Tips for paying off debt quickly and easily
Are you drowning in debt from credit cards, student loans, or car loans? Well, you’re not alone. Many Americans seem to think that debt is just a normal part of life and its ok to have it, that’s just not true. If you want to have financial freedom or retire early, you need to address any and all debt you have as soon as possible. So let’s talk about some strategies to pay off debt quickly.
What is debt?
Whenever you owe someone something, that is debt. Your monthly bills such as cable or electric are not considered debt unless you pay with them for a credit card. So if you owe a balance on something and make payments, you’re in debt to someone. Here are some basic types of debt:
- School loans
- Car loans
- Credit cards
- Medical debt
- Home equity loans
- Payday loans
- Personal loans
- IRS and government debt
Now onto strategies to pay off debt.
Adjust Your Budget
The first thing you need to do is go over your budget and see where your money is going. If you are using the 50/30/20 budgeting technique, you will want to decrease the 30% that goes to wants such as eating out and entertainment. Take those savings and put them towards any debt you have. It doesn’t hurt to be aggressive, if you want to pay off your debt quickly, you are going to have to make some sacrifices. Now that you took care of your budget, it’s time to look at a couple different strategies to pay off debt.
Debt Snowball Method
The debt snowball method is a debt reduction strategy where you pay off the smallest debt first and work your way up to the largest balance. As you pay off each smaller debt, you’ll build up momentum. The debt snowball method works in 4 steps:
- Put your debts in order from smallest to largest
- Make minimum payments on all debts except the smallest one
- Pay off as much of the small debt as possible
- Repeat process until all debts are paid off
Let’s take a look at an example, you’ve ordered them from smallest to largest already.
- $750 credit cards – $35/month
- $8,500 car loan – $158/month
- $25,000 student loan – $375/month
So now you know what debt you are going to tackle first, you’ve adjusted your budget to free up money to pay off debt, we’ll say an extra $600 worth. You’ll be making the minimum payment on the larger 2 debts and the extra money will go to the smallest. It will take less than 2 months to pay off the credit cards.
Now you are going to focus on the car loan. You have the $600 extra that was from freeing up your budget, the $35 that came from the credit card minimum payment, plus the $158 minimum that you were already paying on the car loan, so that’s $793 a month going towards the car loan. In about 10 months, you will have this loan completely paid off.
Time to tackle your last big debt, the student loan. At this point, you will have the $793 plus the $375 you’re already paying to go towards the student loan payment, that’s $1,168 a month. It will take just over 22 months to pay off this debt. Overall, you are going to pay off a tad over $34,000 in debt in about 32 months. You can speed this up by finding more ways to cut expenses from your budget or by finding ways to make extra money.
The reason the snowball method is so effective for paying off debt is that you see progress and build momentum. If you start with the largest debt first, you won’t see progress for a while and might get discouraged. But when you pay off that small debt and see it disappear, it motives you. Plus, you have more money to go towards the next debt. That is what makes it one of the more effective strategies to pay off debt.
Debt Avalanche Method
This is one of my favorite strategies to pay off debt. It is similar to the snowball method in which you order debts and make minimum payments on all debts except one. The difference is how you order them though, with the debt avalanche method, you order from the highest interest rate to the lowest. You use the same 4 steps as the snowball method:
- Put your debts in order from highest interest rate to lowest
- Make minimum payments on all debts except the highest interest rate one
- Pay off as much of the highest interest debt as possible
- Repeat process until all debts are paid off
Let’s take a look at an example similar to before.
- $750 credit cards – 25% :$35/month
- $25,000 student loan – 6% :$375/month
- $8,500 car loan – 4.5% :$158/month
With this example, you are still going to start with the credit card debt because it carries a high-interest rate of 25%. Once you pay that off, you move to the student loan. Although it is much larger than the car loan which was the 2nd one we tackled with the snowball method, it’s interest rate is higher so, therefore, takes priority over the car loan. Once the student loan is paid off, you can move to the car loan. As with the snowball debt method, you will be paid off in 32 months but the difference is you’ll save a little over $200 in interest.
Look for zero percent interest on balance transfer cards
Now some people may not recommend this method because it is dangerous and you need to have discipline but I have done it in the past myself with great success. I would find credit card offers with 0% interest on balance transfers and open an account. Then I would transfer as much from the high-interest debt to the new card.
You have to be careful, the period is only for so long, from 6 to 18 months typically and if it’s not paid off, you’ll be charged an insane interest rate. What I did was divide the balance transfer by the months for the promotion and make that my automatic payment to ensure it was paid off before the period expired. I was able to transfer thousands off cards with 20-30% interest to 0%.
Debt Assistant Services
Be very careful with some of the debt assistant services because they could actually hurt you in the long run. The concept is simple, consolidate your debts into 1 at a lower interest rate. Typically, these services make more sense for credit cards because credit cards have rates of 20-30% or more. There are 2 services that I have looked into that seem to be good options if you decide to go that route. I highly suggest you run all the numbers and calculate everything to make sure it is a good option for you before doing anything.
They have APR’s that range from 6% to 28%, so depending on rates you’re paying on loans now could or could not be a good option. They also have origination fees that range from 1-6%. Neither service charges for early payoff which is good because it should be your goal to pay off ANY debt as fast as possible. Again, I’m posting this to show you that its an option but you need to look at it carefully before doing it.
Strategies to Pay Off Debt Final Thoughts
I hope you found these strategies to pay off debt helpful. It doesn’t matter how much debt you have, you need to make it your goal to pay it off as quickly. If you were to see how much you’ve paid in interest on all your loans you’d probably croak. You could have used that money for investing, a vacation, a new car, or anything for that matter.
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