Debt levels have risen to an all-time high. Reducing this financial burden is a very noble goal. Not sure how to get out of debt? You have options. Use this article to get you motivated and find a way to deal with your debt that feels right for you and your priorities.
There are quite a few ways to get out of debt. Some require brute force, others require discipline, and there are even methods that are somewhat passive and pain-free.
Find the right way for you to get out of debt:
1) The debt snowball
This has worked, endorsed by Dave Ramsey and many other personal finance experts.
What is this? It’s a debt snowball!
Start with the smallest debt you have and pay it off as quickly as possible, all while making minimum payments on all other debts. When your first debt ends, apply that payment to the next largest debt. Follow this pattern until you have officially slain the dragon and paid all debts.
Why is this my favourite? Because people stick to it.
When you pay off a debt and cross it off your list, something inside of you fills with enthusiasm. Want to do it again! “What is the next religion? Let’s kill this too! ” And you just go absolutely crazy until all debts are completely gone.
2) Debt collapse
What does a debt avalanche do that a debt snowball doesn’t?
It takes into account the interest on your loans.
The debt avalanche applies a different methodology to how to get out of debt:
Instead of ordering your smaller debts to the largest ones, you pay them off at the highest rate of interest to the smallest ones. Maggie McGrath does some great analysis on Forbes if you’re into math and want to get a nerd, but an avalanche pays off debt faster than a debt snowball.
However… Fewer people succeed in implementing this plan because you don’t see the immediate gains of your motivation. If your highest interest loan is $20,000 max, it can take a whole year to pay it off. At this point, most people have lost motivation and moved on to the next bright object in life.
If you are extremely obsessed and determined to get out of your debt, Avalanche will probably work for you. If you need the small winnings to energize you and put that spring in your step, use the debt snowball.
3) Loan consolidation
If you have a few high-interest debts and are more passive about getting rid of them, setting up a simple loan consolidation may be your best bet.
Decide on the length of the term, negotiate the new lower interest rate, and you’ll be out of debt at a predetermined time—hopefully long before your retirement date. It is not the most efficient way to pay off your debt, but it is better than ignoring your debt completely.
4) Transfer the balance to a low or no interest credit card
Depending on your credit score and debt load, you may be able to roll over your debt to a no-interest credit card and really focus on paying off the balance as quickly as possible—preferably before your introductory interest rate resets to a higher rate.
This is great if you are really committed to getting out of debt.
5) Talk to your creditors about a lower interest rate
Especially with regard to credit card debt, you may be able to talk to your creditor and ask them to discount the interest rate.
The worst they can say is no. It doesn’t hurt to ask.
6) Try to negotiate a settlement
Your creditors want you to succeed. They make money when you are able to repay the loan.
If they think you won’t be able to pay back the money you owe them or if they think they can get their money back faster, they may be willing to make it easier for you.
Before negotiating, make sure you know exactly how much you can pay back and in what time frame. Be prepared to show the creditor exactly how you will succeed. Prepare a convincing argument for why you should reduce the total amount of what you owe.
6) Refinance your mortgage
Interest rates are at their lowest now.
If you have a mortgage, it can be very profitable for you to refinance at a lower interest rate.
Just be sure to consider closing costs.
7) Refinance your home and incorporate other loans into your mortgage
If you have a mortgage and additional debt, you can really take advantage of lower interest rates by refinancing your mortgage and securing a home equity line of credit (HELOC) at the same time.
Refinancing can lower the interest rate on your mortgage. Assuming your HELOC rate is lower than your other debt, you can pay off your HELOC to pay off other, higher-interest loans.
8) Increase your earnings
Being in debt can be a great motivator for finding ways to make more money. The extra money from the side gig or raise can help you pay down your debt. Besides, when you don’t have those payments, it will be much easier for you to save for retirement!
9) Reducing current expenses
If increasing your earnings isn’t an option, but you really want to speed up your debt payments, you should consider cutting down on current expenses and using those savings to pay down your debt.
It’s not sexy or sneaky, just the old, tried but true way to get out of debt.
10) Commitment to get rid of debt
How do you get out of debt? You simply commit to getting out of debt! As your mother told you: Where there is a will, there is a way.
11) Stop saving and pay off debts
Yes, you have to save money. You definitely need to save and invest these savings. However, in the short term, it may be a better financial decision to stop saving and use the money you would have made to pay off your debts.
This is a good strategy if you have debt with high interest rates. You may want to compare the interest rate on your debt to the rate of return you could earn on savings in order to quickly assess where your money is being put. Put your money towards the higher price.
12) Run the scenarios and compare!
Not sure that paying down your debt will make a huge difference in your financial life? Try.
The new Retirement Planner is a truly powerful and detailed financial planning tool.
After configuring the system with your profile, you can try different scenarios. See what happens if:
- Use debt snowball techniques or debt breakdown techniques
- Pay off all of your credit cards in the next year or two
- Pay off your mortgage before you retire
- Downsize and Eliminate Your Existing Mortgage
- Consolidate all debts into a lower interest rate
Once you see how accelerating debt repayment can affect your finances (now and in the future), you may have the motivation you need to get out of debt.
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