New Approaches to Reducing or Eliminating Debt

New Approaches to Reducing or Eliminating Debt

There’s no better way to kick off a new year than with a clear, intentional plan to consolidate, manage, and eliminate debt! Whether your goal is to reduce balances or pay off debt entirely, taking steady steps now can help you create real, debt-busting momentum.

Tracking monthly spending shows exactly where your money is going, making it easier to cut extra costs and put that money toward paying off debt.

Steps to Eliminating Debt

The first step to eliminating debt is to understand your expenses, primarily how your money is being spent. The simplest way to do this – track every dollar spent. Yes, this will be a tedious task, but worth it in the end! You should use an Excel spreadsheet or one of the numerous software programs available today. Begin by saving receipts for cash transactions and reviewing your checking account daily – taking a bird’s-eye view of your spending can be eye-opening. For example, even small, everyday purchases add up faster than you might expect. That $3 cup of coffee each day doesn’t feel like much in the moment, but over the course of a year, it turns into a $1,000+ coffee habit!

In just a few months, you will have a much clearer, more accurate picture of your personal spending. Of course, unexpected expenses are unavoidable, and daily costs add up. Other expenses, such as rent or mortgage, insurance premiums, and utilities, are predictable, often falling on the same day every month, so those are easy to project out.

The key to paying down debt is to do it wisely, which means discipline and structure. At its most basic, that means paying on time and paying more than the minimum. Luckily, there are solutions and processes that make the admirable goal of paying off debt achievable by almost anyone.

Debt Consolidation Options

There are several options and methods available today to help borrowers effectively payoff debt.

Debt consolidation loans are loans that can be used to combine multiple debts into one single loan. These loans may be advantageous for you if you are in debt, as they generally offer lower interest rates than credit cards and are often relatively easy to obtain for qualified borrowers. In some cases, the lending institution may pay creditors directly, rather than issuing the funds to the borrower. These loans will have a scheduled monthly payment with a final payoff debt, so the goal of debt repayment is clearly structured.

Low-interest credit cards, or even credit cards with a 0% interest balance transfer promotion, are another option open to you for paying off debt. This allows you to move debt from a high-interest credit card onto one of these cards so that you have the opportunity to pay down the balance without more interest piling up each month. You can save a significant amount of money with this method, but only if you have a clear payoff plan. The introductory period of a credit card typically spans 12-18 months. Once that period ends, the interest rate on the credit card can jump up sharply. So if the balance is not paid off, you could end up paying just as much – or more – than you were before.

A home equity loan or line of credit may be an option, too. A home equity loan provides a lump sum at a fixed rate. Alternatively, an equity line of credit is an open line of credit with a variable interest rate for the homeowner to use as they will. Both are considered second mortgages on a home. If the borrower’s credit score is strong and there is enough equity, it is a viable option for consolidating and paying debt.

Payment Strategies

If the options above are not viable for your situation, there are two simple strategies you can use that are effective – the Snowball method and the Avalanche method. Neither method is better than the other, and borrowers can adapt them to meet their specific situation and motivational drives.

The Snowball method means focusing on the smallest balance first. Make the minimum payments on all other debts and put extra money towards the smallest one. Once the smallest balance is paid off, move on to the next smallest one, “snowballing” your payments as you go. This is an excellent method that builds momentum and motivation by providing you with quick wins, which can be highly satisfying and effective for keeping you on track.

The Avalanche method is a strategy for paying off debt by focusing on minimizing interest costs. Make the minimum payments on all debts and put extra money toward the debt with the highest interest rate. Once that debt is cleared, move to the balance with the next highest-interest rate. This method will save you the most money in interest over time, but it can take longer to see that first payoff win compared to the Snowball method. For some, seeing large, scary debt taken off their books is extremely rewarding and can be encouragement enough to keep going.

Graphic From Wells Fargo

Snowball Method

1. Organize debt, including totals owed, minimum monthly payments, and due dates.
2. List debts from smallest to largest.
3. Budget more than the minimum payment by determining how much extra can be paid toward the monthly minimum payment on the lowest debt, after paying the minimum on all the others.
4. When the smallest debt is paid, put that monthly payment, plus the extra budgeted, toward the next-smallest debt.

 Avalanche Method 

1. Organize debt, including totals owed, minimum monthly payments, and due dates.
2. List debts from highest to lowest, or from the highest interest rate to the lowest.
3. Budget more than the minimum payment by determining how much extra can be paid toward the monthly minimum payment on the largest total or highest interest rate debt, after paying the minimum on all the others.
4. When the largest and/or highest interest rate debt is paid, put that monthly payment, plus the extra budgeted, toward the next largest and/or highest interest rate debt.

And obviously…

Do not incur new debt! As much as possible, you should pay with cash, and stay in accordance with carefully documented expenditures, due dates, and balances. Any credit card used should be paid in full. Accruing debt is all too easy and getting out of it can be tough, but with a carefully structured plan in place, it can be rewarding – in every sense of the word!