Making the decision to take control of your finances is empowering. Let’s start you off right with keys to successfully paying off your debts.
Know what you owe, who you owe it to, and when you owe it by. Pull together all your loans, bills, and fixed expenses. Make note of interest rates and monthly payments, then calculate the total balance of your debt.
You should also list all your expenses and compare that to your income. This will give you an idea of how much money you can afford to put towards debt every month. You can also use a to make a basic budget.
With everything in one place, you’re now ready to start choosing a debt repayment strategy.
Different approaches yield different results. What works for one person may not work for another. The important part is that you’re consistently making your payments to avoid late fees while paying down the principal over time. This requires paying more than the minimum.
When you make a payment, it goes towards interest first. If the principal doesn’t go down, you wind up in a cycle of paying interest without ever reducing your debt load.
If you find yourself in a situation where you having trouble keeping track or keeping up with payments, consider a debt consolidation loan to reduce the number of minimum payments you need to make each month, or contact a Licensed Insolvency Trustee for debt help.
Once you’re in a place where you can start to pay more than just the minimum payment on one of your debts, here are some strategies for how to get out of debt:
This strategy is arguably the fastest, but it can be difficult.
You put a large portion of your monthly budget towards debt repayment, paying all your minimums first, and the rest of the money towards the debt with the highest interest rate. Once that debt is repaid, you move on to the debt with the next highest interest rate and so on until all your debts are gone.
It’s likely that the first debt you target will take the longest to pay off*, so you might not see a reward in the short term. Stick with it to make it worthwhile. If you do, the debt avalanche becomes easier and faster after every debt.
* Compound interest is the reason some debts can take decades to pay off. Targeting the highest interest rate prevents that debt from accumulating. It can also minimize the amount you pay overall.
If you’re motivated by consistent progress, this approach might work for you. It’s based on building momentum over time. You start by putting your monthly debt repayment budget towards minimum payments, then paying everything else towards the smallest overall debt.
In this strategy, rather than looking at interest, you focus entirely on the size of the balance. You start off with a feeling of accomplishment because you tackle the smallest debts first. As you move onto larger and larger debts, you’ve already built debt repayment habits and learned what works for you. Plus, whenever you repay a debt, everything you were putting towards the minimum monthly payment can now go towards paying off your next one.
The main downside to the debt snowball is the overall time and money spent will likely be higher than targeting your high interest loans. But this might be a worthwhile trade-off if the momentum keeps you motivated.
This method is comparable with any other technique. Based on accumulation, it’s designed to increase the amount of money you’re putting towards your debts. Essentially, you’re using every tiny bit of money you find, save, or earn outside of your normal budget to put towards your debt.
It’s all going to increase the size of your next debt payment. Whether you choose to collect it in a jar or bank account is up to you, but what’s important is dedicating those dollars to debt as soon as they become available.
When you don’t have the money to keep up with a debt repayment strategy, rethink your budget.
Start by factoring in how much you need per month for the absolute essentials, then before moving onto anything else, add up exactly how much you need to make all your minimum debt payments. Now add a little extra to pay down the principal on one of your debts.
Start allotting whatever monthly income is left towards non-essentials. You’re building your budget around debt repayment. It may require some big cutbacks or temporary sacrifices, but it may also highlight unnecessary spending.
Clearing a debt will free up cash for bringing back something you cut out or paying back the next debt faster. If you need help doing it, consider debt counselling to learn how to tailor a budget to your needs.
Between inflation lowering the value of every dollar and supply chain disruptions raising the price of goods and services, the cost of living is rising. How does this factor into you getting out of debt?
An economic downturn makes budgets tighter, but also more critical. When every dollar matters, you need to keep track of where your money is going to help you make difficult financial decisions. If you can, now is the time to start an emergency fund that can protect your budget from unwelcome expenses.
Your biggest takeaway should be that in a tough economy, the less debt you have, the more you can focus on protecting yourself and your family from rising costs. This makes it more crucial than ever to have a designated debt repayment strategy.
If you’re struggling to keep up with your debts, schedule your free consultation with .
Call 1-855-BDO-Debt or fill out the form below. We’ll assess your finances and explore all debt-relief options available to you.
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