Are You in Debt? Find Out What to Pay Down First
When you’re making monthly payments on high-interest debt, it can feel overwhelming. Managing debt is a great financial goal, but where do you start? Read below for ideas you can use to create a debt-payoff plan and achieve debt freedom faster.
First, create a simple budget
Before committing to a debt-payoff plan, it’s necessary to do some basic budgeting. This allows you to see your finances clearly and determine how much extra money you could allocate toward paying down debt every month (above minimum payments). Though budgeting takes some time and calculating, it’s a simple and helpful tool anyone can use. It’s also key to staying on track with your payoff plan.
Start by finding your total monthly income. Then, record all your purchases for a month (with pen and paper or an app). Categorize your monthly spending into needs, such as mortgage, utilities, etc., and wants like eating out or entertainment. Subtract your “needs” from your total income. See how much money you have left over, putting aside about 30% for “wants” and fun. What’s left can be used for debt payments.
Next, choose a method to pay down your debt
Financial experts suggest some of the following ways to pay down debt faster. The one that would work best for you depends on your situation and goals.
If high-rate debt has trapped you in a costly cycle of making minimum payments, you may consider debt consolidation to pay it off faster and save on interest charges. Many lenders offer personal loans specifically for debt consolidation. Once you know the amount you need and find the right lender, apply for the debt consolidation loan. If you’re approved, and once you receive the loan, you pay off all your existing debt balances and replace them with this new loan.
Consider whether the new rate you’d get with the debt consolidation loan helps you save more. To get a better idea, try out a free, online tool such as a debt consolidation calculator. For consolidation to work for you, you also need to keep yourself from taking on more debt, especially from credit cards.
Make a list of your debts and arrange them from lowest to highest amount owed. Next, check your budget for any extra money to put toward debt payments each month. Plan to use that amount to pay off the first debt on your list faster. Keep paying the minimums on all other debts.
Once you’ve paid off the lowest debt balance, take what you were paying on it and apply it to the next one on your list. As you free yourself of the smaller debt payments, you can roll those former payments together to take out the larger ones.
Using the debt snowball can be good motivation to budget better and pay off debt quicker. It helps to focus on one debt at a time and feel like you’re making progress. However, a disadvantage is that you could possibly save more money by paying off the highest-interest balances first. Plus, you may not want to put all your extra money toward your debt every month, since having an emergency fund available could keep you from having to use credit to cover an unexpected expense.
This method focuses on paying off highest-rate debts first. As with the debt snowball, you make a list of your debts, but from highest to lowest interest rates. While making minimum payments on all your other debts, you focus on paying off the highest-rate debt (on the top of your list) first. This tactic is also great for helping you concentrate on one debt at a time and freeing up more cash every month. You may not be able to pay off each debt as fast as with the debt snowball, but you could really cut down the amount you’re paying on interest.
Are you ready to pay down your debt? Lendmark could help with a debt consolidation loan. Visit your nearest branch to discuss your options with one of our specialists, or get started online today.