Having a strategy in place to manage your debt, whether from credit cards, a mortgage, student or car loans, may help improve your financial well-being, and get you on track to saving for your future. Here are a few tips to start paying down your accumulated debt:
Assess What You Owe. Start by making a list of all your debts. Break them down into short-term (e.g., credit cards), intermediate-term (e.g., car/student loans), and long-term (e.g., mortgage) debt. Put long-term debt at the top of your list and short-term debt at the bottom. By categorizing what you owe, you’ve quickly identified your current financial situation.
Slash Your Credit Card Balances. Concentrate on the short-term debt at the bottom of your list first. It is important to pay off higher interest rate, short-term debt as soon as you can (e.g., credit cards) because the interest that accumulates by stretching out payments over time can make “bargain” purchases cost a lot more. For example, say you have a credit card with a 17.9% finance charge and your balance is $1,000. Making a minimum payment of $20 per month for the next year will only reduce your balance by $66.26. That means you would be paying $240 in exchange for a $66 reduction in your debt. So, when you make only minimum monthly payments, you are throwing money away. Remember, the money you save by paying off high-interest credit cards could be used to build your nest egg.
Disciplined Payment Practices. Setting up a realistic payment schedule and sticking to it will help control your short-term debt and reinforce the importance of saving. Ultimately, your objective should be to eliminate all short-term debt and then get in the habit of budgeting for day-to-day expenses, and using your personal savings instead of plastic or high interest rate loans for purchases.
Curb Impulse Spending. If you are prone to impulse spending, or tend to be an emotional shopper, practice buying only those items you need rather than want in the moment. One method is to delay your purchases for 24 hours. Often, an impulse will pass once you’ve had a chance to sleep on it.
Managing your debt and making adjustments to your spending behavior may brighten your financial outlook, so you can save more to reach your future goals.