This weeks guest post comes straight out of west coast America with Jacob from dollardiligence.com taking a look at a slightly different topic. On MTM we’re all keenly aware that paying off your mortgage fast is a huge life win… but many people out there also get weighed down by various other forms of debt. These can be a pain in the ass and even reduce how much you can push towards your mortgage. Jacob takes us through some of his best tips on how he attacks some of the more smaller forms of debt. Take it away!
Although it is down slightly from its post-recession peak, USA non-mortgage debt, which includes credit card, auto financing and student debt, is on the rise again, hitting $3.62 trillion at the end of 2016. Average credit card debt for people in America is up too, topping $8,000 for the first time since 2008. Student loan debt in the United States is exploding, reaching an all-time high of $1.4 trillion with an average debt load of $30,000 per student borrower. For many borrowers, especially recent college grads, it’s a struggle just to keep up with payments much less build toward their financial future.
Following the lessons learned after the last recession, consumers know they have a choice – either to let their debt kill their dreams or put a proactive plan in place to pay it off once and for all. With the right plan and the discipline to execute it, even borrowers who live paycheck to paycheck can get control of their finances. For anyone struggling with debt, the goal should be to pay it down as quickly as possible. Here are the best ways to accomplish it.
Get Spending Under Control
For many consumers, their debt problems can be directly linked to their spending habit. A large part of consumer debt comes from lifestyle spending – the desire to pursue or maintain a lifestyle they really can’t afford. If you can’t get your spending under control, any debt reduction solution is likely to have a temporary impact. Under any circumstance, but certainly when you are struggling under a mountain of debt, the goal should be to live beneath your means. Debt aside, it is the surest way to build wealth over a lifetime. With debt, there is no other way to gain the upper hand.
Aim For A Target
If your goal is to become debt free at some point in the near future, you need to set a hard target of what you’ll need each month to accomplish the goal. If you determine you can pay off all debt within three years with a $500 a month payment, your budget should be designed to make that available by reducing spending in other areas. That may mean less dining out, fewer car trips, no new clothes, cutting cable, no Starbucks coffee and a generally very frugal approach to living.
You will be amazed at how quickly you can find $500 a month. The key is to strictly abide by the budget and make the $500 debt payment the very first expenditure each month. The good news is, once you have fully embraced your new spending habits, that $500 can be redirected to building your wealth once your debt is paid off.
Snowball Your Debt
As an overall debt repayment strategy, none is more effective than the “snowball method.” It is designed to create a growing debt snowball that builds financial and psychological momentum as it grows. Here’s how it works:
Start off by listing all of your debts, from the smallest to the largest balances. Taking the total amount, you can budget towards debt payments and divide it so that the largest portion is applied to the smallest loan balance, paying only the minimum payments of the larger balances. The idea is to pay off the smaller loan balance as quickly as you can and then using the excess cash to start paying down the next biggest loan.
Each time you pay off a loan, the amount of cash you can apply to the next smallest loan continues to grow. Along the way, you notch small victories which helps to build the financial and psychological momentum that keeps you moving forward until you are completely debt-free.
Ask For A Reduced Interest Rate
As your debt balances start to diminish through your on time payments each month, you may improve your chances of having your interest rates reduced. Credit card companies are actually willing to work with their customers, especially if it means not losing them to a competitor.
If you are no longer maxed out on your credit lines and you’ve been making on time payments for a while, they may be willing to reduce your rate. It doesn’t hurt to ask. Getting a rate cut from 22% to 18% can make a big difference in how quickly you pay down your debt.
Regardless of the type of debt you have, whether its credit card debt, student loan debt or instalment loan debt, you do have a choice in how you live your life. The cruel irony is that it is so easy to get into debt, yet it can seem near impossible to get out of it. However, when you break it all down, make a plan and change your habits, the path to financial freedom becomes very clear.
By Jacob @DollarDiligence – Find him on Twitter to follow his journey and keep up with his blog