In an era where debt has become a common aspect of financial life for many, understanding how to efficiently pay it down is crucial. I’m here to offer a strategic approach to paying down debt, providing practical advice for those seeking to free themselves from the burden of debt.
I’m not taking the high ground here: I took on a lot of debt in 2023. Both debt that is beneficial to my growth as an investor, and debt that is detrimental to me as I move forward into the New Year. How I’m going to be paying down the debt will be a major focus for me.
There are a number of ways that you can pay down your debt. Each method begins with some introspection. If you believe that you have a spending problem, then consider reading my article on having better spending and saving habits.
I admit that this advice is easier said than done. I took on debt for renovations and materials with the purchase of my new rental property. But I also took on debt that I didn’t need to. I am now in the process of paying all this debt down. So I decided to write a short article showing how I intend to do that.
Understanding Your Debt
- Inventory Your Debts: List all your debts, including credit cards, loans, and mortgages, with their interest rates and balances. (I made a balance sheet with all my debts and my minimum monthly payments. I also calculated how much I would need to pay each month in order to pay everything down by the end of 2024.)
- Assess Your Financial Situation: Evaluate your income, expenses, and financial obligations to determine how much you can realistically allocate towards debt repayment.
Creating a Repayment Plan
- Budgeting for Debt Repayment: Incorporate debt payments into your monthly budget. Prioritize essential expenses and find areas where you can cut back to free up more money for debt reduction. (There are many articles and sources online about this topic. But one of my favorites for saving money is from Dave Ramsey himself, the guru on paying down debt.)
- Choosing a Repayment Strategy:
- Debt Avalanche: Focus on paying off debts with the highest interest rates first while maintaining minimum payments on others.
- Debt Snowball: Pay off smaller debts first for psychological wins, while maintaining minimum payments on larger debts.
- Debt Consolidation: Consolidate multiple debts into one with a lower interest rate, if possible. (I have done this with a balance transfer. Take debts that will soon be hit with interest and place them into a credit card with low APR. NerdWallet is an excellent source for this.)
Increasing Your Repayment Capacity
- Increase Income: Explore ways to boost your income, such as taking on a part-time job, freelancing, or selling unused items. If you have free time, like I do, consider getting a part time gig, freelancing, or getting a part-time job that you can do on the weekends. This article here from Fortune will give you some ideas on how you can do that.
- Reduce Expenses: Scrutinize your spending habits and cut down on non-essential expenses. Consider more frugal lifestyle choices to free up funds for debt repayment. A good way to begin is to use RocketMoney’s spending app to categorize what you spend your money on the most. Little purchases add up, and that $5 latte a day is $150 a month that could be spent paying down debt!
Utilizing Tools and Resources
- Debt Repayment Tools: Utilize online calculators and budgeting apps to plan and track your debt repayment progress.
- Professional Advice: If necessary, seek advice from a financial advisor or credit counselor to develop a tailored debt repayment strategy. Even though I have yet to use this method, the small fee you will pay will save you thousands in the long-run.
Staying Motivated and Disciplined
- Set Short-Term Goals: Break down your debt repayment into smaller, manageable goals and celebrate achievements along the way.
- Stay Disciplined: Stick to your budget and repayment plan. Avoid accumulating new debt during this period.
Dealing with Setbacks
- Emergency Fund: Build an emergency fund to avoid derailing your debt repayment plan due to unforeseen expenses. A good rule is to have enough saved to cover expenses for 4-6 months.
- Adapt Your Plan: Be prepared to adjust your repayment strategy in response to changes in your financial situation.
Paying down debt requires a combination of strategic planning, disciplined budgeting, and a commitment to change financial habits. By understanding your debts, choosing the right repayment strategy, and staying motivated, you can effectively reduce your debt burden and move towards financial freedom. Remember, the journey to becoming debt-free is a marathon, not a sprint, and requires persistence and adaptability.
