Getting out of debt is top of mind for achieving financial independence. Although it may seem difficult to achieve, a clear plan and strategy for eliminating your debt can be extremely effective. These tips are a great place to start when trying to reduce your debt.
Make a list of all your debt
Identify the total amount you owe, minimum monthly payment, and the interest rate for each debt you own. Outlining these figures is a great starting point to making a plan for reducing them. It will also help you identify which debts should be most urgently paid off and which can be help for a little longer.
Review your budget
Once you’ve made a list of all your debts, review your budget to determine how much available cash you have to pay them off. You should prioritize paying off debt before allocating money to non-essential purchases.
Create a debt-repayment plan
First, choose a timeframe that you’d like to stick to and create a repayment plan that adheres to it. Determine which debts should be paid off first based on factors such as high interest rates or lowest balances. Consider using the debt snowball or debt avalanche method to create your plan.
Debt snowball method
The debt snowball method involves paying as much as you can each month towards your debt with the smallest balance. At the same time, make the minimum payment towards all of your other debts. Once you have paid off the smallest debt, move on to the next smallest and continue this process until you have paid off everything.
Debt avalanche method
The debt avalanche method is very similar to the debt snowball method. However, it involves paying off the highest interest rate debt first, followed by the next highest and so on.
Consider debt consolidation
Another option to consider in consolidating your debts into a single loan. This will allow you to pay off everything in just one monthly payment, which can be lower than each previous payment combined. However, it could increase the length of your debt-repayment plan, so consider your financial goals and target timeline when following this strategy.
Avoid taking on more debt
Finally, although it may seem intuitive, it’s important to avoid taking on more debt while trying to repay existing debt. One strategy to help with this is to continue building an emergency fund while paying off existing debt. This will help you avoid having to take out debt in the future for emergency expenses or unexpected situations.
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