7 Tips to Pay Off Debt Quickly
If paying off debt is your goal, you are not alone. The thought of paying off your debt may feel overwhelming. Some people ignore their debt as if it will magically go away if they don’t look at it. However, that’s not you. You are ready to take control of your financial life by getting out of debt.
When beginning the journey of getting out of debt, it’s critical to know how you got there in the first place. Did you get into debt due to a one-off expense, like a home improvement project? Did you get into debt due to consistently spending above your budget? Getting to the core of how you got into debt isn’t meant to judge you. It will help to identify if there are different approaches you can take in the future so you don’t end up in debt again.
There are various types of debt: credit card debt, auto loans, student loans, personal loans, and mortgages. While getting out of all debt is ideal, an immediate goal would be to get out of high-interest debt. Typically we see high-interest debt in the form of credit card debt, some car loans, and private student loans. If your interest rate is above 5 or 6%, try to pay off that debt as quickly as possible.
You must understand the impact of interest on your cash flow. Interest compounds, meaning if you don't pay off your credit card every month, you pay interest on top of interest. It can become a cycle which makes you feel like you’re getting nowhere even though you are making payments on the debt.
Here are some tips to help you get out of debt:
- Understand the behavior that caused you to get into debt in the first place. If you got into debt due to a one-off expense, try planning and saving for large purchases in advance. Also, work on building up your emergency reserves so you can be your own bank. If you got into debt due to your spending habits, budget for personal spending and commit to not spending anything else once your budgeted amount is gone.
- List out your debts along with the interest rate and minimum payment. You need to know what you owe. Since we recommend focusing on the high-interest debt first, listing the interest rate with your debt will allow you to know which debts you should pay off first.
- Automate your payments. Automating your payments will allow you to make your payments on time and debt to be paid off without you having to even think about it.
- Increase the frequency of your payments. Interest accrues daily in most cases. Increasing the frequency of your payments will reduce the interest you end up paying on your debt. If you typically pay $500 once per month, make a payment of $250 twice per month. This will help you to get to the finish line a little quicker.
- Pay extra. If you have extra money to put on your debt, then do so.
- Focus on one debt at a time. Make minimum payments on all your debts; however, focus any extra payments on one debt until that debt is paid off.
- Snowball. Once one debt is paid off, snowball that payment onto the next debt. For example, if you paid $100 per month on a credit card that is now paid off, put that $100 onto the next debt in addition to the next debt’s minimum payment until it is paid off.
These tips should help you get out of debt, free up cash flow, and focus your money on things that bring you the quality of life you desire.