Throughout the New Year hundreds of thousands of people make resolutions, yet only a small portion will keep their resolutions beyond January. Many people even joke about how unlikely they are to maintain their good habits. Two of the top resolutions in recent years have been to lose weight, and get out of debt. However, despite its popularity, reducing debt is also one of the least kept resolutions. It can certainly be a difficult task, which requires financial discipline and planning. But with these three easy tips, you can easily crush your debt and be one of the few to see your resolution to the end.
1. Make a list of what you owe
– Compile a list of every debt
– Include the amount and the interest rate
– Write down even small loans (e.g. from family or friends)
How can you get started crushing your debt without first knowing what you are faced with? This step is key since it provides you with an overview of everything you owe, all in one place. For some, this can be a little daunting, but it is important if you truly want to succeed. This should include all major loans you are paying off, such as mortgages, car payments, and student loans. Along with these make sure to list the interest rate on each of these loans. For many people, another main source of debt is credit card debt. Any unpaid balance on each card should be recorded. Also, check the fees and interest rates associated with each card, and include these in the list as well. Finally, list any other sources of outstanding debt. While not everyone has loans to include here, it is important to consider even small loans that you may not even think of often. These can be as simple as $50 from a friend. However, in order to truly crush your debt, you must take care of all sources, so all should be listed.
Try not to be alarmed if you end up with a lengthy list. Seeing an overview is an important step in the debt reduction process. With this first step completed you are well on your way to crushing your debt.
2. Pick One Debt to Crush First, and Focus on It
Now that you have compiled your list, you can easily see which debt you would like to conquer first. There are two common strategies to choose from:
- Lowest debt first
- Highest interest debt first
Trying to pay down the entirety of your debt all at once would be an incredibly difficult task. Instead, it is helpful to choose one of the debts from the list you created, and focus on that first. However, even experts disagree on how to choose the first debt. The first strategy to choosing these is to pay your lowest debt first. The main benefit to this strategy is motivation; it feels good to cross something off your list. The lowest amount is often something you are able to pay off quickly, and therefore give yourself an immediate confidence boost to begin your debt crushing journey. However, the con to this strategy is that dealing with the lowest debt first may not give you the greatest financial benefit in the long run. The second strategy involves paying off the debt with the highest interest first. Since this has a high interest rate, this will accumulate quickly, and cost you the most money in the long run. While you may not be able to pay this debt down instantly, like the lowest amount, you are ultimately saving yourself more money, making it easier to crush your debt thouroughly.
3. Finally, snowball the rest of your debt
– Use momentum from the first payment
– Focus on the second debt, based on your strategy
Now that you have paid off one debt, you can use the money that you were paying towards this debt to pay for the second debt you decide to pay off. Choose the second debt to pay off based on the strategy you chose in step two. With the momentum you have from not needing to pay your first debt, you can crush your second debt even quicker. Continue to use this snowball effect as you pay of your third debt, fourth debt, etc. You will be amazed by how quickly the effects add up and let you eliminate your debt faster and faster.
[Read: Tips for Debt Repayment]
Time to Celebrate
With these steps, some financial discipline, and a little time, you can easily make your debt reduction goals a reality. The day you are finally debt-free is truly an accomplishment you can celebrate. Check out this inspiring video of someone who proves this dream can become a reality.