7 Tips for Paying Down Debt

Paying down debt should be a high priority for everyone. Some of the worst debt you can have comes in the form of unsecured debt. Things like personal loans, credit cards, or payday loans. These types of debt aren’t tied to an asset, like a house or car, so the interest rate is much higher – resulting in more money coming out of your pocket. While unsecured, or high-interest, debt is some of the worst you can have, all debt should be eliminated as quickly as possible.

Since almost all forms of debt come with interest, you are basically paying to use that debt. You will continue to pay for that debt until it is paid off completely. While your mortgage or student loans may have low interest rates, they should still be on your radar for paying them off. The CGS Team is sharing 7 tips to keep in mind when you start the process of paying down debt, any kind of debt.

#1 Know Your Numbers

If your top financial focus is paying down debt, you have to know your numbers. You NEED a budget. You need to educate yourself on your income, expenses and non-necessary spending patterns. When you are knowledgeable about your own numbers, you can start making adjustments to help you put more towards your debt payments.

At minimum, your income should cover all of your living expenses. If it doesn’t, it’s going to be hard to stop using debt to get by. Work on bringing in more money, or lowering your expenses. If all of your income is allocated to your expenses and you have money left over, think through the best way to spend it. Are there things you can give up (like going out to eat, or getting your hair done) for a short amount of time. Does that extra amount factor in savings? Get very familiar with your numbers so you can determine a realistic amount to put towards debt.

#2 Always Pay More than the Minimum

Have you ever read through your credit card statements in full? If so, you will see that there is a chart that specifies how different payment amounts can save you in interest over time. Typically, the chart specifies how long it will take and how much it will cost to pay off your card if you only make minimum payments. It also shows the same information for adding an extra $50 to your payment, and an extra $200. You will notice that the more you add to the minimum payment, the sooner your card will be paid off, and the less expensive interest will be.

There is an important lesson in this chart. The lesson is that paying the minimum payment only is not making much of a difference, and it’s costing you a lot more money over time. If you don’t believe me, just look at some of your debt statements. You will see the exact chart I’m talking about. Even if it’s only an extra $5 or $10, always make more than the minimum payment.

#3 Have a Small Emergency Fund at All Times

Whenever I work with clients to help them pay off their debt, the first step is making sure they have something saved for emergencies. This emergency fund doesn’t have to have the typical 3-6 months’ worth of expenses (although that certainly is welcomed), but it needs to have at least $1000. $1000 is a large enough number to cover a few small emergencies, but a small enough number to save in a short amount of time.

Imagine if you didn’t follow this tip. You are putting all of your extra money into your credit card debt, and then your car breaks down. You need $500 for a new transmission. What option do you have? You will likely resort to using your credit cards and wiping away all of the progress you had previously made. Talk about a motivation killer! Spare yourself the agony of always starting over and get a small emergency fund in place before vigorously paying down debt.

#4 Follow a Payoff Plan

Once my clients have a small emergency fund in place, I create a debt payoff plan for them. It’s very important to follow some form of plan, regardless of the debt repayment method you choose. Having a plan in front of you keeps you on track. You should be able to see what you need to pay each month to pay off your debt, and how long it will take you. Stick to the plan, and you have an end date.

Anything more you can contribute, outside of what your plan specifies, is only going to help your situation. Think about what inspires you to stay focused while paying off debt. Do you need small victories? If so, consider a debt payoff plan focusing on smaller balances first. Do you want a plan that will save you the most money? Focus on higher interest debt first.

#5 Be Careful with Balance Transfers

Balance transfers can be a great way to save some money on interest. If you have a credit card with a balance of $3000 at a 20% interest rate, transferring that balance to a credit card with a $5000 limit and a 0% promotional interest rate may be a good idea.

Where things get tricky and caution is warranted is when you balance transfer before you have a game plan (or an emergency fund). You don’t want to transfer your debt to another card, just to rack up the newly emptied card with a new balance. You also don’t want to open too many credit accounts at once, just to take advantage of balance transfer promotions. Too many account openings or credit report pulls could negatively affect your sore.

#6 Stop Using Credit

If you are serious about paying down debt, you need to stop using it! Put your credit cards in the freezer, include one-off purchases into your budget, and don’t buy things you don’t need. In order to stop using credit altogether and feel comfortable, you need to have that small emergency fund. You also need to remember why you can’t buy things you want so badly. Focus on the end goal. Besides, wouldn’t you feel a million times better buying something with your own money when you are completely out of debt?

#7 Link Any Payments to Your Debt Card or Bank Account

To help yourself stop using credit, unlink any automatic payments, online shopping sites, or subscriptions from your credit card. Anywhere that your credit card was used or could be used a form of payment needs to be removed. Replace all linked accounts with your debit card or bank account. If you can’t afford it with the money in your account, you probably don’t need it.

Don’t leave any stone un-turned, even if it is a hassle to switch everything. You would much rather see your credit card balance going down then to have to factor in an extra payment to cover a subscription cost. If you can’t remember what card is linked to what, do a quick sweep of your credit card statement. You will quickly pinpoint what subscriptions or bill payments are coming out.

Related: How to Tackle Your Debt Head On

Debt is draining. Debt is expensive. Debt needs to go! Put yourself in the best position to succeed financially by thinking through your debt and staying disciplined enough to pay it off. If you need guidance, accountability or the tools to succeed, don’t be afraid to reach out. Schedule a free consultation with me to see how we can get rid of your debt the fastest and most cost-effective way possible!

Do you have any tips for paying down debt? What types of debt do you have? Share your thoughts and experiences with debt by leaving a comment below.

-Raya
The CGS Team

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