is a subject that weighs heavily on many people’s minds. The pressure of mounting interest rates and never-ending payments can feel overwhelming. But escaping the shackles of debt is possible, and the freedom it offers is well worth the effort. “Paying off debt doesn’t need to be complicated,” says Fidelity vice president Ann Dowd, CFP®.
Let’s explore five practical steps to help you take control of your finances and get out of unhealthy debt for good.
1. Look for Lower Interest Rates
High-interest rates can keep you buried under a growing pile of debt. Therefore, the first step towards financial freedom is to look for lower interest rates. Shop around for low-interest balance transfer offers or loans. Some may even qualify for 0% interest promotional rates.
Be aware that transferring a balance typically involves a fee, often around 3% of the transferred amount. However, paying this fee may be worth it if you’ll save in the long run by securing a lower interest rate. Online calculators, like those on CreditCards.com, can help you determine if a transfer would be beneficial for you.
2. Pay More Than the Minimum on Credit Cards
The longer it takes to pay off a debt, the more interest you’ll pay. By only making the minimum payment on credit cards, you can remain in debt for years, paying far more in interest than you originally borrowed.
Consider a credit card balance of $1,000 at a 12% interest rate. Making only the minimum required payment could cost you $184 in interest over nearly three years. By paying more than the minimum, you can significantly reduce both the time and the interest paid. Finding ways to increase your monthly payment can have a substantial impact on your financial health.
Here are some common sources of extra money:
- Reduced spending
- Pay raises
Track your spending to find areas where you can cut back. Even small adjustments can free up funds to put towards your debt.
3. Have Money Available for Emergencies and Unplanned Expenses
Life is unpredictable. While focusing on paying down debt, it’s essential to have an emergency fund for unexpected expenses like car repairs or home maintenance. Without easily accessible savings, you may resort to credit cards, negating your progress.
Think of your emergency savings fund as another monthly bill. Aim to accumulate between 3 and 6 months’ worth of expenses. Keep your essential expenses under 50% of your take-home pay and prioritize contributions to retirement savings to make sure you’re also preparing for the future.
4. Make it Harder to Spend
Overspending can sabotage your efforts to get out of debt. Consider tactics to make spending more difficult, such as leaving your credit cards at home or declining the option to save your payment information online. Small obstacles like these can discourage unnecessary purchases.
List your debts, the total amounts owed, monthly payments, and interest rates. Focus on paying off the highest interest debt first, while still maintaining minimum payments on others. Once that’s paid off, move on to the next highest interest rate.
5. Learn to Use Credit Wisely
Healthy credit habits can keep you out of debt. Always strive to pay off your monthly balances and avoid charging more than you can pay. If you do carry a balance, make it a priority to pay it off to free up money for your financial goals, such as retirement savings.
Ramp Up Your Savings
After paying off your debts, the next step is to keep cultivating good financial habits by saving for the future. Make sure your emergency fund is fully stocked, and take the time to get your retirement savings on track. The money that once went to credit card payments can now be directed towards long-term savings.
Debt doesn’t have to be a permanent burden. With focus, determination, and adherence to these five steps, you can take control of your finances and build a future free from the constraints of debt. Let this year be the year you right-size your debt burden and invest in a financially empowered future. The journey might be challenging, but the payoff is truly empowering.
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