How to pay off Debt
Paying off debt can be overwhelming. When I was paying off debt I needed to know that it was possible and that I was making progress. As cheesy as it sounds my daughter and I made a paper chain. Yep, the kind you made as a little kid with construction paper, glue and tape. We counted up all the debt and then decided what the value of each link was going to represent. Then I hung the ugly thing in the middle of my living room. That meant I had to see it everyday and that people would ask me what it was for. They also noticed when it changed in size. I let my daughter cut each link and we did little happy dances together when she got to cut many links off at a time. It was a constant reminder of the goal and a visual way of tracking our progress.
So how did we get rid of it? I used the Debt Snowball. What is that you ask. It is when you list all your debts from smallest to largest and pay minimum payments on all the debt except the smallest debt. You pay as much as you can on that little debt until it is gone. Then you take the money you were paying towards that and move it to what you were already paying on the next smallest debt. This gains you momentum and you get quick wins.
Other options include things like Debt Avalanche, Debt Consolidation, Debt Settlement, Credit Card Balance Transfer, 401K loans, Personal Loans, Student Loans Forgiveness, or Bankruptcy.
Let’s look at each of those a little. Debt Avalanche is where you pay off your debts in order of highest interest rate to lowest interest rate no matter the balance. While you may think that this approach is best for your situation I just want to caution you. If your highest interest rate is on $20,000. You will be paying on that 20,000 a very long time and probably lose motivation before you ever make it to the next debt.
Debt Consolidation is where you pay off all your debts by combining them into one large payment with typically a reduced interest rate and an extended payoff time frame. This option makes it feel like you made progress, however you may end up paying more in the long run if you extend the time to pay it off. You also lose the momentum in this option. There are no little wins along the way because now you just have one big mountain to climb.
Debt Settlement is where a third party company tries to negotiate your debt payments on your behalf. You can do this yourself, you don’t need to pay someone to help you negotiate and typically they ruin your credit and you will still be responsible for paying off the debt in the end even if they do get it reduced. Plus you will have paid them.
Credit Card Balance transfers are just moving money around that require you to pay a balance transfer fee. You may be moving the money to get lower interest rates or limited time 0% interest, but this is a temporary fix and in not changing the behaviors that got you in debt. It gives you a fake sense that you did something. When in fact you now owe more due to the fees.
401K loans are stealing from your future! This option is dangerous. If you lose your job or leave your employment you will be responsible for the remaining loan plus you will be taxed on it! Many people look at this as you are only borrowing from yourself but you are stealing from yourself, you are missing out on the growth in you retirement account and putting your future self at risk.
Personal loans, Home Equity Loan and bankruptcy are not good options either.
Personal loans or even Home Equity Loan of Credit (HELOC) are just digging yourself a deeper hole of debt and putting you at risk similar to the 401k loan or debt consolidation. Even if you get a lower interest rate these options may increase the length of time you have debt and how long you are paying interest on that money. The HELOC even puts your home at risk if you can’t make those payments.
Bankruptcy is a last resort and most of the time you aren’t at that point yet. It will wreck your credit and messes with your self esteem. You lose your assets, major debts like student loans can’t even be cleared by this option, and sometimes they just set you up on a payment plan. You can look at other options before this and I recommend working with a financial coach and doing the debt snowball.
If you are ready to tackle your debt book a Discovery Call with me and let’s make a plan for you.
