A few weeks ago, I wrote a blog post on the Top Five Money Resolutions to Make In 2019. Over the next couple weeks, we’re going to explore a few of those topics more in-depth, starting with how to pay off debt.
Paying down or paying off debt is a common New Year’s resolution. It’s also one that people make over-and-over again because they were not successful previously.
The first thing you must address if this is a goal for you is your “why.”
Understanding why you want to be free of debt and what that would mean is going to be your most powerful motivation to stick with your plan and whatever parameters you set up. Make your why as personal and specific as possible.
For example, “I want to get out of debt, so I have more money and less stress” is a little vague. While true, it’s not going to be enough to motivate you when things get tough. However, “I want to get out of debt, so that I have more freedom to spend fun, quality time with my family” might be.
First step: identify your why—make it as personal and specific as possible.
Next, you need to address the overall picture of your finances.
What are you earning? What are you spending? How much do you owe? And, where can you start? Natalie Pace, in The ABC’s of Money, says “a debt problem is, at its core, a budgeting problem.” Meaning this: in its simplest form, having debt means you are spending more than you earn. So, to remedy that, you will need to start spending less.
The only way to figure out how much less is to know what you’re earning, what you’re currently spending, and how much you owe. Additionally, figuring out what you need to pay on each debt to start making a dent will help you determine how much extra you need to come up with and potentially where to start.
Step two: know the overall picture of your finances.
This can be as simple as writing it down on paper, using one of the many online templates available, or a specific program that tracks everything for you, like YNAB (You Need A Budget), which is my favorite. Check it out and use this link to get a free month (regularly $6.99). I’m an affiliate because it really is an awesome tool and so worth the minimal expense for what it will help you do!
Once you have identified your why, looked at the overall picture of your finances and come up with a budget, you will need to figure out a plan. The two most popular plans are the Avalanche and Snowball methods.
Avalanche Method
With the Avalanche method you start putting money towards your debt with the highest interest rate first, then work your way down the list. This makes sense because you will end up paying less overall and will likely pay off your debt more quickly.
Snowball Method
With the Snowball method you start with your smallest balance first, regardless of interest rate, and work your way up to the highest one. This makes sense because you will get rid of smaller debts faster (leaving you less to keep track of), and it provides more instant gratification and motivation because you will see your progress more quickly.
Which method you choose is up to you. Just make sure you pick the one that makes the most sense, personally, and the one you are most likely to stick with long-term because that is the key.
Third step: pick a plan and stick to it.
Next, you will want to determine how much extra you can put towards paying off your debt. If you don’t have a lot of wiggle room in that area, you will also need to figure out where you can come up with extra money. Perhaps you cancel subscriptions that are not being used (music/tv, gym)? Or, negotiate contracts with service providers (phone, internet)? Or, pick up an extra job or side hustle, sell some of your belongings, or find cheaper housing? There are a lot of options, for most people, if you break it down and really think about it… This part isn’t fun but, if you are serious about getting out of debt, you will do what it takes to make that happen.
Step four: find extra money to pay as much as you can towards your payoff plan each month.
Finally, you will need to establish the habit of spending less or spending only what you can truly afford or have saved up for. It’s easy for life to catch us off-guard and sometimes debt is unavoidable. I understand that. I also don’t think having some debt is necessarily a bad thing. Where it gets tricky is when it starts robbing you of your future, spirals out of control, or causes unnecessary stress or anxiety.
Knowing that you are spending within — or, even better, under — your means will provide an incredible sense of relief and accomplishment. It will also enable you to participate in behaviors that will make your money work for you (not the other way around), like investing.
Finally, the fifth step: spend less money. More tips on exactly how to do that in next week’s blog. ?
In the meantime, if you need help finding money to save or are curious about growing your wealth, I would love to chat via a FREE connection call.
You can also find me on Facebook, YouTube, and Instagram for more money management and wealth-building tips.
Light and love for the new year,
Karen