Handling debt can be difficult and stressful, but you're not alone. As of December 2023, Americans had a collective $108.3 trillion in revolving debt, much of which is credit card debt.
Debt is one of the most common financial problems faced by many people. Debt can come from various sources, such as credit cards, unsecured loans, vehicle loans, home loans, or online loans. Debt can cause stress, pressure, and financial hardship if not managed properly. — Worldculturepost
Making a plan to reduce your debt is the first step toward debt freedom, but you can do more to simplify the process. Adopting healthy financial habits will help you eliminate debt and enhance your overall finances. Not sure which habits to modify? Try one of these methods that will work for people with any amount of debt.
Key Points
- Simple habits can have a big impact on your progress toward reducing debt.
- Creating and following a budget is vital, and budgeting apps can make it as easy as possible.
- Making a habit of applying extra cash toward your debt can help you clear those balances faster.
- Setting objectives and celebrating each step toward them can help keep you inspired to become debt-free.
List All the Debts You Have
The first step to creating a debt repayment plan is to record all the debts you have. You should record all the debts you have, including the amount, interest, and minimum payment. You can use your credit report to confirm the debts on your list. Having all your debts in front of you will allow you to see the bigger picture and stay aware of your overall debt situation.
To keep track of all your debts, you can use tools or apps that can help you calculate and track your debts. Some of the tools or apps that you can use are:
- Debt Repayment Calculator - Cermati
- Debt Payoff App - Debt Payoff Planner - App on Google Play
- Debt Payoff App - Debt Free - App on Google Play
Create and Use a Budget
Creating a budget establishes a solid base for your finances. In addition to helping direct your spending choices, a budget can also give you a stronger grip on how much money you have coming in and going out each month. Examining it closely can help you identify areas where you can save money—and then use this “extra” money to pay off debt faster.
Note
The 50/30/20 method is a common budgeting approach in which you assign half your budget to essential costs, 30% to wants, and 20% to debt and savings.
While you can make a budget in a notebook or on a worksheet, using a budgeting app may make it simpler to stay on track. In addition to helping you establish your budget categories and expected expenses, an app can monitor your spending throughout the month and let you know where you stand at all times. Some of the best budgeting apps have additional features like bill monitoring, spending alerts, or investment management.
Save for Emergencies
Having an emergency fund is vital for avoiding debt. Without access to emergency savings, you may have to rely on credit cards or loans to pay for unexpected costs.
While focusing on your debt payments is important, you don't have to pick between paying off debt and saving money. You can—and should—do both, even if you don't have a lot of extra money after bills and expenses. It all counts, and these methods can help you save a few dollars at a time:
- Set up regular automatic transfers to a savings account.
- Use bank programs that round up each debit transaction and move the difference to savings.
- Divide your direct deposit paycheck into multiple bank accounts.
Make Extra Payments
Paying more than the minimum is essential to saving money on interest and clearing your debt years ahead of schedule. Using a method like the debt snowball or debt avalanche is more efficient than spreading larger payments randomly among all your debts. Both debt-payoff methods need you to make larger lump-sum payments toward a target debt while paying the minimum on your other debts. With the debt snowball, your target debt is the one with the lowest balance. The debt avalanche, on the other hand, targets the debt with the highest interest rate.
Note
You don't have to stick to one method for your entire debt payoff process. For example, you might begin with the debt snowball to eliminate a few small balances, then switch to the debt avalanche for your remaining debt to reduce the overall amount of interest you’ll pay.
Making extra payments toward your debt lowers your balance much faster and speeds up your debt payoff process. Anytime you receive a lump sum of extra money, like a tax refund or a bonus, think about applying at least a part of it toward your debt.
Set Goals
While reducing your debt likely ranks pretty high on the list of things you want to achieve, it doesn’t have to be your only financial objective. In fact, setting other objectives can help you stay inspired to work on your finances. For example, you may have dreams of purchasing a home, taking a luxury vacation, or growing your savings up to $10,000.
Note
Display your objectives in a place where you see them often, like on a vision board or your phone’s background. Seeing them can remind you why you’re working so hard and motivate you to keep going.
Celebrate Small Wins
Even with a solid method and extra payments, clearing debt can take a long time. It's important to acknowledge and celebrate your progress along the way as you make steps towards your goal. Even seemingly small things, like clearing a balance or reaching $1,000 in your savings account, are worth celebrating—and can help inspire you to work toward the bigger wins.
Monitor and Evaluate Your Progress
The fourth step to creating a debt repayment plan is to monitor and evaluate your progress. By monitoring and evaluating your progress, you can find out whether your debt repayment plan is working or not. You can also find out if you need to make adjustments or improvements to your debt repayment plan.
To monitor and evaluate your progress, you must record and track your debt payments regularly. You can use tools or apps that can help you calculate and track your debt. Some of the tools or apps that you can use are:
- [Debt Repayment Calculator - Cermati]
- [Debt Payoff App - Debt Payoff Planner - App on Google Play]
- [Debt Payoff App - Debt Free - App on Google Play]
You should also evaluate your progress periodically, for example every month or every three months. You should compare your debt payments with the plan you made. You should determine whether you have reached the target you set, how much money you have paid, how much money you still owe, and how much money you have saved on interest.
If you feel satisfied with your progress, you must remain consistent and disciplined to pay your debts according to the plan. If you feel unsatisfied with your progress, you should find out what are the obstacles or problems you are facing. You must find ways to overcome or avoid these obstacles or problems.
Monitoring and evaluating your progress can help you pay off your debt by:
- Increasing financial accountability. You can take responsibility for your finances, including your debt. You can also avoid mistakes or omissions that could cost you money.
- Increases financial flexibility. You can adapt your debt repayment plan to changing circumstances. You can also make the right and wise decisions for your finances.
- Increase financial achievement. You can celebrate and appreciate the progress you have made. You can also boost your confidence and self-esteem.
Seek Assistance
You don't have to go through your debt journey alone. You can find support from online groups, social media, or like-minded friends. Facebook groups, Reddit forums, and Instagram hashtags are good ways to connect with other people who are working to get out of debt. You might also meet people who have cleared their debt and are willing to help others on their way to debt freedom.
If you're having trouble making your minimum payments, think about getting professional help through a reputable consumer credit counseling agency. These firms can help you make a budget, make a plan to clear your debt, or work with your creditors. A credit counselor can negotiate lower interest rates and minimum payments. They can also create a debt payment plan that helps you handle your debt once and for all.
The Bottom Line
Creating better financial habits takes time and practice, and with consistency and time, you'll improve at it. And the trade-offs you're making today will feel worth it when you’re enjoying the benefits of your hard work: a $0 debt balance and healthy progress toward your financial objectives.