In this weeks’ previous blog, we talked about contributing factors of credit card debt (and debt in general). Some debt is for the achievement of long term goals (like student loans and mortgages), but other debt is accrued because of emergencies, cash shortfalls, or frivolous spending. However you look at it, it’s all debt and it’s all going to have to be paid sooner or later. It’s easier than you think to be swallowed up by the quicksand of debt. But digging your way out isn’t always as easy. Never fear, though! There’s always hope!  As promised, here are a couple of strategies you could employ to begin to eliminate debt.

SnowballSnowball Method

This method, devised and promoted by Dave Ramsey, allows you to visibly SEE the results of your hard work in the form of eliminating debt altogether. If you’re following this plan, you would take the money you have budgeted for debt repayment, let’s say $500, and pay the minimum payments on all other debt except for the one with the lowest balance. You would take any and all extra money after the minimum payments were made and put it towards that smaller-balance debt to get it paid off more quickly. Before long, that debt would be eliminated. Then, you would pay minimum payments on all debt except for the one with the next lowest balance. You would put all extra cash towards that particular payment until it is paid off. You would continue this process until you are officially debt free.  Why does this method work? Dave Ramsey swears by it because of the confidence boost it provides. Those who use this plan can visibly SEE the number of creditors decreasing because of their hard work and discipline. Because the number of creditors is decreasing, the amount of money seems to “stretch farther” because there are now fewer creditors. As you gain momentum in paying off debt, your efforts “snowball” and get bigger and faster and, before you know it, you’re only a few payments away from being debt free!

The snowball method works for student debt and other debt, too. Just apply the same rules to your allotted monthly payment chunk. Make minimum payments on all student loans other than the one with the lowest balance. Put any extra cash you have left over towards that specific payment. Before long, that payment will be history! Then you can continue the same strategy with the next lowest balance. Continue until all student loans have been satisfied and you’ve officially settled all student loans. Now breathe a sigh of relief!

Avalanche MethodAvalanche

The avalanche method is similar to the snowball method in that it focuses on one debt at a time, but that’s about all they have in common. Say you have again budgeted the same $500 per month dedicated to debt repayment. If you’re using the avalanche method, you would pay minimum payments on all debt except on the one with the highest interest rate. You would take whatever remained of that original $500 after the minimum payments were made and apply it to that specific debt. Once that debt is paid in full, you would repeat the same process with the next lowest interest rate. You would continue this practice until all of your debts have been satisfied and you are officially debt free (yay!). Why does this method work? Well, it’s simple. By taking the extra funds and applying them towards the debt payment with the highest interest rate, you’re actually saving money in the long run. That higher interest rate is going to cost you more in interest payments if you just paid the minimum balance. By paying more than the minimum balance each payment, more of the money you’re paying is going directly towards the principle.

Again, the avalanche method works the same way for student loans. Choose the student loan with the highest interest rate. Put all extra money towards payments for that specific loan. Pay only minimum payments on other outstanding student loans. You’ll save a bundle in interest in the long term all while knocking down that principle. Once you’ve paid off that one, move that strategy on to the loan with the next highest interest rate. Continue until you’ve paid off all your student loans.

Consolidation

If you’re fortunate enough to have good credit, you may be able to consolidate all of your credit card debt into one lump sum with a single interest rate. Why is this beneficial? Well first of all, you wouldn’t have multiple payments to make each month, you’d only have one. That makes things a little more convenient. Secondly, generally because this option is available only to those with good credit scores, the interest rates tend to be lower than the ones for the single credit card payments. Do your homework—you  may be able to find a promotional offer with a lower interest rate. If you’re lucky enough to consolidate, you’ll benefit from the lower interest rate and have more money going to the repayment of principle each month. But be careful, one late payment could up your monthly interest rate since it would violate the terms and conditions! Also, beware that any new credit card debt may not qualify for the same low interest rate. Be sure to check your terms and conditions.

Now that you’ve dug yourself out of debt (mostly), how can you make sure to never be swallowed up again? First of all, reflect. Think of what originally caused your debt—health emergency? Job loss? Frivolous spending? Now develop a plan to prevent the same situation from happening again. Obviously you have no way of knowing when you may lose your job or have a major health crisis, however, you can be prepared! Make sure to have an emergency fund set aside which contains enough funds to cover at least 3 to 6 months’ worth of living expenses—rent/mortgage, utilities, groceries, car payments, etc. By being proactive, if a major crisis were to occur, you have a safety net already set aside instead of automatically reaching for your credit card.

Tight BudgetIf frivolous spending was your demise, it’s going to take some discipline. It’s easy to look around our circle of friends and feel the need to “keep up” with them. We want the latest gadgets, clothing, and vacations that those around us have. However, LEARN TO LIVE WITHIN YOUR MEANS! If credit cards were what got you into trouble to start with, avoid them for a while. Use cash instead. Decide what your weekly spending budget is and withdraw that amount. STICK TO IT! Once that cash is gone, it’s gone. By dealing in cash, you’ll see how quickly money goes out of your wallet, and it will force you to be more conscious of your purchases. You can learn money saving hacks to stretch your dollars—coupons, outlet shopping, clothing swaps, packing lunches, etc. Trust me, the feeling of being debt free trumps the feeling that new outfit or latest gadget can bring you any day!

Finally, now that you’re debt free (or almost debt free), stay that way by sticking to a monthly budget! As already discussed, a great budget that works for anyone is the 50/30/20 plan. In short, 50% goes to living expenses (like rent, utilities and food), 30% goes to debt retirement, and 20% goes to savings. These numbers can be tweaked to fit your personal lifestyle. Check out my blog from last week to learn all the details!

If you’re serious about becoming more financially independent and retiring debt but are totally overwhelmed on how to accomplish this seemingly impossible feat, Wealth Builders CPAs & Consultants can help. We can develop a financial plan that meets your personal situation that will help you to not only meet your current financial obligations, but also to save for your future. Our team of financial experts can guide you onto the right path that will lead you to financial independence. Call us today for a free consultation!

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Close, Kerry. “The Average U.S. Household Owes More than $16,000 in Credit Card Debt.” Money, 20 Dec. 2016, time.com/money/4607838/household-credit-card-debt/.

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Friedman, Zack. “Student Loan Debt in 2017: A $1.3 Trillion Crisis.” Forbes, 21 Feb. 2017, 7:45AM, www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#3ce67f025dab.

“How the Debt Snowball Method Works.” Dave Ramsey, www.daveramsey.com/blog/how-the-debt-snowball-method-works.