Debt can be a significant burden on one’s financial well-being, causing stress and limiting opportunities for growth. We shouldn’t normalize debt because it stops us from living in the present and building savings for the future. Whether it’s student loans, credit card debt, or a mortgage, paying off debt is a crucial step towards achieving financial freedom. With a solid plan and dedication, you can take control of your finances and work towards a debt-free future. In this article, we will discuss practical tips to help you pay off debt effectively.
1. Don’t take on more debt
We’re about to impart a harsh truth. There’s a difference between being broke and spending beyond your means. If you’re guilty of saying you’re broke when you’ve spent a lot of money on non-essentials, you’re not actually broke. Similarly, if you’re borrowing money from your savings or family or friends to pay off a purchase, you’re not actually paying off your debts, just changing who you owe. So, have some willpower and stick to only buying what you need, especially on your debt payoff journey.
2. Determine how much you owe
We know that working out how much you owe to your bank, a friend, or a family member, can be daunting. But without a precise figure, you won’t be able to start paying off your debts. So, list all your outstanding payments, including utility bills, credit card and loan repayments, and any late fees and penalties you may have incurred for each. Then, add them up. This way, you will have a clear picture of where you stand financially.
3. Create a budget
Creating a budget is a necessary step, especially when you have debts to pay off. A budget will help you identify your spending patterns and determine how much you can allocate towards your debts. So, whatever you do, don’t skip this step.
4. Put together a debt payment plan
There are several ways to tackle debt, and although each method intends the same outcome, their approaches differ. Two common ways to pay off debt are the “snowball” and “avalanche” methods. The snowball method involves paying off your debts from the smallest to the largest. Once you pay off the debt with the lowest balance, you work upwards. While settling your smallest debt, you must make the minimum payments for your other obligations every month (such as your credit card balance).
This method may be ideal if your salary is on the lower end of the scale, as you would have to allocate a smaller portion towards paying off debts initially. Therefore, you won’t feel so financially overwhelmed during the first few months, which may help you stick with your plan. However, this method will take you longer to pay down your debts, and be more expensive, since you will pay more interest over time. The avalanche method differs because you would settle your debts faster and thus save money on interest.
That said, it’s considered aggressive because, unlike the snowball method, you would have to pay off the debt with the highest interest rate and work your way down. While settling your largest debt, you must make the minimum payments against your other debts every month, just like the snowball method. Unsurprisingly, experts disagree on which method is the best. Just follow the one you know you won’t abandon over the long term.
5. Find ways to make extra money
With the current inflation levels, you may be unable to stretch your salary from a 9-to-5 job until the end of the month. Finding a side hustle will help you in that regard and with paying off your debts faster. Working freelance, making money out of your hobby, and doing odd jobs are ways to increase your monthly earnings.
Conclusion
Knowing how much you owe in total can be intimidating, but you don’t have to pay that amount all at once. Regardless of your chosen method, paying off your debts one at a time is what’s important. That is how you can pull yourself out of debt.
