Few people these days are completely debt-free. You might have student loans, a mortgage, a balance on your credit cards, and/or other debt obligations. These top 10 tips can help you trim down or eliminate that debt so you can build wealth and finally focus on your other financial goals.
10. Know the Difference Between Good Debt and Bad Debt
Some personal finance experts think all debt is bad, but that isn’t necessarily so. A loan can make all the difference between getting a degree needed for a high-paying job, for example, owning your own home, or starting your own business—and losing those opportunities. Evaluate your debt to figure out what kind of debt you have so you can prioritize paying it down or using your money for other purposes. Two simple questions can help you decide if debt is “good” or “bad”: Is the debt temporary or a lifestyle? And is it worth it?
9. Cut the Cost of Student Loans
The average person carries $ 27,000 in student loan debt—a huge burden. The good news is you can refinance your student loans and save over a thousand dollars in doing so. You might even be able to get your student loans forgiven or paid for by your employer and eliminate that debt entirely. If you need help managing your loans, Tuitio.io can help you find the most effective plan to tackle your student loans or you can use simple Excel formulas to compare different student loan options.
8. Pay Off Your Credit Cards with a Debt Consolidation Loan or a Balance Transfer
You’ve probably received offers in the mail that promise to consolidate all your credit card debt into one low-interest bill—either through a debt consolidation loan or credit card balance transfers. Are they a good idea? While attractive, debt consolidation loans usually don’t make sense if the loan will cost you more over the long haul compared to paying your cards down faster. With credit card balance transfer offers (e.g., 0% promotional APRs), you’d have to pay a fee for transferring your debt to the other card and make sure you pay all the debt off before the promotional period is over. In both cases, do the math to make sure it’s worth it. (By the way, you might be able to negotiate those credit card balance transfer fees.)
7. Pay Off Your Mortgage Early
Your mortgage is likely the biggest loan you’ll ever take on, and some of us are quite eager to get rid of it as soon as possible. An early payoff gives you peace of mind and financial freedom, but the low interest rate means it might make more sense to invest your money instead of paying off that debt early. The experts don’t agree on this topic, but if you’d like to pay your mortgage early and save thousands of dollars in interest, make extra principal payments, such as twice monthly half payments of your mortgage bill. Don’t use your lender’s biweekly mortgage plan, however, and set this up yourself to save money. If possible, get rid of your escrow requirement with your lender and pay taxes and insurance yourself. Another way to get rid of your mortgage faster and save a ton of money is to refinance either into a shorter-term loan or one with a lower interest rate (and continue to make the larger original payments). Find out if refinancing is worth it here.
6. Use the Debt Snowball Method to Tackle All Your Debt
With the snowball method of paying off debt, you apply the majority of your available money for debt repayment to one loan and minimum payments on the others. Then when the first loan is paid off, you tackle the next loan and so on until all you’re out of debt completely. This Excel spreadsheet can help you set up your snowball payment schedule. If you’re not sure whether you should pay off your smallest balance first (for the motivational boost) or the one with the highest interest rate (which makes more financial sense), consider the “blizzard” payment method, which combines both strategies.
5. Negotiate Your Credit Card Interest Rate and Loan Amounts
A lower interest rate will help you pay off your credit card balances faster. All you have to do is ask, and if you’re successful, you can save hundreds or thousands of dollars, depending on your credit card balance. If you’ve got medical bills—one of the biggest sources of financial distress and common causes of debt—you might be able to get financial aid from the hospital or negotiate that medical bill. You might be able to settle other debts if you can’t pay them back completely.
4. Pay Your Most Painful Debts First
All debt is sort of painful and can take an emotional toll on us. While there are lots of approaches to tackling debt, consider paying off the ones that have the biggest emotional impact on you. For example, pay off that loan from your in-laws before your pay down your credit card. Also, personalizing your debt could make you more motivated to pay it off more quickly: Remember what you bought with the debt in the first place to prevent you from getting into more debt or feel better when you pay it down.
3. Pay Down Debt and Invest at the Same Time
You want to get rid of your debt but you need an emergency fund and don’t want to lose out on the power of compounding to help with your retirement savings. It doesn’t have to be an either/or situation. You can pay down debt and invest at the same time. Perhaps prioritize your most expensive debts (ones with interest rates above 6%) and save some money as well. Budget for an emergency fund, debt, and retirement. This hybrid approach appeals to our emotional needs while also meeting our financial goals.
2. Use “Extra” Money to Pay Down Debt
As we mentioned in our step-by-step guide to getting out of debt, you might be able to find extra money (e.g., from selling crap you don’t need) to throw at your debt or add to your savings. Earmark gifts, bonuses, and other “found” money to your debt payments.
1. Stop Adding to Your Debt
Paying off your credit cards is the best financial return on your money if your cards have high interest rates, but it won’t really help to start paying down your debt if you’re only going to keep the habits that might’ve made you accumulate it in the first place. Some people switch to a cash-only policy to stay debt-free. Whatever you do, make sure you have a plan for what you’re going to do with the money you’ll free up once you pay off your debt, such as setting up automatic payments to your savings. Give your money a purpose, avoid the most common mistakes that keep us in debt, and enjoy being free of debt. It really is possible to live a rich life without taking on (at least too much) debt.
Illustration by Tina Mailhot-Roberge.
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