How to Pay off Debt Effectively
Debt can feel like a life sentence. It can rob you of your paycheck and leave you with sleepless nights. Itâ€™s difficult to enjoy your day if you’re constantly worried about paying off your bills, dealing with bill collectors and trying to meet your financial obligations. Debt can also make you vulnerable to bankruptcy. If you’re living paycheck to paycheck because of your debts, a simple illness or a sudden disruption in your employment can be enough to nudge you into financial disaster.
Getting out of the debt â€” even significant debt â€” is possible if you:
1) Start by taking a good, long look at your debts.
Many people want to avoid taking a look at what they owe. Start by listing everything you owe, including exact amounts and the interest rates on each loan. You need to know what you owe and where that money needs to go.
2) Find out where your money goes.
Create a budget to track where you spend your money. For a month, keep track of every purchase you make and all of the money you spend. You may find that there are ways you can trim back your expenses to save money. For example, you can cut out nonessential subscriptions or trips to the gym and redirect that money towards your debts.
3) Be careful about consolidation.
Consolidation can seem like a great deal if you need to get out of debt fast. Consolidation means you take multiple credit cards or debts and put them together in one lower-interest debt. With only one monthly payment and a lower interest rate, it can seem that it’ll be faster to pay off what you owe.
However, you need a lot of discipline for consolidation to work. If you consolidate your loans and continue spending, you may find yourself in an even worse situation. Getting a great rate on a consolidation loan can also be difficult if your debts have already affected your credit rating.
4) Start with the highest-interest debt.
Go back to the list you made of all of your debts. Highlight the highest-interest debt. Focus on paying this one off first. Set up automatic payments for all of your debts, but every month when you find extra money in your budget, funnel it towards the highest interest debt until itâ€™s paid off. Once it is, cross it off your list and move on to the second-highest-interest debt, paying that debt off with the extra money you have saved through careful budgeting.
Let’s face it: Paying off debt is not fun. But, it can give you a new lease on life and a new level of freedom. It’s worth it to stay disciplined and on track until you’re completely debt-free.