Getting out of debt doesn’t only involve paying down balances. It also involves changing your money mindset.
Debt steals your income, and with less income, it becomes harder to meet financial goals. This includes building an emergency fund and saving for retirement. Additionally, debt can impact your ability to get a mortgage.
The good news, though, is that several strategies can help those struggling with debt. It takes time to reduce balances. But with a solid plan, you can get rid of balances.
Here’s a look at seven tips and tricks to pay off your debt.
1. Stick with a Budget
Living beyond your means can drive you into debt. When your income isn’t enough to pay essentials, you might use a credit card to bridge gaps in the budget. So one of the first steps to getting rid of debt is getting a handle on your budget.
Budgets help ensure you have money for the things you actually need. They create a plan for your money — a way to track what’s coming in and what’s going out.
The first step to budgeting is writing down your monthly expenses. This includes fixed expenses such as housing, insurance and minimum debt payments, as well as your variable expenses. Review your bank statements from the past few months to get an average of how much you’re spending in different categories.
Once you have everything on paper, you’ll have a better picture of your spending habits. And from here, you can decide where to cut back.
To help keep spending within a reasonable range, you can use the 50/30/20 budget. This is when you spend no more than 50% of your after-tax income on needs, 30% on wants, and 20% on savings and debt repayment.
2. Stop Borrowing
Aim to lessen your credit card usage. If you must pay for something with a credit card, pay down the balance within a month.
Some people are accustomed to only using credit, so this might be one of the hardest steps to getting rid of debt.
3. Negotiate a Lower Interest Rate
Contact your credit card issuer to negotiate a lower interest rate. A customer service representative might reduce your rate on-the-spot if you have good credit and a good payment history with the bank.
With a lower rate, a greater percentage of your monthly payment will go toward reducing the principal balance, helping to eliminate the debt faster.
4. Make Higher Payments
It’s crucial that you increase your monthly payments to get rid of debt faster. At the very least, you should double your minimum payments, and then gradually increase these payments.
Two popular debt elimination methods include the avalanche and the snowball method.
With the avalanche method, you’ll make all your minimum debt payments as normal, and then use any leftover money to pay down your balance with the highest interest rate first.
With the snowball method, you’ll also make your minimum debt payments. However, you’ll focus on paying down the debt with the smallest balance first.
5. Get a Part-Time Job
You can also crush debt faster with a part-time job. You can start a side business, or maybe join the gig economy and work for a ride share or delivery company.
Let’s say you’re able to make an extra $150 a week after taxes. That’s an extra $600 a month or $7,800 a year that can go toward paying off balances.
Also, use any windfalls you receive to pay off debt. This can include a work bonus, a tax return, or gift money.
6. Refinance Your Mortgage
If you own your home, refinancing your mortgage can also provide a way to eliminate debt. Depending on your equity, you might qualify for a cash-out refinance. If so, you’re able to tap your equity and pull out cash to pay off debt.
Understand, though, a cash-out refinance will increase your mortgage balance. You should only consider this method if you have control over your spending habits. If not, you could ring up your credit cards again and essentially double your debt.
Getting out of debt is easier said than done. But with the right strategy, you can get on the right path and hit your goal. Thinking about tapping your home’s equity? Contact the loan experts at FirstBank Mortgage to see whether refinancing makes sense for you.
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