Debt Elimination Strategies
With the start of a new year and the onset of spring, many Americans find inspiration to eliminate debt that may be weighing them down and holding their financial goals just out of reach. With determination and a solid plan, you too can make moves to pay off your debt and achieve your goals!
Take it from those who have done it – our friends at NerdWallet have a series on their blog called How I Ditched Debt, which highlights real people who employed smart financial strategies to pay off thousands of dollars of debt. Below are some of these tried-and-true tactics to try as you begin your debt elimination journey:
Know Your “Why”
Think about your financial goals in the near and long term. Whether you’re looking for a new vehicle, hoping to own a home, or saving up for a big family vacation – having a clear motivation to get out of debt will help keep you on track. Consider placing reminders around your home or workspace of your goals, or create a vision board to keep these goals top of mind.
Brian Brandow’s debt elimination motivation came when he told his family there would be no vacation that year. Instead, he decided to face his family’s $109,000 debt, which included five maxed-out credit cards. Brandow’s three children provided the motivation he needed to stay focused on debt repayment. “I didn’t want to disappoint my family,” he said. “I wanted to provide better for them.”
“You’ll need to have a clear reason to want to get out of debt, because it’s going to be hard. It will take sacrifice. You must be mentally prepared. Having a ‘why’ will help keep you motivated.”
Make the Most of Every Dollar
Building a budget is key to every financial plan, and especially so when it comes to paying off debt. NerdWallet recommends a 50/30/20 budget:
- allocate 50% of your income for needs, such as food, housing, gas, etc.
- allow 30% of your income for wants – sticking to a budget requires discipline and sacrifice, but you still need to be able to spend money on enjoyable things too…just budget for it!
- commit 20% of your income to savings and debt repayment.
Since you’re focused on paying off your debt, you may decide to use money from your “wants” category to make extra debt payments. Smart! That will wipe out debt faster and help you save in the long run on interest.
Once you have developed your budget, track your progress weekly. You can always revise your budget as necessary, but it’s important to make sure it’s realistic and something you can live by.
If Possible, Work a Side Hustle
Consider any skills or extra time you may have that you can offer to earn extra cash. It’s incredibly common these days to drive for a few hours for rideshare or delivery services, and you get to choose the hours. There are also side jobs you can pick up from home, like selling old clothes or renting out a room on Airbnb.
Or, could a side business give you extra income to pay off debt? Think about your interests and how you might make a small business out of them. An animal lover could open a mobile grooming service, for example, or a writer could pick up some freelance work.
Michelle Schroeder-Gardner was determined to pay off her student loan debt as quickly as possible. Her strategy? Earn more. “Cutting your budget is great, but there’s only so much you can cut,” she said. “You can always try to make more money.” In addition to her day job, she ramped up several side hustles – including writing a blog, selling items she was willing to part with from around her house, taking surveys, and being a mystery shopper.
The long hours (up to 100 per week!) were tough. But “just watching my debt go down kept me motivated, because I could see the end goal,” she said.
Leverage the Power of Extra Payments
Making extra payments, or paying more than the amount that is due each month, can shorten your payoff time significantly, and can save you money on the interest that accumulates. Making extra payments each month on your debts can also lower your credit utilization ratio, which in turn can improve your credit score!
Learn about debt consolidation and whether it would save you money or otherwise makes sense for your financial situation. You might be able to use a low-interest credit card to transfer your high-balance credit card debt into for one easy payment, or a debt consolidation loan to roll multiple debts into one, ideally with a lower interest rate.
When David Weliver had to choose whether to pay his rent or his credit card bill when he was in his 20s, he felt incredibly guilty. “After years of carrying obscene amounts of debt, it was the first time I couldn’t meet a payment obligation,” he said. Sadly, these same choices are being made every day by folks just like you and me.
To tackle his $80,000 in student loan, car loan, and credit card debt, Weliver set up a plan that included debt consolidation. His credit union gave him a low-rate loan to consolidate some credit card debt for around $5,000. He was able to get another loan for $12,000 at a decent interest rate just to pay off his highest-interest credit cards.
“I made the fixed personal loan payments, and whatever was left over I put toward the higher-rate APR cards, which I paid off before the lower-rate cards,” he explained. Eventually, the strategy paid off. “I was able to pay off all of my debt in a little over three years,” Weliver says, “and I’m very glad I got out of debt at the stage of life that I did.”
Build an Emergency Fund
Saving is crucial to paying off debt, because an emergency fund will give you breathing room and stop you from turning to credit cards and other debt for unexpected expenses. An emergency fund of $500 in savings can keep many small emergencies at bay.
As your credit union, we can help you with these and other tactics to eliminating your debt and reaching your financial goals. Our website has easy-to-use calculators to start figuring out how to tackle your debt on your own with the strategy that makes the most sense for your situation. Or, we are here to help too! Want to know how to get started? Contact us today!