No one likes to go into debt, but there are many kinds of debts and many reasons to go into debt. Debts and loans can be important financial supports to help us get a house, an education, or the car we need to get to work every day.
Regardless of the reasons, it's still a good idea to put a plan in place for paying off those debts on time.
First, there are a few things you should know about how debts work and how getting out of debt works.
The debt snowball is a method for paying down your debts. The method involves paying off the smallest loans first and working your way up to paying off the bigger loans.
Therefore, it's called the debt snowball, because you start with the smallest and work your way up to the biggest.
This debt management method can be great for boosting your confidence when tackling debts and giving you smaller wins sooner to help keep you motivated.
The debt avalanche, also known as the stacking method, is a method for paying down your debts. The method involves paying off the loans with the highest interest rates first.
Therefore, it's called the debt avalanche because you are tackling the biggest loans first and then fizzling out to the smaller, less impactful loans.
This method is brilliant for saving as much money as possible when paying down your debts because the highest interest rates are going to cost you the most in the long run. That's why it can save you money to prioritize getting rid of the highest interest loans first.
Debt relief is a program that helps reorganize and make plans around your debt, usually to relieve or forgive the debt either partially or in full.
This might take the form of lowering the principal amount owed, lowering the interest rate, extending the loan term to provide more time for repayment, and more.
This is an action often taken when the only alternative is an extreme that both parties in the loan agreement would prefer to avoid, like defaulting on the loan or going into bankruptcy.
Both options would prevent the lender from getting their loan funds back, which is why debt relief plans exist. Working with the borrower and getting some of that loan back is often a more ideal alternative to not getting any of the loan back.
Debt consolidation is taking all the debt you’ve accumulated on multiple accounts and combining them into one account and one monthly payment with one interest rate.
Combining multiple debts through debt consolidation can make paying down your debts a lot easier to manage. Sometimes, it can also get you a better interest rate, especially if the interest rates of some of your loans were very high.
It'll also give you one debt to focus on, one debt payment, and one due date each month rather than several of each to remember and plan for.
The first thing you want to do when working down your debts is to figure out where you stand. The best way to do this is to make 3 lists:
By making these 3 lists you'll better understand all the money you have coming in and where all of that money needs to go with your debts and important expenses.
It also helps if you make a note of your total debts and the minimum regular payments you need to make on those debts. This way you can see your total amount of debt and the bare minimum you need to pay toward those debts to avoid additional fees.
Laying all of this information out before you will help you see where you stand and what you need to do to become debt-free.
Most debts will come with an interest rate or an annual percentage rate (APR). This interest is a percentage that accumulates over time and adds to the total amount owed.
When entering any kind of debt or loan, you want to shop around for the best interest rates. Then, when you're making plans to pay down the debt, you'll want to account for that added interest in your calculations.
This might include paying more than the minimum required payments or paying more toward the principal amount to counteract the effect of the interest.
You can also attempt to reduce your interest rates by consolidating debts into a loan at a lower rate.
The next thing you can do is look at ways to reduce expenses. The less you spend, the more you'll have to put toward debts you owe.
Later, when those debts are gone, you'll have even more available to you because you won't have debts taking up space in the expenses section of your budget.
Reduce expenses by eliminating what you can and making economic substitutions to save money on the things you can't eliminate.
Increasing the amount of money you have coming in each month can help a lot with working down debt.
This is especially helpful if you are already doing what you can to reduce expenses and pay as much as you can toward debts, and there's just not enough money in your incoming funds to tackle it all.
Sometimes the key to getting out of debt is very simple—you might just need a better budget.
One of the best budgeting methods is the envelope system because it takes all the hard work out of budgeting.
All you have to do is allocate cash funds to each section of your budget in the envelopes. Then you'll be much less likely to overspend on a section of your budget each month.
Sticking to a budget is especially important when you're trying to take down your debts and the envelope method can help make that process simple.
An alternative to the cash envelope idea is to use a budgeting app. Budgeting apps can link to your existing financial accounts so you don't have to switch to cash to organize your funds.
Use debts responsibly when you need to, but always include those debts in your budgeting plans. This will help you be proactive about debts so they don't get out of hand and weigh you down too much.
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