Debt can be overwhelming when you combine student loans with credit card payments and mortgage or car payments.
The earlier you start putting together a plan to pay off your debts, the better. It’s important to get organized to determine what you owe before you start to pay off your debt.
Start with the minimum payment and work your way up. There’s no easy way to eliminate debt. However, following a repayment schedule can give you a better understanding of your finances.
1. Get Organized
Make a list of all the accounts you owe to determine how much you owe. For each account, collect the following information about debt repayment:
- Creditor
- Balance
- Interest rate or APR
- Due monthly
- Payment due date
This information can be found in your online account, or you can request it from your creditor.
2. Prioritize your debt
It can take a while to pay off your debt, but the sooner that you start, the better. Include all your debts, whether they are personal loans, auto loans, student loans or credit cards. Choose what you want to pay first.
You can consolidate your debts to pay only one payment per month. You could qualify for a reduced interest rate that will save you money over time.
3. Reduce your interest rate
If you have a good credit rating, made timely payments or missed few payments, some creditors or lenders will lower your rate. You may also be able take out a card to transfer your balance, which could reduce your rate.
Refinancing auto loans, student loans, personal loans or mortgages can help you pay off your debt faster and at a lower rate of interest.
4. Plan your repayment
You can repay your debt in several ways.
- Debt Avalanche Method : In this method, you pay off the debt with the highest interest first. Over time, you’ll be able to save money by paying less interest.
- Debt Snowball Method : This method recommends paying minimum monthly payments for all your accounts and then using the remaining money to pay off your debt that has the lowest balance. After you pay your lowest debt, use the previous monthly payment plus what’s left to pay your next-lowest debt balance.
- Snowflake method You can use this method to repay your debts by making small payments when you have extra cash. This method can be combined with the other two. You could, for example, use a bonus you get at work to pay off your debt.
Choose the method that motivates you. It should also work for your particular situation. The snowball method can be a great option if you’re motivated by small victories. You can switch between methods as long as you’re making progress towards your goal.
5. Budget your money
When you are trying to pay down your debt, try to reduce expenses as much possible. Use the 50/30/20 rule to help you keep your expenses in check.
- Use 50% of your income to pay for necessities in life, such as rent, food, transportation and utilities.
- 30 percent of your income: Use this amount to pay for personal expenses, such as your phone bill or weekend trips with friends. You might want to reduce your wants in order to pay more toward your debt.
- 20% your income: Dedicate 20% of your earnings to savings and, more importantly, debt repayments that are above the minimum monthly payment requirements. Start as soon as possible and be consistent.
6. Track your progress
Apps that track and repay debt make your numbers a simple, automated process. Use a budgeting app to track your progress, reward yourself when you achieve success and determine how far you still have to go before you are debt-free.
You can achieve financial freedom by setting goals and micro-wins.
7. Create an emergency fund
Plan ahead and save up an emergency fund for unexpected expenses. Save up to three to six month’s worth of living costs in your emergency fund.
Follow these steps to create an emergency fund:
- Find ways to save — Your emergency fund and your general savings account are different in that the one is only for emergencies. Find ways to save money each month using our budget calculator.
- Reducing your take-home pay —Reallocating funds by maximising your 401(k), and automating the transfer of 20% of your savings to a separate account, forces you to stick with your plan.
- Stay on track with your plan — Remind yourself of your goals and why you have decided to tackle your debt.
Credit Karma Money Save ™ has a high-yielding savings rate that can help you achieve your savings goals.
Get out of Debt: More Ideas
Consider ways to save money each month that you can use for your debt repayment. This can be small changes or swaps in your habits that add up to savings.
- Meal planning — Making meal plans that you can stick to with a grocery budget will help you cut down on costs and reduce the stress of cooking meals at home.
- Cancel your gym membership – if you don’t know when you last went to the gym it may be time to cancel and use the money left over to pay off your debts.
- Get a loan to consolidate debt — A personal loan can help you refinance your high-interest debt and lower your monthly payments.
- Earn passive income — A passive income is a good way to earn extra money or pay off your debts.
- Cut back on unnecessary expenses – Your monthly subscriptions can add up. Take a look and see what you are paying each month. Consider cancelling your subscriptions to streaming services, cable or any other service you never use. Use the money saved on debt repayment.
- Find the best deals — Take advantage of coupons and weekly ads to save money on items that you buy regularly.
- Budgeting envelopes – Divide your pay into envelopes according to a category or budget. This method will help you to avoid spending too much money in a particular area. It can also be used to save for debt repayment.
- Try out the 30-day rule – Think about a big purchase for 30 days before making it. Avoid making impulsive, expensive purchases.
- Change your phone plan – Cut back on spending so you can pay off debt. You may not need the unlimited data that you pay for with your phone plan.
- Accept hand-me downs – When you find that your children are outgrowing their clothes more quickly than you can afford to buy them new, accept hand-me downs from family and friends. You can save money by accepting clothes that they are no longer wearing.
- Carpool to work or school when you can — Save on gas and maintenance by carpooling. You can use the money you save to pay off debt.
- Reduce your energy bill – Some utilities offer free energy assessments to help you save money. Install low-flow showerheads to reduce water consumption, turn off the air conditioner for longer periods of time, and lower your water heater’s temperature.
- Find fun, free activities —Save money on entertainment by searching for free events and taking your children to a park, lake, or beach.
Next: Why it is important to pay off debt
Maintain momentum in your efforts to pay off debt. Your debt-to income (DTI ratio) will be better for lenders if you have less debt. This is helpful if your goal is to get a mortgage or auto loan.
Calculate your DTI and determine where you are. Then, see what you can do to reduce the ratio. Divide your monthly debt payment by your gross monthly earnings — that is, the money you earn before taxes and deductions.
Credit scores can be affected by a large amount of debt. This can affect what you drive, whether or not you qualify for a mortgage, the employment opportunities available to your, and how much money is spent each month.
Maintaining a healthy credit score is important because lenders will evaluate your credit rating when you borrow money.