Want to get rid of your debt? Check out our list of debt defying strategies below as well as these debt elimination tips.
The “D” word…for Debt. Just about everyone is familiar with it, although some people are more intimately acquainted with it than others are. Debt is often the cause of disagreements and unhappiness among couples; and it often tends to creep into your thoughts when you’re busy doing other things, wreaking havoc!
I get a lot of questions from readers who ask about what they should do about their mounting debt. A few of them have seen their debt problems start very early, usually materializing while they are at school (or in college to be exact) — when student loans and credit card debt begin piling up. In a way, I would expect this to be the case for students who aren’t able to receive assistance from their families or who aren’t fortunate enough to get grants or scholarships. At that period in their lives, their capacity to earn hasn’t much exceeded their spending and it would take herculean discipline to avoid debt altogether.
It’s also a fact that debt is on the rise with the average credit card balance growing from $4,800 in 2007 to $5,500 in 2008, and over $10,000 in 2011 (as per CNN Money), with 60% of card holders unable to pay their balance in full. When those numbers add up, it can be pretty overwhelming.
Still, with enough discipline, determination and commitment, debt is something you can manage and control. I am fairly debt averse so the only loan I have is my mortgage. In order for things to stay that way, I refer to these strategies to make sure I stay relatively debt free. These strategies have been echoed time and again throughout financial literature, but I thought it would be worth reminding ourselves what specific, concrete techniques do exist to help us pare down our debt obligations.
15 Concrete Strategies To Get Rid Of Debt
#1 Start budgeting and employ the use of effective money management or budgeting tools.
What has helped a lot of people manage and control their debt is the use of a budgeting tool or software package like YNAB (You Need A Budget). I wrote a comprehensive review of the YNAB personal budget software application, where I discuss why I think this is a superior tool for those who are serious about eliminating their debt for good (it’s much better rated than Quicken). It actually espouses a very clever budgeting strategy that will encourage you to save more and improve your savings habits. You can also try online budgeting tools like Mint.com, which offer standard budgeting features for free!
#2 Stop racking up any more debt and instead, start using cash. Cut up and throw out your cards and use cash. Without the tools to incur debt, you won’t. The key is persistence and applying the strict cash regimen as long as you want to control your spending. Along with sticking to cash transactions, work on a budget if you haven’t done so already, and carefully track where all your money goes.
#3 Don’t spend on things you don’t need. You should carefully consider each purchase you make, perhaps only spending for what’s necessary. Also, try to avoid impulse purchases. I have relatives who are in debt but have an addiction to shopping. Until they face the music on their shopping addiction, they will never get out of debt.
#4 Develop frugal habits and make cutting costs your top priority. There is an element of sacrifice needed to ensure that your money conservation strategies work, but by sticking to your cost cutting plan, your discipline and dedication will eventually be rewarded. There are a lot of frugal blogs that can help you in this regard!
#5 Consider using balance transfer credit cards.
There’s no way around it: the best way to beat debt is to pay it off. But depending on your situation, switching your balance from a high interest rate credit card to one with a lower rate may help you cut down on the interest you’re paying and may help you retire your debt faster. You can do what is called a balance transfer (moving your existing card balance to 0% or low interest rate cards), but be aware that there may be some costs to doing this. It’s only worth doing if you can aggressively retire your debt in a short amount of time, ideally during the promotional period when the card interest rate is at 0%. Check out these balance transfer credit cards if you are interested in this type of debt consolidation.
While there may be costs to doing a transfer, you may still come out ahead and pay off credit card debt quickly if you commit to a disciplined payment schedule. Note that applying for a new credit card may have a short term impact on your credit score.
#6 Consider reducing the amount of money you are investing and/or saving in order to pay off debts. This is a good idea if you’re paying more interest on your debt than what you’re earning with your savings and/or investments.
#7 Use your debt payment plan as an opportunity to establish a savings program. Once you’ve paid off your high interest debt, you can bump up the amount you are socking away and investing, and resume your savings plan. By establishing a system to pay down debt, you’ll be able to use this very same system to build your savings once you’ve retired your loans. Once things are paid off, you can start routing your payments to your savings account instead of to your creditors.
#8 Pay above the minimum on any loans you own. If you have limited resources, focus on paying down your highest interest rate loans first, particularly those considered “bad debt”. Try to pay more than the minimum on those most expensive loans.
#9 Consolidate your debt to simplify your payments. Consider transferring your credit card balances to lower interest rate cards but be aware of the transfer fees that apply. It’s normally still worth doing when you consider the savings you get from cutting down the interest rate on your debt. Or how about looking into loans that have more favorable terms altogether? You can check out person to person (peer to peer or p2p) borrowing opportunities through sites such as Lending Club for potentially cheaper loans. For more information, check out our Lending Club review.
#10 Find ways to increase your income. You can build your income and increase cash flow through a variety of ways, such as through side jobs and investments. You can increase your income by actively pursuing and snaring a high paying job or getting a raise. Or perhaps you can develop additional income streams by supplementing with a secondary job or side business. Make sure that once you make more money, that you apply it against your debt and not towards additional purchases. I say this because I have friends who have massive debt and who were able to secure second jobs to increase their income. Their extra income gave them a boost of confidence and a sense of complacency so that instead of wiping out their debt, they decided to buy even more stuff. You don’t want to fall into this cycle.
#11 Have a spending AND a savings plan. Set your goals and write them down. You’ll be surprised how an actual plan which you review on a regular basis can help with keeping you on track towards your goals. For spending, set a budget and as much as possible, keep within the limits of your budget. With saving, commit to a savings goal every month, set the amount aside, preferably automatically. By charting your progress, you will be further encouraged about staying on track.
#12 Make the best use of your money. If you have money saved up earning very low rates of return in a cash account, utilize these funds towards paying down higher interest debt. There’s been discussion around the blogosphere about whether you should build an emergency cash fund while you still have debt to take care of, and the resounding advice has been to pay down the high interest debt first because of how much it’s costing you.
#13 Devise your debt payment program and stick with it. You can decide to pay off your loans with the smallest balances first, which is the more emotionally gratifying approach since you are able to retire your loans much faster this way. Or you can pay down your most expensive loans first, which will cost you less in the long run. But whichever strategy you choose, what’s most important is that you stick to the system.
#14 Set up a new payment schedule. What about paying debt down bi-monthly, instead of once a month to cut back the amount of interest you are paying? If you can’t afford to pay anything more than you’re already paying out on a monthly basis, simply break your current payment amount into two payments and make the payments twice in a month, instead of once. For instance, if you pay $60 a month to a credit card, pay $30 at the beginning of the month and $30 in the middle of the month, and you will actually save on interest.
#15 Trading bad debt for good debt. Warning: this is a risky way to go about dealing with your debt, and the following tactic can be quite controversial, but I am mentioning this method here for the purposes of discussion. This strategy involves taking out a loan against a 401K or retirement fund to pay off credit card debt. Needless to say, this approach comes with a very strong caveat — that if you do this sort of thing, you MUST repay the loan or face an early withdrawal penalty or additional potential losses. For more on this matter, you can take a look at this write up or take note of the pros and cons below:
Borrowing Against Your 401K?
If your 401(k) plan allows loans (most do), you can borrow up to 50% of your vested account balance or $50,000, whichever is less. You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.
- There is no credit check.
- The interest rate is low.
- Paying yourself back provides you a pretty good return relative to cash account returns.
- The interest is tax sheltered in the sense that you pay taxes on the interest only upon retirement.
- It’s easy and convenient.
- You’re losing the interest that you would otherwise have in your retirement account.
- You’ll need to repay your 401k with after-tax dollars. Future withdrawals will still remain taxable at future tax rates.
- You’ll incur a 10% penalty plus taxes if you’re younger than 59 1/2 and don’t pay back the loan.
- The loan is a consumer loan so it’s not tax deductible.
- This practice can be dangerous if it’s done repeatedly and ends up jeopardizing your retirement.
There’s also the suggestion that you should instead take out a home-equity loan if you happen to own a house. In this way, it’s more likely that you’ll be able to take a tax deduction on the interest you pay. Personally, I would avoid this option altogether since you are putting your house (and for most of us, our biggest asset) on the line.
Created January 8, 2008. Updated June 2, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.