The famous talk show host Dr. Phil often says, “You can’t fix what you don’t acknowledge.” While Dr. Phil isn’t exactly who you should turn to for financial advice—the wisdom here rings true.
It’s tempting to turn a blind eye toward your debt, especially when it feels overwhelming. But this strategy won’t serve you well. Instead, you should face your debt and find out exactly how much you owe.
If you have several credit accounts, you can calculate your total debt balance by:
Once you’ve calculated your total debt balance, you’ll know how much money you need to repay to become debt-free.
Another important metric you should familiarize yourself with is debt-to-income ratio (DTI). This ratio compares how much money you owe to the amount of money you earn.
To calculate your DTI, simply divide your monthly debt payments by your gross monthly income. After that, multiply the resulting number by 100% to transform it into a percentage.
The higher your DTI is, the longer it may take to pay off your debt. If you know this ahead of time, you can manage your timeline expectations. If your DTI is extremely high (over 50%), you may also want to consider credit counseling, a debt settlement program, or filing for bankruptcy (more on these strategies later on).
Juggling multiple debt accounts can become chaotic if you don’t have an organizational system in place. Luckily, there are many tools you can use to streamline your bill-paying process and create a debt management plan.
For example, you can create a customized digital spreadsheet on Excel or GoogleSheets. When you create this spreadsheet, make sure to include the following columns:
|Credit card #1||$4,400.00||13.00%||50.00||2|
|Auto loan #1||$3,200.00||9.81%||30.00||1|
|Auto loan #2||$5,000.00||12.00%||55.00||3|
|Student loan #1||$21,200.00||4.75%||262.12||5|
|Student loan #2||$9,500.00||6.80%||143.85||4|
As you make your debt payments throughout the month, indicate so on the spreadsheet. This will help you ensure that you make all of your debt payments each month on time.
Budgeting may sound like a drag, but it’s actually the stepping stone between you and financial freedom. After all, a budget is simply a plan for how you decide to spend your money each month. If you follow your budget, you’ll be much less likely to come out short when it’s time to pay the bills.
Here’s how you can make a realistic budget:
Make sure to include all of your income, including any odd jobs, alimony, child support, interest, or rental income. If your income varies month-to-month, simply use an average.
Next, list out all of your monthly expenses. Separate them into “essential” and “non-essential” categories. After that, add them both up to arrive at the total amount.
Finally, it’s time to face the moment of truth. If you’re in debt, chances are you spend more than you earn each month. If so, you’ll need to cut some costs going forward. The costs you decide to cut are up to you. Just make sure you create enough room in your budget for your debt payments. As you spend throughout the month, track your expenses with a bill tracking app to ensure you stay on budget.
Living in alignment with your values is important in all areas of your life, finances included.
For example, let’s say your greatest values are family and health. While leasing a fancy car, shopping every weekend, and going out for indulgent dinners gives you some joy, you may have to work overtime to afford these luxury items. In turn, you may have fewer opportunities to bond as a family and the stress of working so hard may take a toll on your health. As you can see, these spending habits aren’t actually aligned with your values.
Once you discover that your spending is out of alignment with your values, it becomes a lot easier to say no to unnecessary purchases and help your financial situation.
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It’s also important to reflect on what got you into debt in the first place. As you examine your past financial habits, ask yourself if you:
Once you pinpoint what got you into debt, you can prevent yourself from making the same mistakes going forward.
If you want to stay in good standing with your creditors and avoid late fees, you must make your minimum debt payments each month. But you might want to do more than that.
To pay off your debt as quickly as possible, put as much extra income toward your debt payments each month as you can afford.
While you may have to live a little more frugally to accomplish this goal, it will be well worth it—you’ll get out of debt faster and pay less interest overall.
While spending less and sticking to your budget can help you get out of debt, increasing your income can also make a big difference. These days, there are many flexible side hustle ideas that can bring in extra cash.
Here are a few possibilities:
In addition to these side hustles, you can ask your boss for a raise, look for a higher-paying position, or work overtime to enhance your earnings. With more money flowing in, you’ll be able to make larger debt payments each month with ease.
Many financial experts recommend using the snowball method to repay your debt. With this method, you approach your debt like you’re building a snowball—you start slow and gradually build momentum over time.
The magic of the snowball method has to do with the psychology behind it. Sticking to a debt repayment plan is a lot easier when you’re motivated and optimistic about the process. With the snowball method, you get to enjoy quick wins at the start of your debt repayment journey.
Due to this rewarding sense of accomplishment, you’ll be more likely to continue with the process, even when the larger debt balances take longer to pay off.
When it comes to paying off debt, working smart is just as important as working hard. In addition to making larger debt payments, you can also find ways to reduce your interest rate or lower your remaining debt balance through negotiation.
Here are a few valuable strategies you might want to explore:
A balance transfer is a type of credit card transaction where you transfer debt from one credit card to another. Usually, balance transfer credit cards come with a 0% APR introductory period. During this time (usually 6 to 24 months), you can pay off your debt interest-free. If you can pay off all of your debt within this time frame, you can save a ton of money on interest.
It’s important to note that your credit card’s APR will return to its standard rate once the introductory period is over. You may also have to pay a balance transfer fee of 3% to 5% of your total transfer amount. Thus, you should do the math to find out if a balance transfer is worthwhile.
If you’re unhappy with your current interest rates or minimum payment amounts, you can refinance your loan to adjust the terms. Refinancing is the process of paying off an existing loan with a new loan.
Your new loan will come with a brand new set of terms. Ideally, you’ll want to find a new loan that offers a lower interest rate, fewer fees, or a better monthly payment amount (depending on your reason for refinancing).
Just keep in mind that refinancing isn’t always the right decision. If you can’t qualify for better terms, you’re better off sticking with your existing loan. This may be the case if interest rates have increased or if your credit score has gone down since you took out the original loan.
If you need help getting a handle on your debt, a non-profit credit counseling agency can help. Credit counselors can give you guidance on how to best repay your debt. They also offer educational workshops and budgeting assistance.
In some instances, your credit counselor may even negotiate with your creditors to reduce your interest rates or monthly payment amounts. If they do, you’ll start paying your credit counselor directly and they’ll pay your creditors each month on your behalf.
If you’re drowning in debt, a debt settlement program can help you reduce your overall debt balance. Once you enroll in this type of program, a third-party company will negotiate with your lenders to reduce your remaining balance.
However, it’s important to know that debt settlement programs can harm your credit score, since they indicate that you couldn’t repay your debts in full. Some programs also come with costly fees. Your creditors may refuse to negotiate, making this option a risky choice. For these reasons, debt settlement programs should only be used as a last resort.
Have you ever had a bill due, but you couldn’t pay it on time because your paycheck hadn’t come in yet? In these situations, you can borrow money against your upcoming paycheck with a cash advance. This money will enable you to pay your debts on time. After that, you can repay the cash advance once you get paid yourself.
While you usually don’t have to pay interest on the money you borrow, you may have to pay a fee. Thus, cash advances should only be used when necessary.
As with all new undertakings, your motivation may peak at the beginning of your debt repayment journey and wane as time goes on. As you lose that initial jolt of motivation, you may stray from your budget or give up on your debt-free goals altogether.
To prevent this from happening, schedule a time to review your finances and debt balances on a regular basis. You can check in once a day, once a week, or bi-weekly—the frequency is totally up to you.
By monitoring your progress consistently, you’ll be more likely to stick to your plan and make any necessary adjustments along the way.
As you can see, a debt-free life can be yours if you take the right steps. Once you’ve paid off your debt, you’ll be able to save, invest, and enjoy greater financial freedom.
Now that you know it’s possible, why not start your journey today? With Possible Finance’s payday loan alternative, you can borrow up to $500 to start paying down your most immediate debt.
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Consumer Financial Protection Bureau. What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?
Consumer Financial Protection Bureau. Credit cards key terms.
Credit Card Insider. How Credit Card Balance Transfers Work.
Consumer Financial Protection Bureau. What is credit counseling?
Consumer Financial Protection Bureau. What are debt settlement/debt relief services and should I use them?