- Alex Casella
Quick & Easy Steps to Implement a Debt Repayment Strategy!
By Alex Casella
Debt can certainly be daunting and cause overwhelming emotional reactions with no end in sight. The American Psychology Association indicates approximately 64% of Americans report feeling stressed about money, according to their 2020 Stress in America survey. There’s no question that, "How to get out of debt" is at the top of that list.
However, research shows that putting together a strategic plan to manage debt can combat anxiety, reduce unpleasant feelings and increase confidence to pay down balances and reach financial goals. Here are some tips to help you increase your sanity while dealing with debt!
1. Inventory your debt. The first step of putting together any financial plan is to get organized and know what you have. Gather all debt balances and interest rates. Don’t be anxious. Take deep breaths, remain calm and objective. Find a time when, and where, you’ll be most relaxed (i.e. if you’re most relaxed on your couch wearing pajamas on a Saturday afternoon then do it then!). If you find yourself getting worked up, take a deep breath and remind yourself you are taking the first, large, step to work down the debt.
2. Rank the Debt. Make a list of your debt and rank each from the highest interest rate to the lowest interest rate. Those with the highest interest rate may be costing you more money. It’s important to consider the economic impacts of your debts in addition to psychological impacts. Interest rates have an impact on how much you’ll pay for the loan.
3. Review Cash Flow. Understand your cash flow. After paying all your monthly expenses, how much money is left over to use for extra debt payments? Where can you modify, or cut-back in spending to find additional money? Be creative! Pursue feedback from friends and family for help in this area to see what others are doing to reduce spending.
4. Choose a Strategy. There are several ways to approach a debt repayment strategy. To find out which one may be best suited you may consider reviewing with a trusted advisor or financial professional. Here are some common strategies:
Debt Stacking a.k.a The Avalanche Method where minimum payments are made on all debts, and extra payments are used toward the loan with the highest interest rates. Once the highest interest loan is paid in full, that payment amount plus the extra amount will go toward the next highest interest rate. Once that’s paid off add that payment now onto the next loan, and keeping moving down and down until debt is paid off. This is an economical approach to pay the least amount of interest while aggressively paying down debt.
The Snowball Method where minimum payments are made on all debts, and extra payments are used toward the loan with the smallest balance. Similar to the debt stacking strategy, once the lowest balance is paid off, that payment amount plus the extra goes toward the next lowest balance and keeping moving upward until all debt is paid. This is a psychological approach to boost confidence in paying off debt with less emphasis on the amount of interest paid.
The Fireball Method which is a way of separating types of debt into “good” (low, fixed interest loans such as student loans or secured debt i.e. a loans) or “bad” debt (credit cards, high-interest unsecure loans). The focus is to Snowball or Avalanche the “bad” debt using extra payments, then turn focus on the “good,” once “bad debt is eliminated.
Debt Consolidation is a strategy to consider where several types of loans are consolidated into one loan which can potentially lower the average interest rate and also have one fixed-payment each month, which simplifies managing several payments.
0% Balance Transfers can also be used to lower high-interest credit cards and loans into a consolidated payment for a period of time (i.e. 12 months). It’s important to consider the 0% period to see if you can pay off the balance before the end of the 0% term, and also consider any balance transfer fees (i.e. read the fine print and terms of each loan).
5. Review Debt with a Trusted Advisor or Financial Professional. Spend time with someone who can assist in making unbiased debt repayment decisions. The focus of this conversation is about the best way to repay your debt, rather than what products are available for you to purchase from this financial professional of debt counselor. Be mindful of hourly rates for fee-for service or costs for purchasing a program. Keep in the back of your mind the cost you’ll pay to hire, or toward a program, can be an actual payment toward your debt.
6. Remain Diligent & Vigilant. Perhaps the most important step is to stay on top of this plan. A diet and exercise plan most commonly bring results when you stay on top of eating and exercise. Dig-deep, show up, and keep your eye on the prize! Paying down debt takes work, dedication, and commitment. Consider an accountability partner, whether that’s a friend or family member, or the financial professional you met with, have a support system that will hold you accountable and you’ll notice how quickly you start chipping away at that debt!