The majority of American adults carry a constant load of debt, often amounting to more than their annual income. A lack of good personal financial management may have led to some of that debt, while student, car, and home loans will often be responsible for the rest.
Not all debt is necessarily bad. There is “good debt” and “bad debt.” But there is no debt you want to be saddled with for the rest of your life – so all debt needs a well laid out plan for paying it off!
Here are 6 key principles to follow as you plan and work to get out of debt as fast as possible. It won’t happen overnight, but using your resources and wits wisely will help it happen sooner.
1. Create a Budget
Without a budget, you don’t know how much you are making, how much you are spending, or which expenses might be a bit too high. In short, you are “financially blind.”
A budget lets you plan to pay all necessary monthly bills first so you can intelligently manage the money left after paying the bills. Here are some great personal finance tips for budgeting to help you create and stick to a reasonable budget. And that’s the first step in putting yourself in a position to pay down (and off) your debts.
2. Take Debt Inventory
To wisely tackle debt, you first have to sit down and make a list of all your debts, including their amounts, interest rates, monthly payment amounts, and who it is you owe them to.
This will give you a look at the bigger picture, and as you update your list over the months/years, it will give you a sense of progress toward your goal of being debt-free.
3. Never Miss Payments
Late payments increase your debt by adding late fees. They also make you delinquent, which will be reported to the credit agencies – which lowers your credit score and potentially increases APR on any future loans.
Make a debt-payment calendar to strategize on, use financial management apps, and always make at least the minimum payment.
4. Prioritize & Plan
Don’t’ just randomly make payments with no general plan in mind. Prioritize your debts, paying off the smaller ones first to reduce the total number and the complexity involved.
Pay off higher interest loans first as well Pay a set total amount on debts each month, and each time you pay a debt off, move that money to speed up the paying off of the next loan on your list.
5. Maintain a Savings Fund
Resist the temptation to simply funnel all the money you possibly can immediately into debt repayment. If you do, and an emergency strikes, you’ll have nothing to fall back on – and you’ll have to go into debt all over again, even before the last debts are paid off. Definitely save every month and maintain an “emergency fund.”
6. Do Pay Charged-off Debts
Some will tell you not to worry about paying debts already charged off, but the fact is that if you pay them off, your credit score will benefit as a result. Future potential lenders will notice what you’ve done, and you’ll feel better about yourself for having done it.
On the other hand, don’t let debts not sent to collections end up there because you spent your debt-reduction dollars on a debt already charged off. If you can afford to pay on both, do so, but if not, you have to prioritize the still “live” debts over the “dead” ones.
One major part of good financial management is how you manage and pay off your debts. It’s probably unrealistic to think you’ll simply never be in debt, so these six principles will apply to virtually everyone at one point or another during their life.