Do you feel like you are neck-deep in debt? If so, you are not alone. The average American has more than $90,000 in debt.
One of the most important financial skills you can develop is paying off your debts quickly and reliably. To help you do this more effectively, let’s go over some recommendations that can make it easier to keep up with your payments and move toward your personal financial goals.
Paying Off Your Debts Quickly
- Communicate with your lenders. The first step you should take is to make sure that the lines of communication between you and your lenders are open. Hopefully, you are able to keep up with your existing loan payments without difficulties. But if that is not the case, contacting your lenders and letting them know what is going on may help you to negotiate a lower monthly payment amount. Doing that will allow you to hopefully build an emergency fund (see below). It also makes it less likely that any of your bills will be sent to collections. Ultimately, that will help you save money, while also protecting your credit score.
- Build an emergency fund. It may sound counterintuitive, but your next priority should probably be to build an emergency fund if you do not have one already. Many Americans have their money tied up in investments and retirement accounts, and may have little in the way of liquid cash. If that describes you, think about what would happen if you got slammed with an unexpected medical bill or vehicle repair cost. Would that be sufficient to tip your bank account balance into the negative? Would it make it impossible for you to keep up with one of your payments? Try working toward setting aside just $1,000 as an emergency fund. That way, if something unexpected does go wrong, you can dip into that, instead of money you need to keep up with your loan payments and bills
- Use the Snowball Method. One popular method for paying off debts is called the “Snowball Method.” With this method, you prioritize paying off the smallest debts, and then start working on the larger ones. From a purely financial standpoint, this method is not the most effective one at clearing debts. It does not take into account interest rates on your loans. So, why is it so frequently recommended? Probably because from a psychological standpoint, it can be very effective for many people. One of the reasons people sometimes fall behind and stay behind is because they get so discouraged by the sheer number of debts they have to deal with. It is reassuring to be able to cross out debts, reducing the total number you have left to juggle. If that encouragement is enough to help you stay the course when you might otherwise fall further behind, it could be what you need to catch up and keep up.
- Pay off high interest debts. Another approach which makes more sense from a mathematical point of view is to tackle your high interest debts as a priority, whether they are large or small. Those are the debts that are most expensive to continue to hold onto over time. So. the faster you can eliminate them, the less they will ultimately end up costing you.
- Consolidate your debts. If you have quite a bit of high interest debt, it may take you a long time to pay it off even if you are prioritizing it. If that is the situation in which you find yourself, it might make sense to instead try consolidating your debts into a new loan with a lower interest rate. Taking this approach may also make your debt more psychologically manageable, since you will have fewer payments to worry about each month. Because you have fewer payments to keep track of, you also are less likely to forget about sending any in the future.
- Avoid buying on credit. Do you make a lot of your purchases using loans or credit? Consider using cash instead whenever possible. If you do use credit for purchases, pay off your credit card debt immediately after you accrue it. That way, you are using your credit almost like cash.
We Can Help You Learn How to Manage and Pay Off Debt
Do you want to learn more about the recommendations we have made above? Jumpstart Empire Academy can answer your questions about paying off debt and provide you with additional tips and tricks to help you keep up. We also can help you navigate other aspects of managing your personal finances.
To get the financial education you need to thrive, please call us today at (559) 540-2275.