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.
Here are the details one how to tackle your debts one by one:
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 (ideally, your free Mint.com account) and list all your debts, along with minimum payments.
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. Some personal finance experts recommend setting aside as much as 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, of course. Use a free online tool to automatically track your expenses.
Did we mention that Mint.com is free and tracks all your spending? Just sayin’.
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.
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, you can cut your cable bill (average of $75 a month) and switching to a mail-order DVD/live streaming subscription (about $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. 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. For example, professional grooming for a small dog can cost $70 a session. By learning to groom your pet, you can skip this expense entirely and put another $70 a month 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. Make this the year you finally become debt free and on the path to financial freedom.
“Tackling Your Debts One By One” was provided by MoneyTalksNews.