5 Steps to Getting Started Paying off Debt
Do you feel as though your current debts are keeping you from achieving your financial goals? If so, you’re not alone. Millions of Americans are struggling to repay their debt. Many have a combination of credit card debt, student loans, car loans, excessive mortgages, personal loans, medical bills, and, in some cases, even payday loans.
If you're struggling under the weight of all of these debt payments, here are a few tips that might help you obliterate these bills.
Make a List
Sit down with a pen and paper and write out a list of every single debt you have. It’s amazing how many people have never done this. Having your debt listed out on a sheet of paper in front of you allows you to clearly see what you’re dealing with.
This by itself can be an incredibly useful experience. This list of your debts should include the following:
- the name of the lender or creditor
- the outstanding balance
- the interest rate
- the minimum monthly payments
Which Debt Is Most Annoying?
Circle the debt that’s the most emotionally or psychologically annoying. This doesn’t necessarily have to be the debt that has the highest interest rate, the highest monthly payment, or the highest balance. Focus on the debt that bothers you the most, the one that keeps you awake at night.
Remember, this doesn’t have to make logical sense. We’re looking for the debt that irks you. Circle this one and make a note of it.
Which Debt Has the Smallest Balance?
Put a star next to the debt with the smallest overall balance. Let’s say you have three debts: a credit card with a $6,000 balance, a car loan with a $15,000 balance, and a student loan with a $20,000 balance.
In this case, the loan with the smallest balance would be the credit card. Put a star next to this one.
Which Has the Highest Interest Rate?
Put a square next to the debt that has the highest interest rate. Going back to the previous example, let’s say your credit card currently has a teaser 0% interest rate for the first 18 months. At this point, you’re 8 months into those 18 months, so you have 10 months left without any interest charges.
Let’s also assume your car loan has a 6% interest rate, and your student loan has a 7% interest rate. In this case, your highest interest loan would be the student loan. Coincidentally, this is also the loan with the largest balance in our example.
It’s Time for You to Make a Decision
Which of these loans are you going to prioritize paying off first? It’s not going to do you much good to save a bunch of extra money and apply it evenly to all of your debt. Doing so will cause you to make minimum progress, and that can feel defeating.
Instead, focus on the debt you're most excited to pay off. Do you want to repay the loan with the highest interest rate to save money on interest payments? Do you want to repay the one with the smallest balance because you can wipe that one off of your list quickly? Or would you rather repay the most annoying one?
No answer is right or wrong. Pick whichever one feels best for you, as long as you make a start.