Rohman Rory HemleyDebt is a necessary part of our lives. There are items and goals that would be unattainable to us without borrowing. Imagine having to save up the entire cost of a house before being able to purchase one. Many people find it challenging enough to save up the down payment, which can range between 5–20% of the home’s purchase price. For some, that amount can be as high as $80,000 on a $400,000 (the average home price).
Despite the benefits of using debt to acquire items we are unable to buy outright, debt can become cumbersome if not managed properly. Ballooning, unmanageable debt can affect your quality of life and lead to financial ruin. Here are some strategies to help you manage out-of-control debt.
Assess And Measure
Before you panic about how much money you owe, take some time to assess your debt. Get a piece of paper or an electronic device and write down all the money you owe. Then write down to whom these debts are owed. Also list the interest rate, duration of the loan, and the monthly payment. Putting it all down makes it real and tangible. It eliminates your mind’s tendency to over-dramatize and imagine the worst possible scenario. Leaving it all in your mind will always make your debt seem unmanageable.
EXAMPLE:
| Institution | Type | Interest rate APR | Duration | Monthly Payments | Amount Owed |
| FK Credit Union | Car Loan | 8% | 5 Years | $729 | $35,000 |
| MU Bank | Credit Card | 23% | N/A | $262.50 | $9,000 |
| MU Bank | Credit Card | 21% | N/A | $192.50 | $7,000 |
| UR Lending | Mortgage | 5% | 30 Years | $1,663 | $250,000 |
After you write everything down, categorize your debt. There are several ways to do this. You can categorize from high to low (or vice versa), by type (unsecured, mortgage, student loans, auto loans, credit cards, personal loans), or institutions they are owed to.
The benefit of categorizing debt is that it influences your strategy. The Dave Ramsey snowball method categorizes debt from smallest to largest and pays them off in that order. Other financial experts recommend paying off debt with the highest interest rate first to save money over time. Before choosing a method, it’s helpful to get everything organized so you can choose the best approach for your situation.
Put A Lid On It
You may be eager to pay down debt, but before choosing a method, ensure that your debt is not growing. Taking on more debt or accumulating fees and fines from late or missed payments can undermine your efforts. Make every effort to keep up with payments and pay on time so your progress isn’t undone.
Cut Back On Spending
Make a list of all your monthly expenses. You can do this by examining your credit card and bank statements. Be mindful of your cash expenditures, which may be difficult to track because they rely on memory. If you believe your memory is not a reliable source, write down all cash expenses for a week or month. A month is ideal because some expenses occur biweekly or monthly. This will give you a full picture of your spending. Small expenses such as tipping at dinner, vending machine snacks, or coin laundry can be easily overlooked.
After creating your list, review it and identify expenses that can be eliminated or reduced. The goal is to free up more income to put toward debt. Many people discover unnecessary spending that can be removed without affecting their quality of life.
Some choose to make major cuts because they are tired of debt hanging over them. How much a person cuts depends on their ability to adjust their lifestyle. If you find no expenses that can be cut, don’t worry—there are other solutions.
Seek Cheaper Alternative/Substitute
If eliminating expenses does not lead to significant savings, explore cheaper alternatives. A popular example is cooking at home instead of ordering delivery. Buying store-brand items, and choosing non-luxury goods can also reduce costs. Another example is switching from cable TV to a video streaming subscription. However, with the increasing number of streaming services, costs can rival or exceed cable if you subscribe to several.
Downsize
Downsizing is an effective method when you find yourself paying for more than you need. You may choose to downsize your home or vehicle if they exceed your needs. Many people downsize their home after children move out. Others downsize their vehicle from a luxury car to a non-luxury option. These steps can significantly reduce mortgage and car payments.
Second Job Or Side Hustle
Reducing expenses and downsizing increases the money available to apply toward debt. Many people also seek ways to earn extra income to pay off debt faster. You may have time to take on a second job or work extra hours. The extra income, combined with reduced expenses, can make a substantial difference.
Create A Budget (Spending Plan)
Your budget, or spending plan, is where you decide which method you will use to tackle your debt. If you decide to use Dave Ramsey’s snowball technique, your budget should reflect how much you will pay toward your smallest debt until it’s paid off. You would then roll that payment into the next smallest debt, continuing the process. Throughout this, you must continue making minimum payments on all other debts.
It is also important to incorporate a payment schedule into your budget. For example, If you plan to make extra payments from a second job, include that in your schedule. Some people choose to pay off debt with the highest interest rate first. Whichever method you choose, your budget should reflect it.
Some Caution
Tackling debt aggressively can be challenging. Here are some cautions that will help ensure success.
- Be mindful of which expenses you cut. Expenses that contribute to self-care are essential to your overall well-being. While living in your car may eliminate housing costs, it can take a toll on your social life and mental health.
- Remember there are only 24 hours in a day. Taking on a second job, even part-time, can affect your mental and physical health. It’s best to treat a second job as a short-term solution. If you do take one on, choose something low-stress.
Seek Professional Counsel
When something is outside your expertise, it is always wise to seek professional counsel. A financial advisor or planner can bridge the gap between what you know and what you don’t. This ensures you are on the right track. Make sure the professional you choose is reputable, and shop around to ensure fees are fair and competitive.
Final Thought
The decision to pay off your debt sooner has many benefits. You gain peace of mind by removing a burden from your life. You also free up disposable income to put toward savings and other goals. Listing and categorizing all your debt allows you to create an effective plan. Keeping up with your payments prevents your debt from spiraling. Cutting back on spending and increasing your income—through a second job or side hustle—can help you become debt-free sooner.