Is one of your goals in the new year to pay off outstanding debt in full? It is entirely possible you can achieve this goal if you have a practical plan in place.
While many of us may aspire to pay off our debt in one year, the savvier approach is to give yourself a timeline of five years. This provides wiggle room to ensure you reach your goal and makes it less stressful to tackle, whether you owe several types of debt or one massive sum. You can do this. Use these tips to start your five-year journey to becoming debt-free in 2023.
First, Get Everyone on the Same Page
You might be paying off your debt on your own or you might be paying it off alongside your partner. However many members are in your household, it’s critical they know what is going on and your plans to become debt-free.
Carl Grande, founder and lead advisor of Grand Capital Management, said it’s important for those who are married to make sure both partners are on the same page regarding your financial plans. Talk to your partner about what you’re planning to do instead of attempting to pay off debt without them knowing about it. Paying off debt is a serious commitment and requires buy-in and support from the household.
Create a Debt Budget
Your budget is a tool that helps you keep track of how much money you have coming in and going out each month. With the help of a budget, you can track your income, spending and expenses.
A budget is also necessary for paying off debt. “This is incredibly important because knowing how much of your income you can allocate towards debt will help you understand how much you can actually pay off during the five-year time horizon,” said Grande.
Review Refinancing Options
Some of your high interest debt could be eligible for refinancing. Grande recommends trying to refinance high interest debt into a fixed interest installment loan or a 0% interest balance transfer type of debt.
Start Paying It Off
You talked it over with loved ones, made a budget and refinanced if possible. Now, you need to start paying down your debt.
Richard Barrington, financial analyst at Credit Sesame, recommends paying off credit card balances in full whenever possible. At the very least, try to make more than the minimum required payment.
If you’re not sure which piece of debt to pay off first, Barrington recommends starting with the highest interest debt and prioritizing extra payments toward this debt.
Barrington uses the example of someone who is in credit card debt and is working to pay off the balance on every card. The cardholder would check their credit card statement to see the current interest rate per card. They would then list their cards in order of interest rate from highest to lowest. From there, the cardholder would make the minimum required payment on each card and target the highest interest card with extra money for payments.
A similar system may also be used to pay off student loans, starting with the loans with the highest interest rate and working your way down. This approach is often known as the debt avalanche method. It helps clear out debt with the highest interest rate. Once the debt has been paid off, it can no longer accrue interest against the borrower.
Keep Saving as You Pay Off Debt
There are a few reasons why it matters to keep saving as you pay off debt. One of the first reasons ties in with overall habits and behavior.
“In my experience if you are only focused on paying things off and not focusing on saving, then you will most likely never get into the habit of actually saving and seeing the account balance grow,” said Grande. “This behavior change is very important to building long term success.”
The other reason is the timeline in which you’re paying off your debt. Five years, if you focus solely on paying off debt, is a long time not to tuck away money in an emergency fund, retirement account or other savings where it can grow and experience the benefits of compound interest.
Sign Up for Credit Monitoring
As you work to pay off your debt, it’s a good idea to keep up to date on your credit score.
“Think of this as an ongoing extension of checking your credit report,” said Barrington. “Credit monitoring lets you know when there has been any significant credit activity in your name. This can be useful in helping you track your progress as you take additional steps to improve your credit.”
Don’t Give Up
Paying off debt in full is a serious commitment. Sometimes you might feel like giving up or be tempted to take a short break. Hang in there. Keep going until every dollar is paid off.
“In all of my years as a financial planner, I found that nothing makes someone happier than being done with the burden of debt,” said Grande. “This should encourage you to get going and put a plan together to eliminate your debt once and for all!”
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