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Here’s what: Time to tackle your debt
Now that the holidays are over and the new year has begun, many people are coming face-to-face with their debt. If you are feeling the squeeze, you are not alone. But without a plan to combat it, debt can harm your credit score, financial stability and future financial prospects. Here are a few ways to get your debt under control.
This email is Week 2 of New Year, More Money, Personal Finance Insider’s four-part series to help you set yourself up to build wealth in 2023 and beyond. Read last week’s email on savings here.
1. Confront your debt
This may be overwhelming, but one thing about debt: You have to confront it to tackle it. Gather all of your debts and get a firm grasp of what you owe. You should have balance totals and interest rates on everything that you are paying. This will serve as a visual reference and help you plan which debts to tackle first and make it easier to track your progress.
2. Choose your debt repayment strategy
When dealing with a heavy debt load, it can be tempting to make the minimum on-time payments to keep all accounts current. But given the interest rates charged by creditors, just making the minimum payments will not reduce your overall debt. If you want to shrink your balances and become debt-free, you will need to pay more than the minimum amount due.
The question may become which debts to pay first, especially if you only have a finite amount of money to put toward debt repayment. There are two debt repayment strategies that can help you decide: the debt avalanche method and the debt snowball method.
Debt avalanche method
With the debt avalanche method, you focus on the debt with the highest interest rate first. Make the minimum payment on all of your other debts, then pay extra to creditors charging you the most interest. This strategy pays off by eliminating your most expensive debt first. When you pay it off, you move your extra payments to the debt with the next-highest interest rate, and so on.
With the debt snowball method, you focus on the debt with the lowest balance first to build momentum. Make the minimum payment on all of your other debts, then pay extra on your smallest debt. This strategy gives you a boost because you get a sense of accomplishment by completely paying off one of your debts more quickly. Once that account is eliminated, take the entire amount you were paying toward that debt and focus on the next-smallest debt until it’s paid off, too.
3. Commit to a no-spend month
No matter how much debt you have, committing to a “no-spend” month can help you gain control and perspective over your finances.
The idea is simple: You eliminate all non-essential spending for 30 days. This means no brunches or meeting out for drinks, food delivery, buying clothes, renting movies, etc. What is considered essential will differ person to person, but the goal is to minimize spending to free up cash for debt repayment.
4. Consolidate your debt
If you have a good credit score, you may be able to obtain a line of credit or personal loan for debt consolidation. If you are approved for a line of credit or personal loan that covers all of your debt, you could take those funds and immediately pay off everything you owe. You would now be left with only one monthly payment and due to the lower interest rate, you may be able to shrink that balance more quickly.
The most important thing when tackling your debt is to not feel overwhelmed or that getting out of debt will be impossible. It will take time to become debt free, but if you resolve to take action, it can be done.
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Senior Personal Finance Reporter and Spokesperson
Jennifer is a Senior Personal Finance Reporter and Spokesperson for the Personal Finance vertical at Business Insider. She started her career covering personal finance at Black Enterprise Magazine, went on to CNBC where she covered personal finance, women and money and tech and then Forbes, where she reported on personal finance, business, tech and money matters related to the economy, investing, credit and entrepreneurship. Jennifer is also the author of Thrive!…Affordably: Your Month to Month Guide to living your Best Life without breaking the bank. The book offers advice, tips and financial management lessons geared towards helping the reader highlight strengths, identify missteps and take control of their finances. In addition, she has extensive experience as an on-air financial commentator and has been a featured expert discussing credit and savings, investing and retirement, mortgages and all things money and personal finance. She has an ability to discuss and simplify complex financial issues and make them easier to understand. Follow her on Twitter @jstreaks.
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