Planning to pay off your debts this year? Here's how to keep your New Year's resolutions on track and become financially free.
With the average credit card debt nearing $5,000, according to TransUnion, it’s no surprise that paying off debts is a popular New Year’s resolution.
If you vowed to pay off your debts and start living a more balanced financial life this year, we’ve got you covered. In the video below, Money Talks News founder Stacy Johnson has a plan for tackling your debts one by one. Check it out, read on, and you’ll have more than a “snowball’s chance” of getting out of debt.
Now, let’s hash out the details and get you on your way to financial freedom.
1. Make a list
Start by gathering all your bills – current credit card statements, car loan and mortgage statements: all documentation, online or off, that shows what you owe. Can’t find a balance? Call the lender and ask for it.
Now put it all in one place: list all your debts, along with minimum payments.
2. Pick a debt to destroy
Once you have a list of your debts, pick one to focus on. There are two schools of thought on which to begin with – the debt with the highest interest rate, or the one with smallest balance.
Mathematically, paying the debt with the highest interest rate makes the most sense. Motivationally, however, focusing on the smallest debts provides quick victories, which keeps you going.
Whatever method you decide on, pick a debt and start destroying it. Pay the minimum on all other debts, but as much as you can on your target. In his book Life or Debt, Stacy recommends setting aside 10 percent of your monthly income as a “debt destroyer.”
Where will you find the extra money to create a debt destroyer? By tracking your expenses and squeezing every possible penny from your budget. Use a website like PowerWallet to automatically track your expenses – see yesterday’s post, Ask Stacy: What’s the Single Best Way to Pay Down Debt? for more.
3. Start snowballing
After you pay off the first debt, move on to the next on your list. While paying the minimum on your other bills, for debt 2, send in the minimum + your “debt destroyer” payment + the old payment from debt 1. After debt 2 is gone, hit debt 3: send in the minimum + your “debt destroyer” + the old payment from debts 1 and 2.
Adding in old debt payments is called snowballing, and it’s a great way to pay off debts. Since you’re used to doing without that money, it’s easy to use it to help destroy all the debts on your list.
If you can come up with a “debt destroyer” equal to 10 percent of your income, by using snowballing, you can pay off every debt you have – including a mortgage – in as little as 10 years.
4. Finding the money
Don’t think you have any extra money to create a debt destroyer? Once you start tracking your expenses, you might be surprised.
For example, in 19 Tips to Save on Entertainment we talked about cutting your cable bill (average of $75 a month) and switching to a Netflix subscription ($7.99 a month). That one move will net you $67 a month you could use to destroy debt.
Planning on getting in shape this year? Drop your gym membership and take up running, or rent exercise videos from the library to do at home. In 10 Painless Ways to Save $1,000, we said the average gym membership costs $42 a month. Put that toward your debt for six months, and you’ll have $252 paid off.
Have a pet? There are some easy ways to save there too. In 10 Ways to Save on Pets, Renee Morad explained professional grooming for her miniature goldendoodle costs about $70 a session. By learning to groom her pet herself, she can skip this expense entirely. Do the same, and you’ve got an extra $70 a month to put toward your debt.
The bottom line – by creating a “debt destroyer” and snowballing your payments, you’ll stay motivated and get your debts paid off. And if you can’t find the money, check our site. We’ve got tons of ideas to help you find a few more bucks without sacrificing your quality of life.