Studies show that debt in the United States is over $14 trillion, with consumer debt just below $4.2 trillion. While some debt is better than other debt, like a mortgage, it's important to have debt reduction strategies in place. Reducing your debt, and therefore your monthly debt obligation, can help you live a more financially fulfilling life.
An Overview of Debt
When it comes to debt, you're not alone. Most Americans have some form of debt—credit card debt, student loans, and car loans, to name a few. To put it simply, debt is when you owe someone else money. Perhaps most responsible for this "debt epidemic" is the idea that it's normal to spend money you don't have.
Types of debt include:
- student loans
- credit cards
- medical debts
- home equity loans
- payday loans
- personal loans
- IRS and government debt
Other monthly payments, like utility bills, are normal monthly expenses. You're paying for a consistent service as you receive it. However, the way you pay these bills can quickly snowball into debt if you're not careful. Using credit cards for groceries and bills can quickly get out of hand.
So, What's Healthy Debt?
It's important to keep a healthy mindset around debt. Without that mindset, it's all too easy to get in over your head. However, not all debt is automatically bad. A mortgage, for example, is the type of debt that can be considered "good." It allows you to own a home that you have control over, while building equity.
Likewise, there is debt that may be justifiable in your personal economy. Having a small car payment for a reliable car may be better than having a car that constantly needs expensive repairs (which could cause you to go into debt). Or perhaps your dream career requires a degree, in which case you may have to take on student loans.
The most important thing is that you have a plan to pay down your debt.
5 Tips for Paying Down Debt
1. Pay More than the Minimum Payment
When you open a credit card, you're given a minimum payment that you have to pay each month. However, only paying the minimum payment each month is the slowest way to pay off credit card debt. After all, credit cards carry some of the highest interest rates, so by the time you've made your payment you've already incurred a hefty charge.
Especially with credit cards, paying more than your minimum payment will help you save on interest costs and reduce your debt faster. You can also apply this method to student loans, car loans, or any other debt. The key is to have a budget and a plan, so you still have money to live off of each month without getting further into debt. Pair this with the debt snowball strategy and watch how quickly you can reduce your liability.
2. Have a Budget
Part of a good debt reduction strategy, as noted above, is to make sure you can live within your means. You'll have trouble getting ahead each month if you continue to spend more than you have. Once you're in the habit of knowing where your money is going to go each month, you'll feel more free.
The simplest way to do this is to add up all of your necessary expenses against what you make in income each month. Look for ways to reduce spending where you can. Then you'll know exactly how much you can allocate towards debt reduction.
3. Use the "Debt Snowball" Method
There are a few schools of thought when it comes to debt reduction strategy. Some recommend paying off your largest debt first, however this offers no short-term sense of accomplishment. Instead, we recommend the snowball approach, which means paying off the smallest debt first.
It's much faster to pay off a $500 credit card bill than it is to pay of $40,000 worth of student loans. By doing so, you'll feel you're making progress, and be able to celebrate victories along the way. Then you can begin applying those payments to your larger debt without sacrificing your budget.
4. Consolidate Where it Counts
Credit consolidation isn't an ideal strategy for wrapping up all of your debt. That's because consolidating everything can eliminate any flexibility and make it harder to pay the minimum balance every month. However, it's important to know when it might be useful.
For example, if you have multiple student loans, consolidating only those loans may help you get a lower interest rate and monthly minimum. You'll be able to attack your smaller debts more quickly, you can avoid large interest costs, and although you're technically lengthening your repayment timeframe, once you've eliminated your lesser debt, you'll have more money to service that loan. Thus, you'll be paying it off before that time frame, anyway.
5. Reward Yourself
Paying down debt and taking control of your finances can be hard work. If you treat it like a punishment, it will be harder to reach your goals and feel good about them. Instead, celebrate your milestones (within reason). Of course, you might need to get creative with your rewards, rather than seeking validation in ways that may have put you in debt in the first place.
If normally you would celebrate with an expensive dinner out, reward yourself with your favorite home-cooked meal. If your reward of choice is a family vacation, consider an overnight camping trip or outing instead.
Find Financial Freedom
When you're deep in debt, it's difficult to feel like there's a way out. However, you have more control than you think. Creating a strategy and taking small steps each day will help you reduce your debt and find peace in no time. Paying off your debt doesn't have to be painful, and we hope that these tips empower you to feel more in control.