How to Pay Off Debt
Debt has a way of sneaking up on us, especially if we’ve had a hard time managing our money in the past. However, it’s never too late to make our money work for us, get on top of debt and maintain a debt-free life.
The task can feel overwhelming, but the right partner such as an adviser from a credit union on your side can make a big difference and help guide your journey. When you’re ready to get started, here are 10 tips on how to say goodbye to your debt.
1. Create a Budget
To pay off debt, you’ll need to build a budget first. Budgets are tools that can help you realize your goals and control spending. A budget will show you where your money is going so you can create a personalized spending plan. Building the budget is the easy part. Keeping to your budget takes practice and discipline.
Create your budget using an app on your smartphone, and it will be within easy reach to keep you on track. The use of Excel or other spreadsheet programs is another alternative. Items to include in your budget:
- Daily incidentals
- Transportation costs
- Child care
- Pet care
- Debt payments (credit card, car payments)
- Health care costs
- Job-related expenses (wardrobe, dry cleaning, parking, etc.)
- Household maintenance
- Charitable donations
Building a budget is an excellent way to see all your monthly expenses. You most likely will find that expenditures can be eliminated or cut back on. Sticking to a budget doesn’t have to be painful. Find ways to reward yourself (modestly) when you hit milestones.
2. Pay Off Small Debt
Paying off the smallest debt (the snowball method) can give you quick rewards and learn discipline. It’s easy to do too. Pay down your smallest debt and continue to make minimum payments on the rest. Once that tiny debt is paid in full, take the dollar amount used for the debt and roll it into the next debt. Continue until all debt is paid off.
Paying off debt, no matter how small, is a victory, and it feels good. These wins keep you engaged with a sense of accomplishment and continued forward movement towards your goal.
An alternative to the snowball method is the avalanche method. Make minimum payments on all debts. Any leftover funds will go to the debt with the highest interest rate.
How you pay off your debt will be unique to you and your circumstances. Use a method that works for you and your budget.
3. Stop Spending
Sounds easy, right? Just stop spending money! How many times have we told ourselves that we’re not going to spend our next paycheck? It’s helpful to know your triggers to spending your hard-earned cash.
- Social Media: If you find you spend money while scrolling through Instagram or other social media limit usage, remove apps from your phone, or charge your phone away from your bed or nightstand. Remember that social media has a purpose, to get you to buy things. If you’re on social media and have the urge to buy, close the app, take a deep breath, and count to 10.
- Build a Budget: Here’s the B-word again. If you don’t track where your money is going, you’ll never control it. Building a budget doesn’t have to be painful. With award-winning apps available, it’s almost painless.
- Delete Credit Card Information: Delete all pre-populated credit card information from the online places where you shop the most. Remove apps from the sites you spend the most on, such as eBay, Etsy, or Amazon.
- Inbox Clean Up: Unsubscribe to all shopping/eCommerce newsletters. Eliminate tempting offers and headlines right at the start.
4. Change Spending Habits
When moving to a debt-free life, you’ll need to change your spending habits. So often, we are not paying attention when we're out shopping. We only needed toothpaste and a gallon of milk but left with a shopping cart of clothes and toys. Shopping with a goal in mind is helpful to keep on track. List-making is another way to bring mindfulness into your shopping experience.
Additional ways to change your spending habits include:
- Eating In: If you eat out a lot, cut back to twice a week or less. Try to find ways to make dining at home fun.
- 48-Hour Rule: If you see something that you want to buy, wait 48 hours. Waiting allows you to think if you need the item.
- Grocery Shopping: Start menu planning for the week and make a detailed shopping list. If possible, don’t shop with the kids. Online grocery shopping is an excellent way to keep you out of the store and your cupboards stocked.
- Retail Therapy: Don’t use shopping as a way to relax. When we are out with friends who love to shop, we often engage in impulse buying and buy things we don’t need. If you use retail therapy to connect with friends, find another way.
5. Credit Consolidation
If you feel like your debt continues to be unmanageable no matter what you do, debt consolidation may be a good option. Debt consolidation combines all your credit card and unsecured debt into one payment—no more worrying about multiple due dates from different creditors. All qualifying debts are put into one manageable monthly payment with a debt consolidation plan. Consumers can consolidate unsecured personal loans, medical bills, and credit card debt. It’s essential to obtain a lower interest rate on a debt consolidation loan. There are two types of debt consolidation loans:
- Credit Card Balance Transfer: Good for those with a good or high credit score.
- Fixed-rate Debt Consolidation Loan: Better for those with fair or lower credit scores.
Individual circumstances vary, but you may pay off your debt through consolidation in 24-60 months. Credit unions may offer lower rates on debt consolidation loans and help you pay down higher-interest debt faster.
If you choose debt consolidation, it’s crucial to maintain your budget and monitor your spending habits.
6. Avoid Payday Loans
One type of loan to avoid is the payday loan. Considered a short-term loan with a low dollar amount, it has exorbitantly high-interest rates, some as high as 400%. Loans must be paid back within the next payday, or additional fees and interest will accrue. Due to the predatory lending practices of many payday lenders, they are illegal in some states. Tip: Credit unions offer better options for consumers and may offer better alternatives.
7. Increase Income - Side Hustle Ideas
The side hustle, everyone is doing it, or so it seems. Side hustles can be a great way to bring in extra cash. From teaching English online, selling on Etsy or eBay, to renting out a room in your home. Here is just a sample of the hundreds of ways to earn extra income:
- Sell refurbished furniture
- Rent out a parking space
- Teach music lessons
- Write an eBook
- Mow lawns or pick up pet waste
- Baby or pet sit
- Sew or alter clothes
- Write resumes
- Teach your hobby (yoga, sewing, knitting, golf, etc.)
- Donate plasma
- Become a product tester
Many side jobs can be done at home, online, or in your neighborhood – there’s bound to be one that fits your personality, schedule, and situation.
8. Financial Education
Many Americans don’t understand how interest works or what inflation is. Good news, it’s never too late to learn about finances, how credit works, investments, and debt management. Financial literacy means you’ll know what it takes to avoid debt in the future and stay on track to a debt-free life. Credit unions are well known for delivering high-quality financial education to members. Education can include in-person workshops, online programs, presentations, and seminars. A sampling of topics:
- Finance Higher Education
- Home Ownership
- Manage Debt
- Credit Cards
- What is Compound Interest
- Identity Protection
- Stock Market and Investing
- Medicare Options
- Student Loan Strategies
Topics and subjects are for various ages, from teens to adults. Find a local credit union and see how to improve your financial literacy.
9. Maintain a Debt Free Life
Debt relief is stress relief. It’s that simple, but living a debt-free life is not easy. We are inundated with the temptation to spend money almost every second of the day. But, with thought and consideration, you’ve recognized what your triggers are, you created and updated your budget, classes and workshops were completed. You put in the hard work and now are debt-free. Congratulations! Know that your work doesn’t stop here. You’ll need to stay in the habit of questioning purchases, avoid impulse buying. Maybe keep at your side hustle to build your emergency account. When living a debt-free life, remember it’s a long-term strategy. A few ways to keep your life debt-free:
- Buy a used car over a new
- Pay off credit card transactions immediately
- Build an emergency fund
- Rent over homeownership
- Avoid student loan debt
- Start an automatic savings plan
10. Find a Financial Partner
Any change we undertake from losing 10 pounds to paying off debt takes dedication, discipline, and commitment. Remember, with every step you make towards your goal, you’re winning. Sometimes we fall short and overspend – and that’s okay. It happens; we’re human, after all. If you slip up, be kind to yourself and get back on track.
It helps to have a partner that can guide you through the ups and downs of becoming debt-free. Credit unions partner with you and can provide a personal guide to help you achieve your financial goals. Find one in your area and get started on a debt-free life.
Further Resources on the How to Pay Off Debts
Here are some additional resources on how to pay off debts:
- Bankrate: This article offers strategies and tips on paying off debt.
- Credit Karma: Offers a Debt Repayment Calculator to help determine how long it could take to pay off your debts.
- Federal Trade Commission (FTC): This article gives some great consumer insights into getting out of debt.