If you look on the internet there are millions of suggestions about how to pay off debt.
The best way to pay off debt is to understand your current situation, define your goals and work hard to achieve those goals. Let’s boil that down to 8 steps.
- Understand your current situation.
How much money is coming in each month and how much money is going out each month is a key to getting out of debt. In other words, you need a budget or a spending plan. A spending plan doesn’t have to be complicated. In fact, many online banks and credit unions offer free budgeting tools.
A budget shows you what you’re spending and where the money is going. It’s a fact-finding tool you can use to make decisions.
If, after examining your income and outgo, you determine that you have to adjust your budget to pay off debt, there are only two ways to do it: spend less or earn more
Are you paying for a gym membership you never use? Are you spending money each month on multiple streaming services you never watch? What about using online shopping as a form of entertainment? Ask yourself if each and every way you spend money is absolutely necessary.
On the other side, what can you do to bring in extra money? Can you work more hours or pick up a part time job? Is there something you can sell to raise cash?
- Create an Emergency Fund
If you are tackling debt, it may seem like you don’t have money to save, but saving is important. Life happens, and if anything comes up, like a job loss, medical bill or car repair, you need to be able to cover it.
Start with $1,000 then build it to three then six months’ worth of expenses. If that amount isn’t possible, aim for one months’ worth, which is still a great starting point. Make it a goal to have an emergency fund. Even if your emergency fund is only $200 when you have to use it, that’s $200 of debt you don’t have to pay back.
- Decide if you are serious about paying off your debt
What is your motivation? How hard are you prepared to work? How much are you willing to sacrifice to fundamentally change your lifestyle? Look deep inside and have discussions with your spouse to be sure you are both serious about debt payoff.
- Create a debt payoff plan
Gather up your most recent statements for all credit cards and loans, including student loans. Once you have the data in hand, make a list of all your debts, including: creditor’s name, total balance, minimum monthly payment, interest rate and payment due date.
Focus on the smallest balance and pay the any extra money you can scrape up to get rid of that smallest balance. Keep paying the minimum payments on all your other debts. Once the smallest debt is paid, use the amount that you were paying on the smallest debt and add that to the minimum payment of the next smallest debt. Use the Snowball Debt Elimination calculator on the Compass Catholic website to run “what if” scenarios on debt payoff options.
Remember, you didn’t create the debt all at once, it accumulated over a period of time. You won’t be able to pay it off all at once either.
- If you ARE serious, set goals
Define a specific goal so you know exactly when, how and what you are going to do. Saying you want to pay-off debt is like saying you want to lose 20 pounds. It’s a nice thought but not actionable. If your goal is specific and actionable, you’ll be much more likely to achieve it.
A specific goal would be: I want to pay off $5,000 in debt this year. I am going to cancel xx. I am going to sell the second car and carpool to work. I am going to use money earned from my part time job to eliminate debt.
Make some sort of goal sheet and keep it where you can see—like your refrigerator door or clipped to the bathroom mirror. If it’s visible to you regularly and often you are much more likely to make progress.
- Lower Your Interest Rates
Interest on loans or credit cards can make trying to get out of debt seem like running a losing race. The more you owe, the more interest you’re charged and the more you owe. One way to start getting ahead of the debt is to pay less interest if possible.
Depending on your credit rating, you may qualify for a credit card that has a better interest rate than your current card or you may be able to get a 0% introductory rate. But be careful, if you don’t make the payments on time per the agreement, the interest rate can skyrocket to something higher than your original credit card interest rate.
- Begin giving
God blesses our generosity and we have seen this and experienced it over and over. It doesn’t mean that if you give you will get. There are many other ways that you can be blessed; loving children, excellent health, a good marriage, faithful friends. The list of blessings goes on and on. One of the blessings is helping you stay focused on your debt payoff goal.
You might not be able to give a lot right now, but begin to give something. Create a plan to increase your giving so that you will eventually be able to give back to God proportionally to the blessings that he has provided to you.
- What if you are totally underwater financially?
If your living expenses and the cost of debt payback can’t be covered by your income, even with doing everything you can to cut costs and increase income, consider using a credit counseling or debt consolidation agency.
They will take all of your debts and consolidate them into a single monthly payment, often at a lower interest rate than you were paying before. This process enables you to pay off your debts faster than if you were just to try to keep up with your minimum monthly payments on your own.
To benefit from debt consolidation, you need to face up to the reasons you ran up so much debt in the first place. Was it irresponsible, impulsive spending? Was it a consistent effort to live beyond your means? Was it an inability to prevent yourself from using credit?
Whatever your problem was, your lifestyle needs to go through a fundamental change, or you will keep spinning in the debt cycle. If you get a consolidation loan and keep using the credit cards, it’s likely you’ll end up with even more debt.
Not all agencies are legitimate–some charge excessive fees, fail to perform promised services, provide bad advice, don’t discuss alternative ways to deal with debt, make false promises, and sometimes even take your money and run. The federal Trade Commission website offers tips on how to choose a credit counseling agency: https://www.consumer.ftc.gov
- 8. Bankruptcy is the choice of last resort.
If there is no way for you to pay off the debt, filing for bankruptcy may be your final option. Before filing for bankruptcy you have to go through credit counseling, so it is not the quick easy fix it once was.
Bankruptcy has a huge negative impact. It shows on your credit report for 10 years and will totally impair your ability to obtain any credit for several years. Think long and hard about this option and avoid it if at all possible.
If you are serious about being debt free, checkout the Manage Your Money God’s way podcast for more on the 8 steps to get out of debt.