Paying off debt one month at a time can feel depressing, but there are faster ways.
I had a friend message me on Facebook asking to chat. Sam (not her real name) was worried about her student loans and some credit card debt that had piled up. She was keeping up with the minimum payments but one of her student loan statements said it wouldn’t be paid off until 2035.
Another 20 years! No wonder Sam was frustrated and discouraged.
Paying the minimum payments is the slowest way to get out of debt. If you feel like Sam, here are some faster ways to get out of debt.
Debt Snowball vs. Debt Avalanche
The easiest solution is to start an accelerated payoff plan. It takes a little time and no extra money is to start. The basic idea is to pay only the minimum payments on all your debts except one. When the first account gets paid off, the minimum payment you no longer need to pay is used to help pay off the next loan.
You may have heard of a debt snowball or a debt avalanche, and these plans are nearly identical. A debt avalanche starts by paying off the account with lowest interest rate first, and the debt snowball approach pays off the debt with the lowest balance first.
For example, let’s say you only have two credit cards. The Best Buy card has $1,000 left to pay off, it charges you a 20% interest rate, and the minimum payment is $50 a month. The Chase card has $2,000 left, a 15% interest rate, and a minimum payment of $100 a month. In total, you are paying $150 every month to pay off these credit cards.
Let’s say you choose the debt avalanche route. You concentrate on paying off the Chase card first since it has the lower interest rate. Once paid off, the $100 minimum payment is used to start paying off the Best Buy card at $150 a month (instead of the $50 minimum). The best part is you still only have $150 coming out of your pocket every month.
The debt snowball method has you pay off the Best Buy card first since it has the lower balance ($1,000). If you want more detailed examples, NerdWallet has a great article on the debt snowball and the debt avalanche.
The plan you choose depends on your personality. I suggest the debt snowball because you get a quicker win. But the debt avalanche is–mathematically–the better option.
My friend Sam used the free restructuring debt calculator at CalcXML. She found out she could get out of debt in 12 years instead of 20. It will still take her a while, but at least she is saving eight years of debt payments.
Find More Money
I can’t stand saving money just for the sake of saving money. But I love saving money when I can reach a goal faster. If I can afford the sunglasses I want, I’m going to buy them. Hopefully, I find a pair of Ray-Bans on sale, but I won’t be mad if I don’t.
Finding money to pay off debt or save for the future can seem daunting, but the latest money apps make it really, really easy to track your income and spending.
Note, I am not talking about budgeting! Tracking your money is Phase 1, and planning ahead with a budget is Phase 2. You would be flabbergasted at how much your decisions change when you start tracking your spending each month.
I had a client start to lose weight because she started tracking her money. Tracy (not her real name) realized how much money she was spending money at restaurants and coffee shops. To save for a down payment on a house, Tracy started cooking more at home. This one decision helped her save money and lose weight.
If you would like to start tracking your money, check out these apps (my favorites are listed first):
Make More Money
There are times when scrimping and saving aren’t enough. Another client of mine realized this as we were working together.
Luciana (not her real name) started tracking and budgeting her money, but her bills were too much. Cutting back on all her expenses was going to be a lot of work and effort.
Instead, Luciana decided a second job would help her pay the bills and have some money left over for fun. She figured she might as well work hard earning more money rather than work hard clipping coupons.
I understand your situation might be a lot worse than what Luciana was facing. Eventually, you run out of time in the day to get another job. In that case, you need to get creative.
Be sure to work hard and ask for raises. Learn new skills that employers are looking for. Sales jobs can pay well, but they are usually on commission. Deliver pizzas or take-out in the evenings or on weekends.
Do what you need to survive.
Don’t Trick Yourself
When I was talking to Sam about her debt payments, she had some ideas that are okay to try but aren’t as effective as you might think.
Debt consolidation is combining some or all your loans into one spot. You can also transfer all your credit card balances to one card. But debt consolidation is a lot like combining a bunch of dirt mounds into one giant pile.
You still have a lot of dirt laying around.
Refinancing can also help as long as you get a lower interest rate. Your minimum payments would pay off more principal each month. But a lower interest rate on 10 years of debt is like running a 25-mile race instead of a full marathon (26.2 miles).
You still have to run for a long time.
Negotiating with your banks can also be fruitful. If you run into hard times with credit cards, call the banks and mention you are in a tough spot. Most can put you on a plan to help you out while shutting off access to the credit card.
You can save money and save you from yourself.