Your Debt is Dragging You Down

Your Debt is Dragging You Down

Debt may not seem like a big deal, but having debt deeply affects your lifestyle.  Even small amounts of debt cause people to lose sleep, weigh on the mind, and can impact your relationships. Large debts can lead to large monthly payments which can lead to even more debt.  Job loss can wipe out a debt-laden family.  Even if you only have a small amount of debt, it needs to be addressed now before it becomes a big problem. 

You MUST take control of your debt and pay it off as soon as possible.  Otherwise, you are literally pouring money down the drain.  Think about how much money you are paying in interest.  You are cheating yourself out of the lifestyle you deserve.  This is money that could be working for YOU instead of for the banks.

Aim to cut spending everywhere possible and stop digging yourself further into debt.  Cut the morning latte, cut going out to eat, cut entertainment and host at home instead, cut traveling or at least make sure it’s a frugal trip, cut everything you can and knock your debt out.  Use every penny you can find to pay the debt off and free yourself of the burden.  Every aspect of your life will feel better when the debt is gone, and you’ll be able to enjoy luxuries so much more later on knowing you aren’t paying interest on them.  This is an awesome opportunity to develop frugal habits and make permanent life changes, too.

Sometimes emergencies happen that throw a curve-ball at your finances.  The important part is to take control and push your way through until you can knock the debt out.  The best way to protect yourself against this is an emergency fund of three to six months living expenses, or a year if you are self-employed.  After paying off all your debt, focus on building up your emergency fund.

Taking Control

Figure out exactly what you owe.  List out the balance for every credit card bill, medical bill, auto or student loan, and even your mortgage.  Also figure out exactly what the monthly payments are.

Note the type of debt.  Consumer debts (credit cards, medical bills, payday loans, personal loans) should be top priority to pay off because of variable interest rates.  Student loans and auto loans should be next priority, depending on interest rates and whether or not they are fixed.  Mortgages should be carefully considered last for repayment, based on interest rate, term length, and payment.

Make a plan to target the debt with all the cash you are no longer spending, and stick with it.  If you have a partner or family, get them all on board.

Debt Payoff Methods

The Snowball Method – Target your debt with your lowest balances first.  Make minimum payments on all your debt except for the account with the lowest balance, in which you should funnel every extra penny.  When this is paid off, all the extra money gets funneled into the second lowest balance, and so on.  This method will help you secure early wins, so it can help motivate you to keep going in your debt repayment.

The Avalanche Method – Target your debt with your highest interest rate first.  This is more effective because the interest rate dictates how fast the debt will grow.  Make minimum payments on all your debt except for the account with the highest interest rate, in which you should funnel every extra penny.  This method saves you more money in the long run.

Depending on your personality and your debt type, the amount saved between the avalanche method and the snowball method can be negligible (it depends on the actual balance and interest rates).  Also, depending on the balance, it may be a while before you have an early win, and it may not feel as motivating.  If you need early wins to keep going and stay on track (or an early win could help motivate you to cut your spending further), use the Snowball Method.

You Might Need to Make Big Changes

There are two ways to pay off debt faster: earn more money, or cut your spending.  The easiest way is to cut out the things you don’t need.  If you aren’t able to pay off things or free up more cash flow because of all the money going out each month, but you feel like you’ve cut everything you can, it might be time to make a big change in your lifestyle.  Could you sell your house and downsize or rent instead?  Could you trade in your car for a cheaper model, or get rid of it entirely by moving closer to work or finding a new job closer to you?  If you don’t want to make any changes, it might be time to negotiate a higher salary, find a new job, or start a side hustle.  The one thing you can’t do: throw up your hands and ignore the problem.  It’s not just going away!

Extra Payoff Tips

Make a payment as soon as you get your paycheck.  That way, the money is no longer in your bank account to tempt you.  (I actually pay off all my credit cards in full twice a month, which also helps keep my total spending in check.)

If a credit card is tempting you to spend, and you don’t need it anymore, you can cut it up but still leave the account open to help with your credit history.  (You could always call for a replacement if needed.)  I’ve seen people literally put their credit cards in a bowl of water in the freezer to help them stop using the cards.  You should not close the account unless it is paid off because it will throw off your credit utilization ratio which lowers your credit score.

Every time you “find” extra money – a bonus, a gift, an old bank account, or even change on the street (count your pennies, and your dollars will count themselves!) – put it toward the debts.  Use them to help knock the debt out sooner and free yourself of the burden.  I once brought $100 in found loose change to the bank to apply toward my auto loan.

Find a side hustle – driving for Uber, hosting on AirBnB, lawn mowing, baby/pet/house sitting, using your writing or craft skills, etc. – and direct the extra cash flow to your debts.  You might find that you enjoy it and want to keep doing it even after the debts are paid off, furthering you on the journey to financial independence.  I’ve enjoyed house hacking, which allowed me to pay off my 401k loan.

Clean out your space and sell anything you don’t need.  (Give away the rest – no use holding on!)  Go through every single inch.  You will clean out clutter which will (1) free up mental space, (2) free up time that was used to care for the items, (3) allow you to see exactly what you have so that you don’t buy a second later, (4) bring in money on things you don’t need that can be used to pay off debts which betters your life, and (5) it prevents you from going out to spend more money because cleaning keeps you at home.  If you have a storage unit, it means you have too much stuff and should be selling it all.  You can always repurchase anything.

Look into debt consolidation.  Sometimes it can help.  Do NOT pay for services, though.  Take control yourself to create repayment plans.  You can do it!

Not All Debt is “Bad Debt”

I fully support holding a low interest rate mortgage to term, because I feel that money can be better invested elsewhere when the interest rate is really low.  However, if you’re not actually investing the money elsewhere, it’s not doing you any good to hold onto the mortgage and you should direct the money toward paying it off.

I also support 0% financing as a leveraging tool as long as it is paid off within the terms and is for a good reason, either a need or something that adds real value to your life.

However, each piece of debt you take on is one extra monthly payment, and you must be sure that whatever it is used for adds a real value to your life.

For more thoughts on conquering debt…

I recommend a google search.  There are many websites devoted to debt management and repayment.  There are many blogs written by people who have defeated massive piles of debt.

Once you pay off all your debts, you can start working toward financial independence and make your money work for you.  That’s when the fun really starts.

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