Managing Debt to Kick-Start your Year!
Last month, we provided you with some tips on how to kick-start your 2021 financial journey, by establishing a budget/spending plan. Through that process, we encouraged you to determine your needs and wants, calculate your income and expenses as well as allocate your funds based on what your budget allows for. For many, current outstanding debt tends to govern how and where our money is going, potentially making an already stressful situation even more stressful. So, to help you achieve the financial freedom you’ve been working towards, here are a few tips on how to manage debt.
Paying Off Debt
Easier said than done, I know… but working towards a plan for paying off debt is truly an essential first step. Determining what debt you should pay off first, is a part of that process, but because everyone’s situation is different, it’s important you find what works best for you. If you’re in a situation where you have outstanding credit card debt, I like to recommend leveraging different payment methods such as the Debt Avalanche or Snowball method to help reach your goals.
Snowball: This method prioritizes your smallest debt first, no matter the interest. Once the smaller debts are paid off, you move to the next larger debt and so on (hence starting small and going bigger like a snowball). This is a great option for those of us that need small “wins” by allocating funds towards one card at a time and seeing those zero balances.
Avalanche: This method focuses on using a strategy where you are paying off debt with the highest interest rate first, and then moving to the smaller interest rate cards, no matter the balance (like an avalanche, you are starting high and trickling down the balances). This method is great for folks that have the funds available to pay any additional amount towards those higher interest rate cards, which in the long run will not only result in the balances dwindling away, but also result in saving you money in interest.
Another option to help you manage debt, is considering debt consolidation. There are different options such as credit card balance transfers, where you are transfer current debt to a lower interest credit card. If you own a home, you can also consider a Home Equity Line of Credit (HELOC), where you can leverage the equity in your home to help consolidate debt, decrease your monthly expenses, while also saving on the interest you’re paying.
Staying on Track:
Sticking to a financial plan is half the battle, but the good news is there are different tools that you can leverage, as well as additional options to help you stay on track.
1. Find a tool that works for you. If you are working towards paying off debt, tracking your success is going to be key. Whether it’s tracking in a journal, an excel spreadsheet or a handy digital app, having something to reference regularly is going to be extremely helpful.
2. Another option to consider helping free up your cash flow to pay off your debt is to look for ways to lower your bills. When was the last time you reviewed your auto insurance? If your credit has improved, if you’ve relocated, if you’re driving less, you may qualify for a lower auto insurance and may qualify for a lower premium. Reviewing your cell phone or cable plan is another way you may be able to save on those expenses to apply towards your debt.
3. To pay or to save… that is the question (and our answer is, it depends). If you’re in a position where you have savings, but you also have outstanding debt, a decisioning factor that might help is, determining if your monthly debt payments are taking up 10% or more of your monthly take home (excluding your mortgage). If the answer is yes, then you may want to consider using some of your savings to pay off that debt, since it is likely you are paying more in interest on your debt, than you are earning on your savings.
Visit PartnersFCU.org to find additional financial education resources on debt management, credit, budgeting and more! If you’re interested in speaking to Partners Representative to get assistance with loan consolidations, schedule a virtual appointment today!