A new year usually calls for a fresh start. Some of us take the brand new year's inspiration to get back on our fitness journey or a project that had been taking the back seat the previous year. Some are determined to take the necessary steps to become more financially stable, such as planning to be debt-free soon.
If you plan to manage your debts – that is, eliminate most of them soon – then you are already on the right track. Setting your mind to it is the first step and an important one.
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| Image courtesy: Mikhail; source: https://www.pexels.com/photo/couple-calculating-all-their-bills-6964107/ |
Here are some debt reduction strategies to get started and become debt-free.
Revisit your budget
Re-examine your budget and see in which areas you can make some cuts. Are you paying for too many subscriptions? Choose between Netflix and Disney+ for now. Is your phone plan still working for you? It may be time for a little downgrade. Move around these funds and put them in your "debt-free dream fund." These short-term sacrifices will pay off in the end. On the other hand, you can also increase your income by looking for a side hustle.
Pay more than the minimum
Now that you've moved around funds in the budget, you can make small steps in paying off your debts. Start by paying more than the minimum payments for your credit card debts and loans. For example, you have a $20,000 credit card balance with a 16% APR and the minimum payment is $600. If you make the minimum payment every month, it will take 45 months to pay off the debt.
You'll pay a total of $6,627 in interest. If you increase your monthly payment to $700, you will only need 37 months to pay off your balance and only pay $5,345 in interest. There are credit card payoff calculators online that you can use to determine this.
Try the snowball method
Some people try the snowball method to avoid getting overwhelmed with paying different kinds of debt simultaneously. In the snowball method, you must pay the minimum payment for all debts except for the smallest one. Get started on the debt with the smallest balance.
Pay it off as fast as possible, and you do the same to the next smallest balance when you're done with it. This way, you see the progress immediately and motivate yourself to keep going. After all, an excellent way to continuously motivate yourself is to get "rewards" – and a paid-off debt could be the reward your brain needs to keep paying off debts fast.
Consolidate your debts
Another way to manage your debts and save money on interest is to refinance your debt. One way to do this is to take a debt consolidation loan. A debt consolidation loan is a personal loan with a lower interest rate than your current debts. The idea is to use the debt consolidation loan to pay off all your existing debts, leaving you with more predictable monthly payments and just one loan term.
You may also consider transferring your debt to a balance transfer card if you have credit card debt. Banks usually charge zero interest for these balance transfer cards for a specific period – usually six to 18 months.
Use windfalls to pay off debts
We usually use unexpected sums of money, such as inheritance and bonuses, to splurge on ourselves, and there's nothing wrong with that! However, a little sacrifice will go a long way if this year is about becoming debt-free. Commit these windfalls to pay off your debts, so you can build momentum and eventually be debt-free sooner than planned. You will thank yourself later.
Get credit counseling
There's nothing wrong with seeking help. Some credit counseling agencies can give valuable advice on managing debts, and organizing your budget, offer you workshops and educational materials, and assist you in making a plan to repay your debts. Do your research and look for counselors who only charge in advance to give you any help first.
Also, look for ones that offer a wide range of counseling services, such as budgeting, debt management classes, and workshops. Last but not least, make sure that an outside organization accredits them. The U.S. Trustee Program has a list of credit counseling organizations.
Bottom line
Congratulations! You have taken the first step in facing your debts this year. Reading through this list of tips means you are willing to start. It can be challenging to get out of debt, especially if you have a lot. The information above helps you devise a plan and take steps toward a debt-free future.
