You know that feeling when you miss being around your best friend(s)? Yep, that’s not the feeling we have when we say goodbye to our debt. There are thousands of people in the United States, and millions around the world who have some amount of debt. This could be as small as owing your friend or relative $20 bucks to being in student loan, car loan, or credit card debt. Even having a mortgage is considered debt! Is this sounding eerily familiar? It’s pretty common to hear of people with ALL of these types of debt – it could even be you. Debt is a stressful topic for most, so don’t feel embarrassed friend! Take control of your debt and get some peace of mind with these tips to help you pay back your debt efficiently.
Determine Top Priorities
While paying off all debt is important, there are some debts that should be a higher priority than others. Take a look at interest rates; the higher the interest rate, the more interest you are paying – yuck! Save yourself some money in the long run by paying off the debt with the highest interest rate first.
More than the Minimum
Once you identify the debt with the highest interest rate, determine its minimum monthly payment (it’s usually stated on your bill or statement). Remember, you will need to pay more than the minimum in order to pay off your debt in a timely manner. Making minimum monthly payments makes it harder to pay down your principal amount since this minimum payment is typically applied to interest first. If you feel really overwhelmed by your debt, try creating a budget. Using a spreadsheet (or good ol’ pencil and paper) can help you track your expenses and identify areas where you can improve your spending habits.
Use the Snowball Effect
Unfortunately, the snowball effect isn’t about having a fun snowball fight with your friends. It’s not a short-term fix to paying off debt either. To get started, first organize your debts from highest interest rate to lowest. You will then start paying more than the minimum on the debt at the top of the list, and continue to pay the minimum for the rest of your debts.
In the example above, the credit card has the highest interest rate. Let’s say this person had $100 leftover from their budget; they would then apply the $100 to the $25 minimum credit card payment. So, if you’re still following, that’s a $125 credit card payment being made each month until the debt is paid off!
Once the credit card is paid off, the student loan will be paid next by making its minimum payment amount PLUS the monthly payment that was being made for the credit card balance; that’s $125 plus $280 for a total monthly student loan payment of $405. So lastly, they’ll be making a $645 car payment ($405 plus $240 minimum car payment). Behold “the snowball effect”! Continue this process until all debts are paid off.
Be Mindful of Your Spending
We’ve all heard it before – "be wise about how you spend your money." Amongst paying for other expenses, paying off your debt can quickly become stressful. We’re all human! Don’t be intimidated by what you just read, but do consider tackling your debt! Knowing how to repay debt should be a skill that people of all ages learn sooner rather than later. If you want to be proactive in handling your debt, but you’re new to budgeting, find ways to save money first. Saving money can help you rack up a bit more money to start paying off your debt today!