Trying to figure out how you ended up with a pile of debt can be a tricky venture. Finding a way of dealing to pay it off can be even tougher. While, in some cases, carrying debt isn’t necessarily a bad thing, not having a clear plan to deal with it responsibly can become a serious problem.
Just remember that if you find yourself in a situation where you’re wondering how you’re going to manage to get yourself out from under the cloud of debt that’s been hovering over you, there may be things you can do to improve your situation.
But before you can begin to understand how to pay off debt, you should start by getting a clear idea of the type of debt you’ll be dealing with. Maybe you’re a recent grad and you’re now facing the prospect of having to pay off your student loans. Or maybe you’ve run up a huge tab on your credit cards. Whatever the situation is, you’ll need to know what you’re dealing with.
On top of this, you’ll also want to know exactly how much debt you’ll need to pay off. Once you have these two pieces of information, you can start to work on a plan to help you budget to pay off debt. To help you get started, here are six tips to give you a hand!
1. Put a Budget in Place
If you know the amount of debt you’re looking to pay off and what form this debt takes, the next thing you should be doing is finding ways to incorporate your debt payment into your budget. But before you do this, go over your budget and see if you can identify where things went wrong. If you’re already working with an effective budget that’s been geared to your financial situation, then you should be able to spot the problem.
But what do you do if you don’t have a budget in the first place? You make one! After all, you can’t learn about how to budget to pay off debt without having a budget in the first place.
There are plenty of ways to build a budget, and no single technique is going to be the best system for everyone. You’ll need to spend some time researching different budgeting techniques to try to figure out what might be best suited to your situation.
Outside of this, you can also explore different budgeting apps that can help you to build and organize your budget. In either case, you’ll want to regularly review what you’re spending money on and look for ways to cut back on spending where you’re able to. This can help to free up cash that can go towards helping you pay off debt.
2. Pay off High-Interest Debt First
There are different schools of thought when it comes to the best way of paying off debt. Some people suggest starting with your smallest debt accounts to keep yourself motivated with quick wins along the way. While this can be an effective way of going about it, if you want to reduce the total amount of interest that you’re going to end up paying in the end, you may want to consider starting with your accounts with the highest interest rates first.
Begin by making a list of all your debt – specifically your revolving debt accounts – ordering it from highest to lowest interest rates. Then start to work on paying off each account from top to bottom, and make sure you make at least your minimum payments on every other account.
3. Exceed your Minimum Payments (When you Can)
Speaking of minimum payments, we should briefly touch on what they are and what they mean to your ability to pay off debt.
With revolving credit like lines of credit
and credit cards, you are required to make a minimum payment each billing cycle in order to keep your account in good standing.
Keep in mind, you should always try to pay more than the minimum if you’re able to. Why? Well, the less money you pay on a particular account, the longer you’ll be paying off debt on that account, and the more total debt you’ll end up paying. So, if you can manage to pay more than the minimum, you typically should.
4. Use Windfalls to Pay Off Debt
There may be times over the course of a year where you come into a relatively large amount of money all at once. This is called a cash windfall. It could be from things like a work bonus, your tax refund, an inheritance, or maybe some sort of gift from a member of your family.
If you receive one of these, it’s important that you use it wisely. If you’re trying to pay off debt, you may not want to blow it on a vacation or a new computer. Instead, take this as an opportunity to get ahead on your debt payments.
5. Temporarily Stop Using your Credit Cards
When your main aim is to start paying off credit card debt, it might not be the best idea to keep piling it on needlessly. Having said that, some people may have a harder time than others resisting the urge to spend. So, if you count yourself among those people, what do you do?
Well, one potential solution is to not give yourself the option to overspend. Start by removing all your credit cards from your wallet before you leave your house to do any shopping. While you might lose the benefits you build up through your credit cards, like travel rewards or cash back, that’s a small price to pay if it’s going to help you curb the amount of debt you take on. Don’t put your cards back in your wallet until you have your spending issue under control.
While this can be a useful tactic to implement, it’s not necessarily going to work for everyone. For some people, the fear of increasing your already big pile of debt may not be enough to stop them from putting their credit cards right back into their wallet. If this sounds like you, don’t just stow your cards away into a sock drawer. Give them to a friend or family member that you can trust to keep them for the interim.
Another problem you might face is what to do when it comes to online shopping. At this point, you may have your credit card information saved on a bunch of different sites that you shop on, which can make it a lot easier to spend. If this is the case, delete all this info right away.
While doing some of these things might not help you pay off debt directly, they may be able to help staunch the bleeding while you get your finances back on track.
6. Cut Back and Save Money
Like we’ve already touched on, if you’re looking for ways to pay off debt, you’ll want to start by going over your budget. The first thing you’re going to want to look for is any clear signs of overspending and do what you need to regulate these right away.
After that, it’s time to try to find ways to save money where you can. Having said that, understanding how to pay off debt and save money at the same time isn’t always so simple. This can be especially true if money is tight in the first place. The key here is to be mindful of your spending, avoid the previous mistakes you’ve made, and get comfortable with the idea that you’ll likely need to sacrifice some things in the name of paying off debt. Some things that you can do to help you through this process can include:
- Not spending more money than what you have coming in.
- Setting small savings goals to keep your goals achievable.
- Automating the savings process.
- Trying to put small amounts of money towards your savings before it goes to anything else.
Be Diligent to Pay Off Debt
We never said paying off debt was going to be easy, and depending on your situation, you may have a long way to go. You’ll need to do your best to stay motivated as you go down this road. If you feel like you’re in purgatory, it might be a lot harder to see things through till the end. So, set yourself small goals for you to hit along the way, and when you reach one, reward yourself with something small. Maybe you go out for lunch, or maybe you go see a movie. Whatever it is, pick things that are going to keep you chugging along. While it may not be easy, it’s doable, so do your best to create a better financial future for yourself!