How to Properly and Quickly Pay Off Debt

What does the word “debt” mean to you? For some, it ushers in the most negative of thoughts, and is a cruel, yet prudent, reminder that you’re struggling with debt from one month to the next, from one paycheck to another.

For others, debt is a necessity and is understood as an evil you deal with on your terms but manage to keep it at bay and under control.

The fact remains that debt is a part of just about everyone’s life in some form or fashion, and the statistics show that to be the case.

A recent study showed that eight out of 10 Americans have some form of debt, whether it be a house they’re paying for, credit cards, cars or student loan.^[1]

And if you look at your home, your student loans and debt of that ilk, you can defend having it, as most can’t afford to simply write a check or hit an ATM to pay for a five or six figure home or what might be a six figure education as well.

You also can’t ignore that having debt, particularly the kind that is unsecured and unnecessarily limits on what you can do as far as retirement and working goes, too.

The new year is upon us, and one of the more popular resolutions is to get yourself financial fit again, and that begins and ends with no only watching your spending but focusing on getting out of debt, again namely the kind that centers on credit cards and debt you can’t draw back to something tangible (education, home, etc.).

This undoubtedly is amplified by the recent holidays, and a penchant for some to put those gifts on credit cards, only adding to the plight that is debt.

The retail sector saw a nearly five percent increase in 2017, which is being heralded as an economic win.^[2]

The question, however, remains is at what cost did this rejuvenation come as far as the consumer and debt goes.

The average consumer added just over $1,000 ($1,054 exactly) of new debt in 2017, up five percent from 2017.{http://www.magnifymoney.com/blog/news/2017-holiday-debt-survey/">[3]

So a couple five percent increases work differently and have different impacts based on perspective, but if you’re someone who has added debt, and already had debt to begin with, you’ll want to start thinking about how to pay it down, off and for good in one of these timely and efficient ways (or a combination of them).

Budgetary Lapse: Why tracking expenses eliminates debt

The average amount of debt carried in the form of credit cards is around $17,000 per household.^[4]

That number didn’t happen by accident, nor is it something you can ignore, particularly if you fall into that category. The aforementioned statistic about adding $1,000 to holiday debt might not seem like a lot if you’re pushing $20,000 in credit card debt but consider that holiday “tradition” for the next 10 years.

You guessed it, $10,000 more in debt.

That’s why budgeting will forever be the best way to eliminate debt, and it’s one of the easier ones if you don’t mind cutting expenses.

A simple look at your budget is a case study in expenses versus income, and if the latter can’t cover the former that creates debt. If your expenses outweigh your income, you need to simply start cutting expenses, and you can start with cable television (in some form), cell phone bill, auto insurance (looking for a lesser expensive plan) and eliminating eating out at restaurants or take out food.

Only a few years ago, the average household made $69,629 and expenses were around $55,978, leaving $13,651 in free cash. Fast forward to 2017 and 19 percent of Americans have saved $0 to cover emergency expenses.^[5]

Quite a discrepancy in statistics, right?

That would suggest that not everyone is budgeting whatsoever. If you have that kind of extra cash floating around, and nothing to show for it, that suggests you’re spending money on things you’re not budgeting for, whether it’s shopping sprees or vacations.

That $13,000 extra is almost enough to cover the average credit card debt per household, but if that cash flow isn’t managed properly, it obviously vanishes without a trace, suggesting just how paramount a proper budget is.

Minimum Effort: Why paying more than minimum eliminates debt

The moment a credit card bill arrives in the mail, what is the first thing you do with it? Hopefully, you’re answer, aside from pay it, is take a look at the note that is included just below the balance and due date.

Credit card companies include a minimum payment amount, the number of years it will take you to pay off the debt with that minimum payment amount only, along with an amount you can pay to cut the time of the debt off significantly.

Unfortunately, that minimum payment tends to be the more traveled path by the masses, thus leading to speculation to whether the minimum really is the best way to go about paying debt.

Easy answer: no.

Let’s understand that paying the minimum is better than nothing, but consider this scenario.

If you have household debt on credit cards totaling $15,609 and pay $625 (minimum) each month, assuming credit card interest is around 15 percent, you’ll end up taking about 14 years to pay off the entirety of that debt.^[6]

Granted, it’s not easy to put more down on to each bill, each month but simply doubling that cuts the interest down by 80 percent.

You can’t stress to yourself enough just how important it is to fall into that lull of paying only the minimum.

The interest alone is back-breaking and eye-opening if you pay the minimum on household debt. Consider too that even if you’re paying even a little more than the minimum could make a world of difference.

A household with $14,718 worth of debt, to pay just the minimum, would take them 31 years to pay off the debt and pay about $16,722 in interest over the 31 years (more than the debt itself). Changing that to just $10 more per month can result in $10,000 less in interest spent and a shorter term (roughly only 6 years).^[7]

If you want to truly get out of debt, you have to understand how to do it, and that it’s not as impossible or long-term as you think.

Method Acting: Why proper payment method eliminates debt

Paying off debt doesn’t happen without some sort of commitment but also an agenda on how you’re going to do it.

Most individuals, couples and households struggling with debt realize the gravity of the situation but aren’t quite sure how to go about fixing the problem. The know they have to keeping trucking along, paying as much as they can each month, but if there are multiple accounts to deal with, is it just turning into blind chaos with no real end game in sight?

That’s why you have to choose a method that works for you, and one that stands out is the trusted “snowball method,” which allows you to focus on one creditor, credit card or piece of debt first and then move on to another once the first bill is paid off.

For example, if you have 5 credit cards with balances, take the four that aren’t the lowest and pay the minimum. Pay as much as you can toward the fifth card, the lowest balance one, and continue doing that until the lowest balance is paid in full.

Then, take what you were paying on that lowest balance, the full dollar amount, and apply it to the next lowest balance (along with that minimum payment, too) and keep paying minimum on leftover accounts, and so on and so forth until all debt is paid.

Some argue that the better option to is to target higher interest cards first.

One example shows you’ll save $500 more if you center on higher interest rates first, rather than the lowest.

If you balances of $5,000, $3,000, $2,000 and the rates are 18.9, 15.9 and 11.9 respectively, you’ll pay $17,600 worth of interest over eight years at minimum payment, but if you have extra money to put toward debt, the snowball method suggests going for the $2,000 card but if you go to the higher one instead, you’ll cut interest by $3,100 and save you $541 in the process, not to mention take 3 months off the total amount of time you’ll be paying.^[8]

The upside to the snowball method is that you’ll see progress sooner in the form of that smallest balance being paid, but either option works as long as you have some sort of plan in place.

Extra, extra: Why putting any extra income eliminates debt

What did you do with last year’s raise? Did you take that bonus money and put it to good use? The answers to those questions might be anything from vacation to renovation for the first question to a resounding “yes” for question number two.

The fact remains that if you’re struggling with debt, your extra income, bonuses or even a side job should be put toward paying down debt.

Consider even just a 4 or 5 percent raise at work, and taking that and putting it toward a credit card with an interest rate of 18 to 25 percent. Even an extra $50 per month can cut the duration and interest of debt in half.

It’s easy to want to take a bonus and spend it on something with the idea that you “earned” the right to do it, but that doesn’t mean taking $5,000 and booking a vacation in the middle of February when you have $20,000 in credit card debt.

The thought, too, might be to dump that money into a savings account, but that might not be your best bet.

You’d actually be better served to tackle high-rate interest credit cards for an instant return on your cash that is better and more lucrative than banking it.^[9]

An argument can be made for putting some of that bonus money into an emergency fund, particularly if you don’t have one or not much money in one.

The general rule of thumb is you should have between three and nine months worth of salary saved in an emergency fund in case you lose your job, work stoppage, spouse loses their job, etc. So if you’re making $2,000 per month now, you should have between $6,000 and $18,000 saved in an emergency fund so you can have ample time to cover expenses should your income suddenly dry up.^[10]

Even if you add to an emergency fund, take some of what you’ll get in a bonus and at least pay off a smaller credit card or throw some money toward debt in some form or fashion. Getting rid of debt can’t be lost in the aura of actually getting a bonus from work.

The one thing debt can’t be is ignored, because doing so is going to create a financial vacuum that sees you paying the minimum payment for 30 years, spending thousands of dollars in interest and not being able to maximize how you save, whether that’s for an emergency fund or retiring before the age of 90.

Debt also doesn’t have to be something that is scary or acceptable, either. Implementing any of the aforementioned debt relief and payment scenarios and tips will go a long way toward tacking it head on, rather than turning the proverbial blind eye and hoping it goes away in time or with minimal effort on your part.

No matter how you define “debt”, it still has to be a financial priority so that you can do a number of things as you continue living your life with money on your mind. You’ll want to focus on paying down debt so you can ultimately save money, have a debt to income ratio that allows for a credit score that will allow you to buy a home, a car or have financial flexibility.