So, you’ve got debt. The not-so-comforting reality is that you aren’t alone.
Most Americans have debt. 81.5% of my fellow Millennials, 80.9% of Baby Boomers, and 79% of Gen X are in debt.
(Don’t worry, Gen Z. You youngins have plenty of time to catch up.)
Debt doesn’t feel like a problem when you meet your obligations every month. But what happens when life hits the fan—and it always does—and you can’t pay off your debts?
After all, credit cards, a mortgage, car notes, medical debt, and student debt weigh us down like a sack of bricks. And over time, they can get in the way of both your life and financial goals.
One day you’ll get sick of running on the debt treadmill, (or, as I like to call it, the dreadmill), and you’ll want to pay off that debt ASAP.
But few people get out of debt completely because it’s hard. Plus, we’ve normalized debt so much in America that it’s hard to imagine life without it. To make matters worse, few Americans keep a budget (just 32%) or even know their debt liabilities.
Once you’re aware of your debts and make a commitment to pay them down, you might wonder, “How the hell do I actually make this happen?”
That’s precisely what I thought in 2015, when my husband and I were so in debt we couldn’t buy a house. I got angry at our debt and made a plan to free ourselves for good.
After years of work and a fair amount of crying (don’t judge), we’re debt-free today. If you want to wake up without owing a dime to the bank, here are 3 methods to pay off your debt.
3 ways to pay off your debt
There’s no “right” way to pay off debt. What worked in my situation might not work for you. Personal finance is personal and you’ve got to do you, boo. Consider these routes to debt freedom and weigh their pros and cons carefully.
To start, you’ll need to know your debt balances, interest rates, minimum payments, and due dates. Slap those numbers into a spreadsheet and decide where to go from here.
Fortunately, you’ve got options.
Pay the small stuff off first
This is the approach that my husband and I took. By paying off the smaller balances, you build momentum fast.
(For you Dave Ramsey fans, this approach is called the Debt Snowball for that very reason.)
For example, if you’ve got a $500 credit card debt, you would tackle that before your $30,000 student loan. We tackled the small debts first to see quick wins. This does wonders for your motivation, especially if you’re unsure about this whole debt freedom thing.
Plus, tackling the smaller payments frees up your cash to tackle bigger payments and balances.
The con to this approach is that you actually spend more money on interest. Since you’re not concerned with interest rates with this method, you’ll likely pay more in interest over the long term. But for us, it got debt off our plate faster, so we didn’t really care.
Go for the highest interest rates
The second approach—which our pal Dave calls the Debt Avalanche—pays debts off in order of highest to lowest interest rate.
This is a more long-term strategy that saves money over a period of several years. That’s because interest builds, costing you more money over time. After all, it doesn’t always make sense to pay off a 5% APR when you’ve got a 25% interest credit card racking up charges in the background
The downside to this method is that you might not get the easy wins you need at the start of your journey. If you have a $2,000 loan at 25% APR, that would take precedence over your $500 credit card debt with a 10% APR.
The third option for debt repayment is consolidation. This is like ordering food at a restaurant: you pay more when you order individual items instead of the meal. But when you get those sweet, juicy chicken nuggets in a combo meal, it’s cheaper.
Debt consolidation rolls all your debts into one payment at a lower interest rate. This is a form of refinancing that’s better for folks with multiple loans.
Consolidation could work if you:
- Have a better credit score now than when you took out the debt.
- Got a bangin’ balance transfer at 0% APR for at least a year.
If you’re financially worse off than you were when you got the debt, you probably shouldn’t do consolidation. This will only work in your favor if you get lower interest rates on everything, which usually comes with having a better credit score.
The good thing about consolidation is that it saves you money on interest and simplifies your payoff strategy. But it’s not always easy (or wise) to consolidate, so tread lightly. Always, always, always read the fine print with these deals so you don’t get screwed over.
The bottom line
There are so many paths out of the trash fire that is debt. Whether you want a quick win, to save more moolah on interest, or simplify the whole ordeal, you’re the only one who knows what’s right for you.
Whatever you do, make a plan and stick to it. Be aware of your debt. Get angry at it and commit to overcoming your debts. Don’t be afraid to get crazy and blaze your own path. All roads lead to financial freedom, and anyone can dig their way out of debt with the right tools, mindset, and education behind them.
Now go crush your debt by carving your own path towards financial freedom and stability!
Contributor’s opinions are their own. Always do your own due diligence before investing.