Day 23: GOBankingRates wants to help you Live Richer. For a month, we’ll be sharing daily tips for how you can do just that, with advice on budgeting, saving, investing, making the most of your career and managing debt — plus money advice for every phase of your life. Check back each day during our 31 Days of Living Richer to learn everything you need to know to set yourself up for financial success and live the richest life possible.
Being in debt can feel overwhelming at times — but it doesn’t have to be. What you need is a plan to pay down your debt in a way that’s doable and fits into your budget. Sound too good to be true? Believe it or not, it is possible. Here’s exactly how to pay off your debt in a manageable way.
Figure Out How Much Debt You Actually Have
The first step in paying off your debt is getting a clear picture of how much you owe and who you owe it to. Compile a list of all your debts that includes the following:
- The name of each creditor
- How much you owe
- The interest rate on the debt
- The minimum monthly payment
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Come Up With an Action Plan
Once you can see how much you owe, you can start figuring out a way to pay it off. There are generally two methods to paying off debt — starting with the highest-interest debt, or starting with the lowest balance.
“The interest rate being charged is the key factor,” said Scott Schleicher, advisor team manager and senior financial advisor at Personal Capital.
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Typically, your credit card debt will be your highest interest debt.
“These are the debts that should be addressed first,” Schleicher said. “Oftentimes cardholders only pay the minimum due each month. The interest being paid on these amounts is often painfully high, meaning the monthly minimum payment may not even decrease the overall debt. You might just be paying the interest only, and the actual debt never decreases. Attack high-interest debt with everything you can, even if you have larger debt elsewhere at a lower interest rate.”
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If you owe multiple debts with similar interest rates, start with the debt with the lowest balance. Some experts even advocate for starting with the smallest balance, regardless of the interest rate.
“Doing so can provide a sense of accomplishment before moving on to larger amounts owed,” said Mark Nicholson, marketing director at Match Financial. “Studies have shown many to find success with the debt snowball method due to its motivational aspect.”
Factor Debt Repayment Into Your Monthly Budget
Whichever method you choose, start prioritizing your debts in the order you plan to pay them off. Add a line in your monthly budget for paying down your highest priority debt. To ensure you stick to this, you may want to set up an automatic monthly payment.
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As you focus on paying down the highest interest rate debt or the smallest balance, continue to make the minimum payments on all your other debts. Once you have your highest priority debt paid off, move on to the next one.
Keep Going Until You Are Debt-Free
Once you have a plan set in place, keep going until you have paid off all of your debts. Sure, this may take time, but every payment you make is getting you closer to your goal of being debt-free. If you want to pay down your debts faster, the best way to do this is to increase your income. Consider working more hours at work, asking for a raise, getting a second job or taking on the occasional side gig to earn some extra money to go towards debt payments.
Day 24: Join us tomorrow for our Living Richer series when we look at how debt can prevent you from living your richest life.
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Last updated: July 23, 2021