can help, check out the alert on your monthly credit card statement. The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 requires card issuers to warn consumers about how long it will take to pay off a balance if only the minimum is paid each month.
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One way to consolidate debt is with an unsecured personal loan. You may be able to consolidate all or some of your debts at better terms, such as a lower or fixed interest rate and possibly pay them off in less time than you expected.
This strategy could be useful for those who aren’t up for keeping tabs on several bills every month. A personal loan can consolidate multiple debts together into one manageable payment, which could help make it easier to keep tabs on what you’ve paid and what you still owe.
And because the interest rates offered for personal loans can sometimes be lower than the rates on credit cards, you could end up paying less in interest over the life of the loan than you would have if you just kept plugging away at those individual revolving credit card balances.
Typically, the better your financial and credit history, the better the loan terms are likely to be, so it can be a good idea to check your credit record and make sure the information listed on credit reports is accurate.
Then look for a lender who offers the best terms to fit your needs. Keep the length of the loan in mind, as well as the interest rate and other terms to help you on the road of becoming debt-free.
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It could be difficult (okay, next to impossible) to stop using credit cards completely since they’re commonly used for things like booking or holding flights, making online purchases and more. But making a commitment to reduce credit card utilization could help you cut spending and reduce the amount of money that’s only going toward interest on those cards.
A credit card is a convenient way to pay — if you can keep your balance at zero. But if you can’t afford to erase the balance each month with a full payment, the interest can start piling up.
And though many credit cards make limited-time “no interest” offers, it’s good to review the terms in detail.
For instance, some cards may have terms where if consumers don’t pay off the entire balance by the end of the promotional period, they may be charged all of the interest accrued since the date of purchase.
To better the chances of staying in check, some options may be to consider recording all credit card purchases with a budgeting app or pen and paper and to try and face the costs in real-time, instead of weeks later when the bill arrives.
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Seeing progress is inspiring for many people. Think about how good you feel when you lose a little weight from dieting or gain some muscle from working out. Even small wins can be motivating.
How does that apply to downsize your debt?
Two of the commonly recommended approaches to debt repayment are the Debt Snowball and Debt Avalanche methods. These strategies vary but primarily focus on paying extra toward just one balance at a time instead of trying to put a little extra money toward all your balances at once.
The Debt Snowball
The Debt Snowball method directs any excess free cash you might have to the debt with the smallest outstanding balance. Here’s how it can work:
• Start by listing outstanding debts based on what you owe, from the smallest balance to the largest. (Disregard interest rates.)
• Make the minimum payment on all other debts and pay as much as possible each month toward eliminating the smallest balance on your Debt Snowball list.
• After you pay off the smallest debt, turn your attention to the next-lowest balance.
• Keep going until you are debt-free.
The Debt Avalanche
The Debt Avalanche method targets the highest interest rates rather than the balance that’s owed on each bill. It’s more about math than motivation — you can save money as you eliminate each of those high-interest loans and credit cards, which should allow you to pay off all your bills sooner. Here’s how it can work:
• Disregard minimum payment amounts and balances, and list balances in order starting with the highest interest rate.
• Make the minimum payment on all other debts and pay as much as you can each month to get rid of the bill with the highest interest rate.
• Move through the list one debt at a time until you pay off all the balances on your list.
Though the methods are different, both plans provide focus, and as each balance disappears, momentum grows. But a newer approach, the Debt Fireball method, may be a better fit for modern-day debt, which could include a large amount of low-interest student loan debt.
The Debt Fireball
The Fireball method takes a hybrid approach to the traditional Snowball and Avalanche strategies. It’s called the Fireball because it can help blaze through bad debt faster by making it a priority. Here’s how it can work:
• Categorize all debts as either “good” or “bad.” “Good” debt is generally things that can increase your net worth such as student loans or mortgages. (Interest rates under 7% could be considered good debt—rates above 7% would likely fall into the “bad” category.)
• List all those “bad” debts from smallest to largest based on each bill’s outstanding balance.
• Make the minimum monthly payment on all other debts and funnel any extra cash available each month toward the smallest balance on the Fireball’s “bad” debt list.
• Once that balance is paid in full, move on to the next smallest balance on that list. Keep blazing until all “bad” debt is repaid.
• Pay off “good” debt on the normal schedule while investing for the future. Apply everything you were paying toward “bad” debt to investing in a financial goal.
The Fireball makes sense mathematically because it gets rid of expensive (or bad) debt first, but it also provides plenty of motivation because momentum can grow as you approach the finish. These two combined elements could provide an extra boost to your efforts.
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The deeper the hole you’re in, the longer it may take to climb out. But having the right plan in place before you start could give you a better shot at sticking to a budget, minimizing your dependence on credit cards and methodically reducing your debt in a way that keeps you motivated and saves you money.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636. For additional product-specific legal and licensing information, see SoFi.com/legal.
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