Best Way to Pay Down Debt
Mar. 6, 2017 Article

Teaching The Next Generation: Best Way To Pay Down Debt

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Ready to kick debt out of your life? Have you finally had enough of payments keeping you from doing the things you really want to do? If so, you’re not alone! Every day thousands of people make the decision that debt no longer has a place in their lives and commit to getting rid of it. Here’s the way to make it happen. 

Debt Is A Reality of Life

From student loans to car loans to mortgages and credit cards, debt is a reality of current life, but it doesn’t have to be going forward.  

When discussing debt, people often feel it’s “just the way it is” and that “there isn’t much I can do about it.” While these are understandable feelings, it still remains that debt is not only a reality, but it is your responsibility.

Responsibility has a negative connotation in our culture, but it is the single most powerful mindset you can take when getting out of debt. Once you admit to yourself (and the world) that you are 100 percent responsible for your debt and financial situation, two powerful things happen:

  1. You feel free, and
  2. You realize you have the power to change your situation

Why Pay Down Debt

There is an old saying that “Someone is always paying interest and someone is always earning interest.  Who do you think is richer?” Borrowing money not only reduces what you could save or spend, but each payment costs you interest. With that, there are two reasons you should focus on paying down debt: 1) it costs more than you think, and 2) it lowers your future net worth.  

It costs more than you think. When you are in debt and paying interest to others, you not only lose the interest you pay, but also any future growth that could have come on that interest. Try this for yourself:

  • Pick one debt you have that you are making payments on
  • Take your monthly payment and multiply it by the number of payments you are required to make
  • Take this total and compare it to the amount you borrowed
  • The difference is the amount in interest you are paying over the life of the loan

It lowers your future net worth. With debt, not only do you lose the interest you pay, you also lose the growth that could have come from saving and investing your payments. Because of this, you lower your future net worth far more than you might imagine. What does this mean to you? It means you are able to do less, have less and live less.  

So, what to do?

Getting Started

First, stop adding new debt. Don’t trade in your car for a lower monthly payment in exchange for a longer term. Don’t purchase the new outfit or tablet on a credit card, and don’t buy the new couch with the store card.  

Second, take an inventory of where you stand now. How much debt do you own? What debt is tied to what asset (e.g. your car loan is linked to your car) and what is each worth? List out your debts by: amount, interest rate, length, and payments.  

Once you have your inventory, you’re ready to choose a way to pay it down.

Successful Strategies

The two most common ways to pay down debt are the “snowball” method and the “avalanche” method.  

The snowball method: pay off your smallest balance first, and when that is done, take those payments and put it toward the next smallest balance.  

  • Pro: There is an enormous psychological boost as you see balances falling off
  • Con: It can be much more expensive than the avalanche method

The avalanche method: Pay off the highest interest rate loan first, regardless of the size, and then move to the next highest interest rate.  

  • Pro: Pay off in the quickest way with the least amount of interest
  • Con: Can be discouraging if your higher interest rate debt is also your biggest debt

So, what’s the right answer?  Whichever one you will stick to and feel most comfortable with.  

Speed It Up!

The more income you have coming in and the less expenses you have, the faster you can pay down debt. Combine both and accelerate your way to debt-free living.  

First: Earn more income. Consider starting a “side hustle” where you earn money in addition to your main job, getting a new job, or adding more value to your current role and asking for a piece of the gains you provide.  

Second: Spend less. Look for big wins in reducing your expenses such as a less expensive car, cancelling subscriptions, etc. If you can’t find big wins, know that every little bit counts, as both the snowball and avalanche methods accelerate over time.  

Bottom Line

If you’re like most, you’re sick of your debt. Make a decision to accept responsibility for your debt and get rid of it so you can live a freer life. The time to start is now and the four keys are:

  1. Stop adding new debt
  2. Earn more income and cut a few expenses to accelerate your pay down
  3. Choose a strategy – snowball or avalanche
  4. Don’t give up – persistence is the key to success in anything, and being free of debt is no exception

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