1. The Debt Snowball Method
Popularized by Dave Ramsey, the debt snowball method has worked wonders for many people, including ourselves. It simply means paying off your debt balances from smallest to largest, helping you to pay off debt faster. While paying off the smaller balances with as much as you can afford each month, keep paying the minimum balance on your other debts. When the smaller debts are paid off, you can apply those monthly payments towards the higher balances, accelerating your efforts to pay off debt faster. If you want to pay even more towards your debt, consider cutting back on other expenses, like subscriptions you can do without or reducing the number of times you eat out. Every little bit you can cut back on can be thrown towards your debt. Remember, cutting back is only temporary until you are debt-free!
To illustrate the debt snowball method, let’s say you have three credit card balances and you pay $500 a month in minimum monthly payments. Focus on paying more towards paying off the smallest debt balance first. Once that’s paid off, continue paying at least $500 a month towards the remaining two, focusing on paying down the second highest balance. Once that is paid off, keep paying at least $500 a month until the final debt is gone!
By paying off the smaller balances first, it motivates you psychologically to keep going! It is a great feeling to see your debts start to disappear and the burden becomes less and less. It also allows you to pay down your higher balances much faster when you are not paying down other debts.
There are many success stories with this method. Check out the few below:
This couple used the debt snowball method to pay off $130,000 in four years
My Debt Story: How I paid off $125,181 of student loan debt
Debt Snowball Method Examples | Credello
2. Automate Your Payments
As you pay down your debts, it is important to be as consistent as possible with how much you have committed each month to pay. Best way to guarantee that your target is met, is to automate your payments and schedule them around the time you get one of your paychecks. This can be done via your loan or credit card’s website or app. By doing this, you do not have to worry about missing a payment or risk not having enough funds to make the payment.
The question remains though… What is the optimal automatic payment amount? Well, for starters, make the auto payment the minimum balance due for the debt balances you are not paying off right away. For the debt balance you are targeting and paying more than minimum balance, let’s discuss how to approach this.
First, it’s highly dependent on your personal income and other expenses. You want to look at what you have left over every month if you were to pay the minimum on every debt balance and after you have paid for all your other expenses (i.e. utilities, rent/mortgage, car note(s), groceries, medical, subscriptions, eating out, etc). What is that amount? Write that down.
Next, let’s figure out how to cut unnecessary expenses so you can have even more money to use to attack that debt. See tip number three below.
3. Cut Unnecessary Expenses
Let’s take a closer look at your expenses. Is there anything you can do without for a while? Like a NetFlix subscription or expensive gym membership? If there is anything there that is not an absolute need and is in a “want” category (i.e. Starbucks every day or week and/or subscriptions you don’t need), consider doing without it for a while. Make a list of those expenses that you can suspend for the time being while you target your debt. Total up what your savings would be. Write that down and then add that amount to the first amount you said you had left over at the end of every month. You may notice you have a few hundred dollars to work with! Now go ahead and suspend those activities so you can apply it towards your debt instead. The more you can throw at the debt, the faster it disappears!
The more you can throw at the debt, the faster it disappears!
4. Generate Additional Income
To pay down your debt even faster, you can consider ways to generate additional income. It will require a little more time and effort on top of your current employment situation. One way to generate additional income is by working a side hustle. Ride share and food delivery services provide the flexibility you need around your current schedule and allow you to make some extra income. Another side hustle is tutoring. Think about the subjects you can teach that are related to your profession. Can you help young children, high schoolers, or even college age students with their academic area of need? Another is offering childcare services like baby sitting in the evenings or weekends.
Perhaps you are not interested in side hustles, but you do have a lot of unused items around your house. Clothing you don’t use and is in great condition with the tags still on? What about unused exercise equipment or kitchen gadgets (i.e. peelers, that egg cracker you always said you’d use but never did)? Look around your house and see if there are old electronics, items that do not go with your current decor, or novelty items that were an impulse buy and do not need. Consider selling them on Facebook Market Place, EBay or Amazon.
Another way to make additional income is asking your boss for overtime or extra work opportunities. Be sure to use any windfalls you might receive towards your debt, such as tax return checks or bonuses you received from work.
5. Negotiate a Lower Interest Payment
You might be able to get a lower interest rate on your credit cards by simply calling your credit card company and inquiring. Before you do though, be sure to check your check your credit score and compare offers with other credit card companies, so you have that information to use as you negotiate for a lower rate. Also, if you have been a good customer and have paid your bills on time, you could use your history with the company as leverage, as well. However, if the credit card company will not give you a lower rate, you could see if they would give you a temporary reduction on the interest rate.
Also, check with your credit card company to see if they have a 0% APR interest rate for balance transfers. If you have multiple cards, you may be able to transfer those higher balances to another credit card you own that offers temporary 0% financing on the transferred balance. Be sure to check for fees. They can be anywhere between 2-4% of the amount you are transferring. For instance, let’s say you are transferring $1000 and the fee is 3%. You’d pay $30 to the credit card company you are transferring to, and your total balance will be $1030 at the temporary 0% interest rate. The fees usually amount to less than what you’d have paid at the high interest rates on your credit card. You’d really save money if you are able to pay off the balance your transferred before the 0% interest rate expires!
6. Use The Cash Envelope System
The cash envelope system is a budgeting method that involves allocating specific amounts of cash into separate envelopes for various spending categories. To use this system for paying down debt, you can designate a specific envelope for debt payments. Each month, allocate a portion of your income to this envelope. As you pay off debt, you can either increase the amount allocated to the debt envelope or reallocate the funds to other financial goals, such as savings or investing. This system can help you stay on track with your debt repayment plan by making it easier to visualize and track your progress.
For a more in depth explanation and illustration of this method check out the following website from Discover.com: How does the envelope budgeting system work? | Discover
7. Create a Bare-Bones Budget
A bare-bones budget is a temporary, strict spending plan designed to minimize expenses and maximize savings. It involves meticulously categorizing expenses into essential (housing, utilities, groceries) and non-essential (entertainment, dining out). Non-essential expenses are significantly reduced or eliminated entirely. This may require temporary lifestyle adjustments, such as cooking at home instead of eating out, limiting entertainment, and finding free or low-cost activities. Creating a stripped-down budget involves tracking income and expenses, identifying areas for cuts, and setting realistic spending limits for each category. The timeline for following a bare-bones budget depends on individual financial goals and circumstances. It could range from a few months to a year or more, requiring consistent discipline and reassessment of spending habits.
By creating a bare-bones-budget, you are increasing your savings. Therefore, you have essentially freed up your cash to use towards paying off your debt more aggressively and more quickly!
By creating a bare-bones-budget, you are increasing your savings.
8. Round Up Your Payments
Rounding up your payments is a debt repayment strategy that involves paying slightly more than the minimum amount due each month. While seemingly small, these incremental increases can significantly accelerate debt payoff. By consistently paying even a few extra dollars, you reduce the overall interest accrued, leading to substantial long-term savings. Many budgeting apps and banking platforms offer automated round-up features, seamlessly transferring the difference between your purchase and the nearest whole dollar to a designated debt repayment account. To calculate the impact on your payoff timeline, you can use online debt calculators that incorporate the effect of extra payments. These tools provide a clear picture of how consistently rounding up can shorten your debt-free journey and save you significant amounts in interest.
Bankrate has a great online debt calculator you can use to determine how long it would take you to pay off your debt if you paid more than the minimum balance: Debt Paydown Calculator – Eliminate and Consulate Debt | Bankrate
9. Consider Debt Consolidation
Debt consolidation involves combining multiple debts into a single loan or credit card. Consolidation options include personal loans, home equity loans, and balance transfer credit cards. Carefully compare interest rates from various lenders, considering factors like APR, fees, and repayment terms. Potential pitfalls to avoid include:
- Higher interest rates: If your new loan has a higher interest rate than some of your existing debts, consolidation could increase your overall costs.
- Longer repayment terms: Extending the repayment period can lead to paying more interest over time.
- Increased spending: Consolidating debt can sometimes lead to increased spending if you feel you have more available credit.
- Damage to credit score: Applying for a new loan or credit card can temporarily lower your credit score.
10. Track Your Progress and Celebrate Milestones
Tracking your progress and celebrating milestones is crucial for maintaining motivation and staying on track with your debt repayment journey. Set realistic, achievable milestones, such as paying off a specific debt, reducing your overall debt by a certain percentage, or reaching a specific savings goal.
There are various tracking methods to choose from.
- Manual methods:
- Spreadsheet: Create a spreadsheet to track your income, expenses, debt balances, and payments.
- Notebook or journal:
- Digital methods:
- Debt tracking apps: Utilize free apps like Mint, Personal Capital, or YNAB (You Need A Budget) to track your finances, including debt balances and payments.
- Online calculators: Use online debt calculators to visualize your progress and adjust your repayment strategy as needed.
Celebrate your accomplishments along the way. These celebrations don’t have to be extravagant.
- Enjoy a free or low-cost activity: Go for a hike, visit a local park, have a picnic, or enjoy a movie night at home.
- Treat yourself to something small: Buy a new book, a cup of coffee, or a small plant.
- Acknowledge your progress: Take time to reflect on your achievements and acknowledge the hard work you’ve put in.
Celebrating milestones, no matter how small, provides a sense of accomplishment and reinforces positive financial behaviors.
