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Whether it’s student loans, credit cards, car payments or any other type of debt, it’s costing you money! And if thinking about debt keeps you up at night, it’s likely causing you a lot of extra stress as well.
But here’s the thing: once you make paying off debt a priority, it can often be easier than you think.
The key is persistence — and with the right plan of action, you’ll start to see results in no time.
1. List debts by interest rate
Sometimes we may just want to stash those bills away and never look at them — but the one big key to paying off your debt is knowing where you are. Take out all of your bills and list your debts from smallest to largest.
Then, list them in order from highest interest rate to smallest interest rate. Since the one with the highest interest rate is costing you the most money, that’s the one you want to pay off first.
Once you have the totals listed out, and the interest rate on each, you’ll know exactly what you’re up against before you start to tackle the highest interest rate debt.
2. Have an emergency savings fund
Let’s face it — emergencies are bound to happen. And although no one expects them, everyone should always prepare for them. But stashing away emergency savings doesn’t have to derail your debt payoff plan.
Before starting to really pay off your debts, build up a small emergency savings fund of at least $1,000 for any unexpected expenses or bills that could pop up (think car repair, medical bills, etc.). This is your “rainy day” fund, or money you tap into when something unexpected happens. If you do have an emergency and need to use some money from your fund, build it up again before paying off more debt. (But, be sure to still pay minimum payments on your credit cards and other debts.)
3. Always make minimum monthly payments
You’ll want to be sure to always pay your minimum payments on time for every debt you have — in order to avoid paying higher interest and late fees. So if you’re trying to pay off the highest interest rate card first, put more money toward that card each month, while continuing to make the minimum payments on all other debts. Then move to the next highest interest rate card and so on.
The best way to stay on top of monthly credit card payments is to go by the card’s closing date, rather than the payment due date. The closing date wraps up your bill for that month, so any transaction after that date is included in the next month’s statement. You can find your card’s closing date on your statement.
The balance on the card as of the closing date is the one that’s reported to the credit bureaus. So if you pay off the balance before that date, your statement will show a zero balance — which not only allows you to avoid interest charges and fees on your credit card, but this strategy will also help you improve your credit score!
4. Create a budget and remove any extraneous items
If you don’t already have a budget, putting one together is a great idea. The idea of budgeting might conjure up feelings of lack or scarcity, but in reality, budgeting is just a simple way of you telling your money where you want it to go.
A good place to start is to take a look at your last month’s expenses from bank or credit card statements. To organize your expenses, you could use a paper budget or an Excel spreadsheet. You could also use an app like Mint to budget your expenses. You’ll want to create categories for each expense in order to set a limit for that category, and also list your income. Be sure your budget never exceeds your income — if it does, there might be some items you’ll need to cut.5. Gain momentum by laddering your debts
Once you’ve listed out all of your debts from highest interest rate to lowest interest rate, start paying as much as you can each month toward the card with the highest interest rate. Then once that debt is paid off, apply what you were paying toward that debt to the card with the second highest interest rate and so on. This will save you the most money over time. And once the debts start to disappear from your list, you’ll be able to gain more momentum and stick to your plan.
You’ll be able to finally see the light at the end of the tunnel once you’ve paid off the first debt, and then you’ll feel accomplished and encouraged to take on the next one!
