Debt can quickly accumulate and become a source of constant stress if not handled wisely. Whether it stems from credit cards or loans, getting rid of debt and staying on top of repayments is key to maintaining good financial health. So, before debt becomes overbearing, it is better to manage it through planning, budgeting, and making timely payments. Fortunately, several practical strategies can help one reduce debt faster and become financially stable.
Start by Calculating Total Debt
Evaluating the total amount owed is the first step to managing debt efficiently. This includes all forms of debt, from personal loans and mortgages to credit card bills. Doing this gives individuals clarity about their situation and an idea about how to proceed with the repayment. To simplify the process, individuals can also pull their credit reports that list all their outstanding debts. It enables individuals to check for errors that may show more remaining balance than the actual amount.
Create a Budget
After a clear picture of the total debt amount, individuals can create a monthly budget for their debt payoff. They should first determine the total monthly income and make a list of all the sources of income. Next, they should make a list of all the necessary monthly expenses, such as utilities, groceries, rent, etc. They can realistically allocate the amount toward monthly debt repayment by subtracting these essential expenses from the total income.
Budgeting can also help individuals identify non-essential expenses, such as subscriptions and dining bills, and determine which can be avoided to free up more funds for debt repayment.
Having a fixed budget mainly encourages individuals to prioritize their spending and avoid making impulsive purchases that can mess up their repayment plan. It is a simple yet effective method to reduce debt.
Choose a Debt Payoff Plan
When it comes to handling multiple debts, there are three repayment plans that individuals can choose from based on their financial situation and personal preferences.
Snowball Method
This plan involves focusing on repaying the smallest debt first. Individuals can continue making minimum payments for the larger debts until the smallest one is entirely repaid. After that, they can repay the next smallest debt while making minimum payments for the larger ones. This method enables individuals to quickly pay off one debt at a time.
Avalanche Method
In this method, individuals first focus on repaying the debt with the highest interest rate while making minimum payments on the rest. This way, they are saved from making high-interest payments over time. The avalanche method can be slower than the snowball method, but it is more beneficial in the long run, as it reduces the overall cost of the debt.
Reverse Snowball Method
This repayment plan is the exact opposite of the snowball method. It involves paying off the highest debt first while making minimum payments for the remaining small ones. This approach can help individuals attain peace of mind, as paying off the biggest debt first can make the repayment of the remaining debts more manageable.
Consider Debt Consolidation
This is one of the most common strategies for paying off multiple debts more easily. It requires individuals to combine all their debts into one loan with a lower interest rate. A drop in APR makes the debt more manageable, making it easier to pay it off.
That said, one piece of debt consolidation advice that individuals must remember is that this repayment strategy is mostly beneficial for those with a good credit score. Those who do not may be unable to get a low interest rate, which defeats the purpose of consolidation.
Pay More Principal
Another tip to become debt-free by paying it off faster is to pay more principal whenever possible. This means every month, individuals must try to pay more than just the minimum required amount toward their debts. These extra payments go on to reduce their total principal amount, or the actual loan balance, rather than just covering the interest. Over time, such payments shorten the loan term, decrease the total interest paid, and accelerate debt elimination.
Set Up Automated Payments
When it comes to debt elimination, individuals must stay consistent with their payments and not miss a single one of them. However, in the hustle and bustle of life, individuals can miss a deadline occasionally. This may not be ideal for their situation since missed payments can affect their credit score and even increase interest rates. To avoid such issues, it is better to set up automated payments so that at least the minimum installment amount can be paid on time.
Consider Additional Sources of Income
Individuals can also consider increasing their sources of income, at least until all of the debt is paid off. They can consider taking up side hustles, such as freelancing or tutoring, or gig work through apps for ride-sharing or food delivery.