Pay Off Debt

If you’re looking to pay off debt, you need to make sure to go about it in the right way. A lot of people who eliminate their debt find themselves in the same situation again only a few months later. Think about the payoff not as a quick fix but as a lifestyle change. It’s the same way people approach diets if they want to keep the weight off.

Don't stress over debt. Make a plan to pay it off!

One highly recommended way to pay off debt is debt laddering. It works especially well if you several loans that have different interest rates. The first thing to do is get together all of your account statements and create a spreadsheet that lists each balance, the current monthly payment you’re making and the APR.

Once you’ve done that, it’s time to stop making all but the minimum payments on every debt but the one with the highest interest rates. Use all the additional funds you would have used to pay on the other loans toward that one debt. Once the first debt is completely repaid, move on to the one with the second highest rate. Put all the money you were paying on the first debt onto that second debt along with the minimum you were already paying on it. Then continue to the third and so on. With each debt you pay off you will have more and more money to put on the next one.

While the laddering method is a good one, there are other things you can do at the same time to make paying off your debt more manageable:

• Consolidate your bills – You may want to move all of your high-rate debt to a new creditor if you can get a much lower interest rate. Consider a low-rate credit card or a home equity loan or line of credit, but be careful with these option because there are potential issues. First, some credit cards have low promotional rates that don’t last long enough for you to get your debt paid off. Secondly, a home equity loan uses your house as collateral. If you can’t repay it for any reason you could face foreclosure.
• Use your savings – If you have a lot of money in savings, you may want to use it to pay on your debt. Most likely the dividends you’re earning on it are lower than what you’re paying in loan interest. Just don’t deplete your emergency fund.
• Borrow against an insurance policy or 401(k) plan– Either of these options can give you quick access to cash. However, there are strict guidelines for doing so and it’s not always to your benefit. Consult a financial adviser about pursuing these options if they are of interest to you.

The key to paying off your debt and keeping it paid off relies largely on how well you can reduce your overall spending. To figure out what you need to do to keep your finances on track, fill out a budget worksheet, listing everything you spend in one month’s time. Don’t leave anything off, not even a $5 coffee.

Once you have your expenses list, see how it compares to your income. Then decide how much of that income you’d like to put toward repaying your debt. Go through your expenses one by one and determine what you can do to make that happen.

If you can’t get enough money together to repay your debt in the timeframe you’d like simply by cutting expenses, consider ways to increase your income. Sell household items you no longer use, check out opportunities for part time or freelance work or ask your boss for that long-overdue raise.

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