How To Manage Your Debt
Too much debt can feel crushing and put stress on you and your relationships. By keeping up with your payments and creating a game plan, you can have a better handle on your debt. Discover how to manage your debt and pay it off strategically.
Evaluate How Much You Owe
First, you need to get the big picture of how much debt you have before you can start trying to manage it. On a piece of paper or spreadsheet, write out all your loans, including personal loans, mortgages, auto loans, student loans, credit card debt, and anything else you owe money on. Don’t leave anything out!
Then, collect the following information about your debt and add it to your spreadsheet:
- Creditor – who lent you the money and is servicing your loan
- Total amount left – how much is left to pay on the loan
- Minimum payment – what’s the minimum amount due every month?
- Interest rate – when you borrowed this loan amount, you agreed to pay back the original amount, plus interest
- Due date – this is when the minimum payment is due every month and needs to be collected by the creditor
Write Down Your Due Dates
The best way to manage your debt is to never miss a payment. On-time payments help your credit score and avoid unnecessary late fees. Yet, this can be difficult with lots of due dates happening through the month. To keep track of it all, try recording the dates in a planner or calendar, or something else that you check regularly. Or, you can set up monthly notifications on your phone’s calendar.
Always Make The Minimum Payment
When you signed up for the loan, you agreed to pay back that amount, plus interest, within a certain term. A term can be as small as one month or up to 30 years. Paying the minimum makes sure you are paying the loan back on time without incurring late fees and paying more interest than you have to. By paying the minimum amount due, your account stays in good standing.
To get ahead on your debt, you can pay more than the minimum. This will jumpstart you to finish your loan sooner than the original term. Be aware that some types of loans or providers will limit early payoff options, so make sure you read your specific terms!
Create A Debt Strategy
A debt management strategy like the snowball or avalanche method helps pay off your debt efficiently. For example, imagine you have the following debt:
• Student Loans -> $30,000 at 5% interest
• Car Loan -> $40,000 at 7.25% interest
• Mortgage -> $160,000 at 7% interest
• Credit Card -> $5,000 at 6% interest
Based on the example, you have a total of $235,000 in debt. That’s overwhelming and leaves little room for extra expenses and savings in your budget. To pay off your debt the fastest and pay less interest, you should follow the avalanche method.
The avalanche method asks you to pay the minimum payment on all your loans except for the one with the highest interest rate. Whatever extra money you can put towards your debt should be dedicated to this loan. In this example, your extra money would go towards your car loan, despite being the second highest loan. Paying down interest saves you time and money in the long run.
The snowball method puts more money on the lowest loan amount to pay it off quickly. By doing so, it creates a snowball effect to pay off the next lowest loan. Paying off debt is hard, and without making accomplishments along the way, it can feel really defeating. This method gives you instant gratification (compared to the avalanche method) and encourages you to keep paying off your debt.
Both require targeting a specific loan and putting extra money into the payment. Once you pay a loan off, you can take that amount and move to the next highest interest loan or lowest loan amount. Whatever method you choose, stay on track to pay off your debt!