Few people these days are completely debt-free. You might have loans, a mortgage, a balance on your credit cards and/or other debt obligations. These top 10 tips can help you trim down or eliminate that debt so you can build wealth and finally focus on your other financial goals.
8. Know the Difference Between Good Debt and Bad Debt
Some personal finance experts think all debt is bad, but that isn’t necessarily so. A loan can make all the difference between owning your own home or starting your own business — and losing those opportunities. Evaluate your debt to figure out what kind of debt you have so you can prioritise paying it down or using your money for other purposes. Two simple questions can help you decide if debt is “good” or “bad”: Is the debt temporary or a lifestyle? And is it worth it?
7. Pay Off Your Credit Cards with a Debt Consolidation Loan
You’ve probably received offers in the mail that promise to consolidate all your credit card debt into one low-interest bill — either through a debt consolidation loan or credit card balance transfers. Are they a good idea? While attractive, debt consolidation loans usually don’t make sense if the loan will cost you more over the long haul compared to paying your cards down faster.
6. Pay Off Your Mortgage Early
Your mortgage is likely the biggest loan you’ll ever take on, and some of us are quite eager to get rid of it as soon as possible. An early pay-off gives you peace of mind and financial freedom, but the low interest rate means it might make more sense to invest your money instead of paying off that debt early.
The experts don’t agree on this topic, but if you’d like to pay your mortgage early and save thousands of dollars in interest, make extra principal payments, such as twice monthly half payments of your mortgage bill.
5. Use the Debt Snowball Method to Tackle All Your Debt
With the snowball method of paying off debt, you apply the majority of your available money for debt repayment to one loan and minimum payments on the others. Then when the first loan is paid off, you tackle the next loan and so on until all you’re out of debt completely. This Excel spreadsheet can help you set up your snowball payment schedule.
If you’re not sure whether you should pay off your smallest balance first (for the motivational boost) or the one with the highest interest rate (which makes more financial sense), consider the “blizzard” payment method, which combines both strategies.
4. Negotiate Your Credit Card Interest Rate and Loan Amounts
A lower interest rate will help you pay off your credit card balances faster. All you have to do is ask and if you’re successful, you can save hundreds or thousands of dollars, depending on your credit card balance. You might be able to settle other debts if you can’t pay them back completely.
3. Pay Your Most Painful Debts First
All debt is sort of painful and can take an emotional toll on us. While there are lots of approaches to tackling debt, consider paying off the ones that have the biggest emotional impact on you.
For example, pay off that loan from your in-laws before your pay down your credit card. Also, personalising your debt could make you more motivated to pay it off more quickly: Remember what you bought with the debt in the first place to prevent you from getting into more debt or feel better when you pay it down.
2. Pay Down Debt and Invest at the Same Time
You want to get rid of your debt but you need an emergency fund and don’t want to lose out on the power of compounding to help with your retirement savings. It doesn’t have to be an either/or situation. You can pay down debt and invest at the same time.
Perhaps prioritise your most expensive debts (ones with high interest rates) and save some money as well. Budget for an emergency fund, debt and retirement. This hybrid approach appeals to our emotional needs while also meeting our financial goals. As we mentioned in our step-by-step guide to getting out of debt, you might be able to find extra money (say, from selling crap you don’t need) to throw at your debt or add to your savings.
1. Stop Adding to Your Debt
Paying off your credit cards is the best financial return on your money if your cards have high interest rates, but it won’t really help to start paying down your debt if you’re only going to keep the habits that might’ve made you accumulate it in the first place.
Some people switch to a cash-only policy to stay debt-free. Whatever you do, make sure you have a plan for what you’re going to do with the money you’ll free up once you pay off your debt, such as setting up automatic payments to your savings. Give your money a purpose, avoid the most common mistakes that keep us in debt.