Ready to Ditch Debt? Three Steps to Pay Debt Off Quickly
Having debt is no fun. Not only is it another bill siphoning money out of your paycheck, but you have to pay extra on top in the form of interest. Sometimes debt is unavoidable, emergencies do happen, or maybe you have debt but are ready to pay it off! Here are three steps to ensure your debt gets paid off quickly so you can spend that money on something a little more fun than a payment.
Know Your Numbers
In order to make a plan to tackle your debt, you’ll want to know your numbers. What are these ‘numbers’ I speak of? You’ll want to know four things; the interest rate, minimum monthly payment, debt balance and any promotional offers such as zero interest for the first year.
When we know these numbers, we can use a debt calculator to see how long until we are debt free using scarios with various monthly payment options. You can see how long you have left if you continue to make minimum payments, pay an extra $50 a month or pay an extra $300 a month. Testing various monthly payment amounts might be the motivation you need to pay off your debt for good!
Here is a tool by Vertex42 that I love to use (scroll down to download in Excel or Google Sheets) and I have a video here explaining how to use it.
Choose a Non-negotiable Payment Amount
Once you have decided on a payment amount that works for you, make that number non-negotiable in your brain and your budget.
When I was paying off my student loan I promised myself that before restaurants, clothing or vacation, I made my extra payment on my student loan. This was so that I could have them paid off by the date that the debt calculator gave me without things popping up and ruining the plan.
To help buffer the budget during this phase I waitressed a few nights a week on top of my day job. I say this because it allowed me to have more money for things like vacation and restaurants. Without that extra income I would have had to reduce spending on those areas quite a bit.
Whether or not you have to reduce spending in certain areas while you are paying off debt will depend on your income and your cost of living. Maybe you have a great income you just need to streamline a bit. Or maybe you don’t have a high income and taking on another job isn’t possible right now, that’s ok you’ll just have a ‘debt free’ date that is a bit further out.
Use the Snowball Method
If you have multiple debts that you are trying to pay down, you should use the debt snowball method to focus on one debt at a time. By focusing all of your extra dollars on one debt, you can make a larger dent in the balance and ultimately pay all your debts off more quickly.
For example, I had multiple student loans I was making payments on. By using the snowball method, I threw my entire ‘extra debt payment’ amount, that non-negotiable payment you have from above, at the debt with the smallest balance. This was on top of my minimum payment. Once I paid off that debt, I focused the minimum payment from the paid off debt along with my non-negotiable payment towards my next smallest loan. I continue the process until all debts are paid.
For the longest time I was trying to pay extra on all of my debts but I wasn’t seeing progress, I was losing motivation and I would quit. With the snowball method, my non-negotiable payment actually increased as time went on. Not because I was making more money, but because I was getting better at budgeting. As I saw my balance dwindling, I was becoming more motivated and started eliminating other expenses from my budget to focus every possible dollar towards my debt. This is how I was able to pay off more than $46,000 in 20 months.
If You Have Federal Student Loans, What's Your Plan?
May I extend my fullest congratulations to those with Federal student loans. You are granted, yet again, an extension to when your payments will resume.
Now let me put my overbearing mother-figure hat on and ask you, “what are you doing about it?” How are you improving your finances with this never-been-done-before miracle that has come out of a horrible time for our world?
These COVID relief measures mean much more than simply not having to make your payment. The bigger piece is that you are not accruing any more interest. Compound interest can be a wonderful thing when you are earning it, but it has the opposite effect when you owe it on a debt.
What happens if you continue to make your payments when they aren’t required? This breaks down to a $393 student loan payment (the national average) going directly to pay off the balance of the loan.
Normally a part of that $393 payment goes towards the principal balance and another part goes towards new interest that has accrued since your last payment. Your payment has less of an impact when you are also paying on interest, taking longer to pay off your loan.
Now I ask you again, what will you be doing with this newly awarded time? Are you paying off high interest debt? Are you using it to increase the amount saved in your emergency fund? Are you doing the work to get on a working budget while you have some wiggle room?
If you didn’t say yes to one of the above, I want to ask you ‘why not’? I am a true believer in ‘everything happens for a reason’ and if this wasn’t a huge wakeup call I don’t know what is.
We have been taking our health, relationships and finances for granted for decades now. I am not the first to write about what 2020 has taught us but I am here to reiterate it for those of you with federal loan debt.
How you focus your time and energy with your finances these coming months will have a major impact on the rest of your life, good or bad.
Are you going to continue to look the other way at your debt, knowing it will ‘get paid off eventually’. Or are you going to jump in the deep end, as hard as it might be, and create a plan to change your future for the better?
Get started with tracking your spending with this free tool to see where your money is currently going. We can’t change our futures unless we dig into our past.
Bouncing Back After #livingmybestlife
Keeping up with the Joneses is expensive. Spending excessive amounts of money on going out to eat, a quick trip up north or that thing at Target adds up quickly and is a major reason Americans struggle with debt.
I am here to tell you that overspending just by a little in a handful of areas may be the reason you are carrying a balance on your credit card.
According to an article in usatoday.com, “Groceries are the number one reason why people carry a balance.” One explanation for increased credit card debt is that we put everyday expenses on credit cards, when we once used to pay for these items in cash. Dealing with other debt payments, we are strapped for cash at the end of the month, unable to pay the full balance on our cards.
Here are some tips to get ahead of your credit card debt after you had a couple months of excessive spending:
Look at your spending and figure out which categories caused you to not make your payment in full
Determine a spending limit for all your budget categories and make sure it adds up to less than your monthly household income
Use that extra money to pay extra towards your credit card balances
Check your spending before each purchase to make sure you haven’t hit your category limit
Make sure you are not spending just to qualify for rewards or card benefits, you can do this once you get your balance back to zero
If your credit card balance is not manageable, but you would be able to pay it off within a year, look at consolidating onto a new card with 0% APR.
The thing to remember is that consolidating to a new card or rolling the debt over with your mortgage does not solve the problem at hand. Be sure you are proactively creating a spending plan before each month and really sticking to it. By following a plan each month you will be able to ensure you have money extra to pay down debt.
How Much Extra Should I Be Paying on My Student Loans?
This is a fun question because when I start digging deeper into your finances as a coach and I tell you how much you can afford on paper - the jaws drop! We have been trained to think that if we are making our minimum payments we deserve a pat on the back - because we did it! Right? We didn't have an adjusted payment, we aren't in forbearance, we made the payment. Well, sorry, but no.
That minimum payment will cost you tens of THOUSANDS of dollars in interest that frankly, you can't afford. Nobody can! In most situations you should be able to pay double (at least!) on your loan to get rid of it! There are a lot of financial calculators online, I like Unbury.me, that help you play around with various extra payment amounts to find out just how long it will take you to pay off your debt.
Give it a shot, it's really motivating to see if you pay just a little extra each month, the number of years you can knock off the term of your loan!
Keep Paying Your Federal Student Loans While They Suspended, Here’s Why
Right now you are not required to may a payment on your federal student loan, sounds great right? Wrong! If you are still employed, or your household can afford to make your monthly loan payment, you should continue to do so. And, this may sound crazy but, pay extra!
Think about it this way, normally you have interest tacked onto your loan each month. So when you make your payment, some goes to the loan and some goes to interest.
Right now, with your payments, 100% of it is going directly to the principle! That means that every penny you are sending to your lender is paying down your debt.
Of course, if you are worried about making rent or buying groceries you should hold off. But, if you are one of the lucky ones, hit it hard!
What to Do With Your COVID Stimulus Check
So, this stimulus check. What about it?
First off, check out this link to see the details on how much you may be receiving. Amounts vary but are up to $1,200 for individuals and $2,400 for those filing jointly (with $500 per child also in the mix). If you are behind on child support you won't be seeing a check. You will receive this money via direct deposit or a check in the mail, depending on your last filing method.
What should you be doing with this money? I can tell most of you that the answer here won't be to spend it. There are a few easy scenarios to cover but if you think your situation is a little more unique you can always reach out.
If your job is stable, you are not worried about lay-offs or reduced hours, this money should go towards any debt you may have. Let's say you don't have debt, then it should go towards your savings. If you have a five month emergency fund you can always invest or, my personal favorite, make a donation to an organization that is doing some good right now.
If you are at all questioning your employment then it should go towards your necessities and any leftover funds should go straight to savings. What are necessities? Rent/mortgage, gas for your car, food and utilities. Netflix? Nope. It's only $8.99/mo - nope. Getting food to go because you can't stand to cook anymore? Nope. Birthday gifts for friends because you feel bad they are stuck at home? Nope. Nope. Nope. You lost all or some of your income, it's time to save every penny you can.
Be safe and be smart out there!
This Is What Debt You Should Pay off First!
Debt, a lot of people have it but no debt is good debt. Hear me now, I will say it again. YOU DON'T WANT DEBT.
Ok, now that we got that out of the way, if you do have debt and you are trying to get rid of what, where do you start? Reminder, no judgement, I was there too with a scary amount of student loans, but I am here to help.
Ok first, we want to list all debts from largest to smallest. I also like to put the interest rates next to them because it might effect things.
After we list all our debts, we are most likely going to pay the smallest debts first. This is snowball method, you can also use the avalanche method which is where you pay off the highest interest rates first. Back to paying off the smallest, this helps with creating easy wins as you pay them off. If it takes you a year to pay off one debt (let's say it's your largest), a year is a long time before you get a win in your journey. Too long and it's hard to keep up momentum.
With that, if you have a $300 credit card bill that is at 25%, we gonna get rid of that.
Back to the plan, once you pay off your first debt, that money then rolls into your payment for your next debt, and so on. And that's it! Easy right? Stay on track, remember your why and life will be grand on the other side.