Debt levels have risen to all-time highs. Alleviating this financial burden is a very worthy goal. Not sure how to get out of debt? You have options. Use this article to motivate yourself and find ways to tackle debt that suit you and your priorities.
There are many ways to get out of debt. Some require violent force, others require discipline, and some are even fairly passive and painless.
Find the right way for you to get out of debt.
1) The debt snowball
Endorsed by Dave Ramsey and many other personal finance professionals, it works.
what is that? Debt is snowballing!
Start with the smallest debt and pay it off as soon as possible while paying the bare minimum for all other debts. Once the first debt is gone, apply that payment to the next larger debt. Follow this pattern until you have officially defeated all your dragons and paid off all your debts.
Why is this my favourite? Because people stick to it.
Something inside of you runs wild with enthusiasm when you pay off your debts and take them off your list. I want to do it again! “What is your next debt? Let’s kill that one too! ” And until all your debt is completely wiped out, you’re just completely insane.
2) Debt Avalanche
What happens in a debt avalanche that doesn’t happen in a debt snowball?
Interest on the loan is taken into account.
Debt Avalanche applies a different methodology to get out of debt.
Instead of ordering from lowest debt to highest debt, pay off highest interest rate to lowest interest rate. Maggie McGrath has a great analysis on Forbes If you’re into math and you’re into geeks, same thing, you’ll pay off your debt faster in an avalanche than in a snowball of debt.
But… fewer people follow through with this plan because they don’t see an immediate effect to keep them motivated. If the highest interest loan is a $20,000 limit credit card, it could take him a year to pay off. By that point, most people lose motivation and move on to their next bright goal in life.
If you’re super nerdy and determined to get out of debt, Avalanche will probably work for you. If you need a little victory to lift your spirits and spring your steps, use the snowball of debt.
3) Summary loan
If you have some high-interest debt and are reluctant to get rid of it, setting up a simple loan consolidation may be your best bet.
Set a time period, negotiate a new lower interest rate, and the debt will be forgiven at a prearranged time, preferably well before your retirement date. It’s not the most effective way to pay off debt, but it’s better than ignoring debt altogether.
4) Transfer balances to low or zero interest credit cards
Depending on your credit score and debt burden, you may be able to focus on moving your debt to an interest-free credit card and paying off your balance as soon as possible, preferably before the introductory rate resets to a higher rate.
This is great if you are really determined to get out of debt.
5) Discuss low interest rates with creditors
Especially in the case of credit card debt, you may be able to negotiate with your creditors and request interest deductions.
The worst they can say is “no”. And it doesn’t hurt to ask.
6) Try to negotiate a settlement
Creditors want you to succeed. They make money when they can pay off their loans.
If they think you can’t pay back the money you owe them, or think they can pay you back sooner, they may be able to make it easier for you.
Before negotiating, find out exactly how much you can afford to pay back and for how long. Be prepared to show your creditors exactly how you will succeed. Prepare a compelling argument as to why you should reduce the amount you owe.
6) Mortgage refinancing
Interest rates are currently at an all-time low.
If you have a mortgage, refinancing to a lower interest rate can be very beneficial.
Just be sure to consider closing costs.
7) Refinance your home and consolidate your other loans into your mortgage
If you have a mortgage and additional debt, you can take full advantage of low interest rates by refinancing your mortgage and securing a Home Equity Line of Credit (HELOC) at the same time.
Refinancing can lower your mortgage interest rate. Assuming the HELOC has a lower interest rate than other loans, you can use your HELOC funds to pay off other high interest loans.
8) Increase revenue
Being in debt can be a great motivator to find ways to make more money. The extra cash you get from your side job or a raise will help you pay off your debt. Plus, once those payments are gone, retirement savings will be easier.
9) Reduction of existing expenses
If increasing your income doesn’t seem like an option, but you really want to pay off your debt faster, you should consider cutting your existing expenses and using your savings to pay off your debt.
It’s neither exciting nor tricky. An old-fashioned, tried-and-true way to get out of debt.
10) Work hard to get out of debt
How do you get out of debt? You just work on paying off the debt. Your mother may have told you She said, “Where there’s a will, there’s a way.”
11) Stop saving and pay off debt
Yes you should save money. You definitely need to save and invest that savings. However, it may be a better short-term financial decision to stop saving and use your savings to pay off your debt.
This is a good strategy if you have high interest debt. To easily assess where to invest your money, it’s a good idea to compare the interest rate on your debt with the rate of return you get on your savings. Direct your finances toward higher interest rates.
12) Run the scenarios and compare!
Not sure if paying off your debt will actually make a big difference in your financial life?
new retirees retirement planner is a very detailed and powerful DIY financial planning tool.
After configuring your system with a personalized profile, you can experiment with different scenarios. See what happens when:
- Use the debt snowball or debt avalanche technique
- Pay off all credit cards within the next 1-2 years
- Pay off your mortgage before you retire
- Shrink and eliminate existing mortgages
- consolidate all debts into low interest rates
Understanding how accelerated debt repayment will affect your finances (now and in the future) may give you the motivation you need to get out of debt.
This post, How to Get Out of Debt: 12 Ways to Cut This Expense for a Safer Future, first appeared on NewRetirement.
