Tips for Reducing Debt
June 11, 2020
If the amount of your debt is overwhelming, there are tools and motivational ideas you can use to reduce it and even eliminate it. Here are some steps to take to start you on the path to being debt free.
Know your ‘why’
Understanding your short- and long-term financial goals is a great way to motivate yourself to reduce your debt. Whether you’re saving for a new phone, vacation, or a house, having a goal will help keep you on track.
Make the most of every dollar
Creating a budget is important to any financial plan, but especially so when you’re paying off debt. You may have heard of the 50/30/20 budget: Keep essential expenses, like bills, to 50% of your income; allocate 30% for wants, and use 20% for savings and debt reduction. Since you’re focused on paying off your debt, you may decide to use money from your wants category to make extra debt payments. That will reduce your debt faster and help you save more on interest.
Align spending and values
Use your goals and your budget as your guide if you find yourself overspending. Analyze your credit card statements to see where you can reduce spending each month. By building new savings habits, like cooking at home instead of eating out, you’ll reach your goals faster and easier.
Consider side work
Evaluate skills that you can offer to earn extra money. “Side hustles” are becoming increasingly popular. These could include web designing or coding, renting out a room on Airbnb, or selling artisan goods on Etsy. You may even have items in your home you can sell online. However, it is important to use your best judgement and avoid scammers with online garage sale platforms.
Pay extra on loan payments
Making extra payments each month on your debt will not only get you closer to being debt free, it can also lower your credit utilization ratio, which in turn can improve your credit score. With an improved credit score, you will be able to qualify for lower interest rates on various loans, which could save you thousands of dollars in the long run.
Refinance or consolidate your debt
Transferring a high interest rate credit card balance to a low-rate card, or applying for a consolidation loan to roll multiple debts into one with a lower interest rate could save you money. With rates so low right now, refinancing is a great option to consider, especially if your credit score has improved since you last financed your auto loan or mortgage.
Becoming debt free is not easy to do, but with the right tools and motivation, it is possible. Keeping your end goal in mind will help you stay on track and achieve your financial dreams.