FollowHow to Pay Off Debt
- Know What Is Owed
- Make a Budget
- Choose a Strategy
- Explore Alternatives
- Track Progress
Falling into debt can feel overwhelming, but there are simple steps people can take to become debt-free. People incur debt for many reasons, and it is usually not because of irresponsible spending. Job loss, a medical crisis or divorce are just a few of the situations that can lead to debt. Here is how to become financially solvent once more.
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1. Know What Is Owed
Debt can be scary. Once people start to feel they cannot catch up, it is not uncommon for them to lose track of how much they owe at all. Therefore, the first step in becoming debt-free is understanding exactly how much is owed. Total amounts, interest rates, payment dates, and any other relevant information should be included. Some people who find this exercise particularly stressful might be helped by the presence of a friend or family member who can remain neutral and soothing during the process.
2. Make a Budget
The next step in becoming debt-free is to make a budget. While there are many tools and tips out there for creating a budget, this does not need to be a complex process. Apps or other software should only be used if they make the process easier, but they are not necessary. A common error in making budgets is failing to account for all expenses. People should remember to build in personal expenses, such as haircuts and items like toothpaste, as well as entertainment and other miscellaneous expenses. Quicken offers a list of common items to get started.
3. Choose a Strategy
Most experts advise concentrating financial resources on one debt at a time while paying only the minimum on other debts, but choosing which debt to focus on varies. One approach and the most logical one is to choose the debt with the highest interest rate and pay that one down first. However, an approach that may be more psychologically satisfying and therefore easier to stick to is to pay off the smallest debt first. In both cases, the “snowball” method means taking the amount used to pay off the first debt and applying it to the second debt. In this way, the amount paid “snowballs” as the debts shrink.
4. Explore Alternatives
For some people, even after making a budget, there is simply not enough money to cover expenses and pay off debts. They may need to consider getting a second job or borrowing against other assets. The Motley Fool lists several options, including borrowing against life insurance, borrowing against a 401(k) and taking out a home equity loan. All of these approaches carry some risks, and people should fully understand them before choosing one of these approaches.
5. Track Progress
Tracking progress is just as important in becoming debt-free as the initial understanding of how much debt there is. It gives a sense of accomplishment and also shows how much is left to go. This can be done on a simple spreadsheet, with an app or simply by writing down the amount left to go each month in a notebook. Small rewards on reaching certain milestones can add motivation.
Tackling debt sooner rather than later is the best approach since interest rates can add up. With these steps for becoming debt-free, people can take control of their finances and their future.
