Nearly everyone has some kind of debt, and it can be intimidating.
It can also be financially crippling and cause immense stress. But remember, not all debt is “bad.” Some debts are even considered “good,” and can work to your advantage. Whatever kind of debt you have, be sure to manage it smartly. If done correctly, managing debt can open new doors and opportunities at more affordable premiums. Identifying your good vs. bad debt and deciding how to tackle it strategically is a core part of any sound financial plan.1
Before you can repay your debt, you need to organize it and get a clear picture of what you owe and how you can approach it. Here are some steps to get you started:
Define your budget.
How much money do you have to spend each month and where does your debt factor in? Consider what you need for your essential bills (rent/mortgage, utilities, food, insurance) and how much cash you have to put toward your debt.2,3,4 Use our net worth calculator to get an idea of where your finances stand.
Identify all your debt and capture it in one place.
Make a list: write down the debts you have, how long you’ll need to repay them, what types of debt they are (e.g., mortgage, credit card, student loan, etc.), the interest rates you’re accruing and who gets paid back when.2,3,4 You can gauge how long paying off your debt might take by using our calculators.
Consider any lifestyle changes you might be able to make.
These changes don’t need to be complicated. For instance, are you willing to switch to generic brands? Can you trade your car for public transportation? Could you pick up extra shifts at work or get a side job? Think about the ways in which you could potentially cut back on spending and put more money toward your debt.
Make a plan
After you’ve organized your debt and have a clear picture of your priorities, you’ll want to choose a repayment method that fits with your goals, comfort and lifestyle. There are three commonly used debt-repayment plans—the avalanche, snowball and consolidation methods.5
With this method, you make minimum payments on all outstanding debt and use all remaining money earmarked for debt to pay up on your bill with the highest interest rate. For example, if you have a student-loan payment with 6% interest, a credit-card payment with 18% interest and a car payment with 7% interest, you’d pay each monthly bill and use any leftover funds to pay a little extra on your credit card. Your main goal with this method is to save the most money possible on interest payments. When the debt with the highest interest is paid off, you move on to the next-highest.5
Similar to the avalanche method, the snowball method is focused on accelerating your payments. With the snowball, you focus on the smallest debt first. So, if you have three credit cards with balances of $500, $1,000 and $1,500, you’d pay the minimum balance on each and put whatever funds you have left toward the $500 debt. When that’s paid off, you put all the money you were paying toward it to the next-lowest balance.5
This route involves capturing all your debt under a single, lower-interest loan with one monthly payment. This will simplify paying off your debt and might be a great option to consider if you feel confident that you can manage your spending and keep working toward your goal.
Each of these methods are effective and will depend largely on your personal spending habits and your determination. Just be sure to pick a plan that you feel confident sticking with until you conquer your debt.
Stay on track
Try to think about paying off debt as a bigger part of your overall financial health. That means keeping track of your spending and other bills while finding smart ways to chip away at what you owe. The best thing you can do for yourself while attempting to tackle your debt is to stay focused and committed. Finding ways to cut costs from your day-to-day life or supplement your income will help enormously and get you to your debt-free life faster.6 You can start right away by looking at our payoff and savings calculators and figuring out what kind of payments you can manage while staying on track with your other financial goals. And don’t forget, we’re always here to help any time you need us.