Debt is the cancer of our society. I’m not talking about mortgage payments or student loans, which all add value to our lives. They offer lower interest rates and are considered ‘good debt’. What I’m referring to is credit card debt. This is a black hole of relentless struggling. It’s a serious issue with about 80% of Americans caught in the vicious cycle of debt.
We are surrounded by the temptations of new shiny objects and expensive lifestyles, making it nearly impossible to resist. A new collection is being released and you have an extra $100 left on your credit card. What’s another $100 when your card is already nearly maxed out? That mentality will continue until you realize you can’t meet all the credit card payments and your credit score is dangerously low.
Climbing your way out of debt seems like an impossible task. I would know, since my wife and I were once over $70,000 in debt. Breaking your normal routines to cut back and find ways to save extra cash for payments can be especially tough. Some fantasize about cutting back to the extremes, removing cable, Netflix, eating only ramen for months and moving back in with your parents to tackle their debt. Others may choose to try to ignore it and go about their normal life acting oblivious to their growing mountain of debt. It’s important to find a balance so you’re on the right track but also maintain some form of freedom, otherwise it’s likely you will crash and go back to your old lifestyle.
Track all Finances
First, let’s start with one of the hardest things to do. Make a list of ALL expenses you have each month along with any income you bring in. Having a full picture of your finances lets you come up with the most accurate and efficient plan to help you succeed.
This lets you work on debt management for the long term, staying debt free going forward. You should be able to clearly see how much you earn exactly and how much you spend each month. Your spending should include both necessities like mortgage and bills and non-essentials, like monthly subscriptions and new clothes.
Create a Budget
Now that you know how much you earn and spend each month, it’s time to create a budget for every month going forward. I recommend doing this at the very least, once a month. Every month will bring with it different expenses so it’s important to plan ahead for them. Doing so will help you find areas to cut spending and increase the amount you pay towards debt.
If you were able to correctly track your finances from the last step, you should now have an idea of the trends in your spending. Knowing yourself and your partner will help you come up with a proper budget that is realistic. You want to make sure this budget can be done in the long term.
It’s not realistic to never eat out ever again, or to cancel Netflix, if that’s your only go-to entertainment. Cutting your habits out too extremely will result in failure. I know since I watch Netflix every single night it’s an expense I use and depend on. Otherwise I may be tempted to rent a movie or spend money elsewhere. Like I said, breaking some habits may result in extra spending elsewhere to accommodate. It’s sick, but it’s how most of our minds work. Mine included.
Set Some Money Aside
Creating a budget each month will now paint you a picture of how much money you can realistically dedicate to debt repayment. Remember to leave some money aside for emergencies and unplanned events. We can’t remember to cover everything and also can’t plan for everything. You can never anticipate a sudden car repair or emergency vet visit for your dog.
Dave Ramsey suggests to set aside $1000 into an emergency fund to keep you afloat incase something bad comes along. I agree with this since there is always some unplanned issue going on in our lives. I like to plan for Murphy’s Law; anything that can go wrong will go wrong. That way you planned ahead for what may come to be.
Debt Repayment Plan
You have a budget in place, an emergency fund set aside; it’s not time to start crushing that debt repayment. But first, you need a plan. I don’t recommend just picking one card at random and placing all your focus on that. There are two different methods I would suggest instead. The Snowball and the Avalanche Methods. If you have ever searched for paying off debt, I’m sure you came across these two.
Debt Snowball Method includes focusing on the card with the smallest amount due, while still paying the minimum on the rest of your credit cards. Once you paid off the credit card with the lowest amount, you move on to the next. This creates a snowball effect, taking the payment you made on the last card and adding it to the next. This is proven to help those who may have a hard time sticking with a plan. If you find success paying off one card, you’re more likely to stick with it and continue the debt repayment.
The Avalanche Method consists of focusing on the card with the highest amount and the highest interest rate. This method will save you the most money, but since you’re paying off the highest dollar amount, it will take longer to first see results. When I was starting my debt repayment, I started on this method, paying off my credit card with the highest amount and highest interest first, since it was unfortunately maxed out. I had earned a large chunk of money that month, so I could pay it all off in one go. It was a great feeling and even boosted my credit score by 70 points! What an awesome day.
Other Methods to Pay Off Debt
My wife and I were extremely focused and cut back on a lot of our spending to make this plan happen. Pooling all our resources together we were able to climb our way out of debt within half a year. For others, it may take even longer. If you want other ways to help speed this along try thinking outside the box.
You can call your credit card companies to negotiate a lower interest rate. I was able to do this for my second highest interest rate card. I was able to lower it significantly so it actually became one of my lowest interest rates. I did this after I paid off my biggest card in full and raised my credit score significantly. Having a decent credit score definitely worked in my favor.
Consolidating your debt is another option you can pursue. There are many loan companies you could pursue to combine all your debts into a single account with a lower interest rate. I highly recommend you do your research on this one and see if this is an option for you.
Finally, the last option is to find ways to increase your income and bring in more money. Whether this includes side hustles or asking for a raise, having some extra money will definitely shorten the length of time needed to pay down debt.
You have many options available to you as long as you remain focused and remember one important tip. You are not alone. Millennials alone have an average debt of over $75,000! It is much more common than you think and there is nothing to be embarrassed or intimidated about. When I was drowning in debt, I was far too embarrassed to even look at the amount I owed. That led to more issues and even more debt. As soon as I created a budget and stuck to it was I proud of the amount I paid down and became addicted to finish paying off the rest.
