Do you feel crippled in debt? That overwhelming feeling from the mounting pile of bills that feels like it will never dwindle.
Are you staying up late at night worrying about making payments on time?
Never feeling like you will be debt-free. If so, you are not alone.
According to CNBC, “three in four Americans (77%) report feeling anxious about their financial situation”
The good news is that you can take control of your finances!
The first step in paying off debt is committing. The second step is learning the best method to pay off your debt! The third step is PAYING OFF DEBT.
Understanding Your Money
There are several things to consider before paying down debt.
1. Understand Your Finances. The first is understanding how much money you bring home. Then analyze how much you spend each paycheck and on what.
Understanding your earnings versus your spending gives an insight into if you are saving or overspending each month.
2. Cutting Back. Having a budget can show where all your money is going.
A budget allows the ability to track every dollar spent, allowing the ability to see areas to cut back on to put toward paying down debt.
The different areas to cut back on (ex., subscriptions, eating out, lowering electric bill) and by how much will vary from person to person.
Here are a few questions before cutting back on your budget.
• Can I live without this in my life?
• How frugal and am I willing to go?
• Will I be happy living like this?
3. Earning Extra Money. The third thing to consider before paying down debt is the ability to earn extra cash.
Different ways to make money are picking up a side gig, working a second job, or selling unwanted items online—[Read also: Different Side Hustles to Earn Money].
Do thorough research before investing money into buying products for resale or joining an MLM.
Make sure the assumed profits reaped are enough for the time and energy spent. Furthermore, make sure the investment will not further your debt.
Nerd Wallet features an online calculator that will indicate how much interest is saved when paying off a debt early.
Different Methods to Pay Down Loans
1. Pay off the Highest Interest Loan First
Paying off the highest-interest loan first is your best bet if it’s costing you the most in accruing interest.
For example, if you have three loans, let’s say one loan has a 1% interest rate, the second loan has a 3% interest rate, and the last loan is a whopping 10% interest rate.
Let’s say each loan balance is precisely $10,000.00 Therefore, paying off the loan with the highest interest rate will save you the most.
2. Pay Highest Loan Amount First
Sometimes the best thing to do is pay the loan with the most amount borrowed. For many, the mortgage payment is likely the largest loan.
In fact, according to the CNBC article, The Average Size of a New Mortgage Just Set a Record, as Home Prices Continue to Climb, “The average purchase loan size was a record $453,000.00”
If having an enormous mortgage loan keeps you up late at night with worry, then focusing on paying this down as quickly as possible is the best solution.
3.Pay Smallest Loan First
For some, paying off the smallest loan amount keeps them motivated to keep working towards the goal of being debt free. Paying the smallest loans can also offer faster gratification since it’s easier to pay off smaller loans first.
The image shows an extra $500.00 dollars going towards paying off monthly debt. In this scenario, the extra $500.00 dollars is money the individual has left over each month to put towards paying down debt.
In the sample, we start with paying down the Credit Card since that is the lowest amount owed.
Therefore, we put the extra $500.00 dollars towards the Credit Card debt while paying the minimum on all other loans.
In this scenario, to make it easy, minimum payments are $100.00 for the Car and Student Loans and $1000.00 for the home.
Once the first loan (Credit Card) is paid in full, we use that amount ($100.00 minimum Credit Card payment plus the extra $500.00) and put it towards the second smallest loan, the car loan.
Therefore, take the $600.00 a month Credit Card Payment and apply it to the new smallest loan (Car) until it is paid off.
During this time, still making the minimum payment on all other bills.
Once the car loan is paid, take the $700.00 monthly payment from the car loan and put it towards the student loan along with the $100.00 minimum payment.
Therefore, paying $800.00 a month towards the Student loan debt until paid off.
The last loan is the mortgage payment. Once all other loans are paid off.
Take the remaining $800.00 used to pay the Student Loan debt off and put it towards the home loan for a total amount of $1,800.00 paid towards the mortgage.
Continue adding this amount to the mortgage until paid in full.
4. Consolidate Multiple Debt
Consolidating multiple debts may be an option if keeping up with managing all payments is too much to handle. Consolidating your debt is the best option if you often miss or do not make payments.
When consolidating debt, one thing to look at is the overall interest. If interest is more expensive in the long run, it may not be a good idea.
5. Pay Down All Loans Together
One strategy is paying down all loans together. First, determine how much extra money you can put into paying down monthly debt each month.
Then, divide the allocated amount of cash evenly towards each debt. Therefore, paying off each debt together.
Once the smallest amount is paid off, then take that amount and dividing evenly among all other debts.
In this example, interest is the same on all loans.
In the infographic above, $400.00 is extra monthly cash to divide among all debts. If wanting to pay all debts down at once, then take the $400.00 and divide among each debt.
Within the example, the $400.00 divided among four loans (Credit Card, Car, Student Loan, and Home Loan) will add $100.00 to each debt.
Since the credit card has the least debt (assuming the interest rate is the same for all loans), it will get paid down first.
Once the Credit Card is paid off, divide the remaining balance among the car, student, and home loans. Since $200.00 was used towards the Credit Card, it would then get divided into three ways adding another $66.00 to each payment.
After the Car Loan is paid off (the second lowest amount) will add $300.00 towards paying off student loan debt and the mortgage.
The extra $300.00 comes from the extra $400.00 set aside, plus the $100.00 payment from the Credit Card and Car Loan, a total of $600.00. Divide the $600.00 by two (the last remaining loans), which equals $300.00 each.
The next loan that is in line to get paid off is the Student Loan Debt. Once the Student Loan debt is paid in full, you take the $400.00 towards paying down that debt and add it to the mortgage.
Thus, adding $700.00 toward paying down the debt. The $700.00 comes from $400.00 set aside plus the $100.00 payment from credit cards, car loans, and student loans, a total of $700.00
Continue doing this until the mortgage is paid in full, leaving you completely debt free.
However, in reality, it will likely be more complex since interest will significantly impact how quickly the loans are paid off.
Why Pay Off Loans Fast and Get Out of Debt
We are not going to sugarcoat this. Paying down debt is difficult to start and even harder to complete. However, it is worth it in the long run.
Paying down debt has many short-term and long-term benefits. Below are some of the different benefits of paying down debt.
Releases stress. A pile of endless debt can be unmotivating, devastating, and downright stressful. Going to a job day in and day out only to pay bills is misery.
However, paying off your debt is freeing and rewarding. Being debt free allows you to focus on spending money on adventures, vacations, and family.
Saves you money in the long term. The more time you spend paying off a loan, the more money goes toward interest. In most cases, the faster the debt is paid in full, the less you will spend on interest over the loan’s lifetime.
Learn more about how you can save on interest by paying off your loans early with the amortization calculator. Therefore, saving money by paying the loan off early.
Increases cash flow. Once you are debt free, it allows you to have more cash in hand each month.
Therefore, allowing you to put your money into investments so that eventually, your money will work for you instead of you working for your money.
Save for the things you want. Paying down debt allows you to save to pay in full for the items you want, such as a boat or sports car.
Saving to pay cash for big-ticket items prevents you from taking out a loan.
Not taking out a loan allows you to save on the interest you would otherwise have to pay.
Since you do not have to pay interest on the loan keeps you from paying more for the item than needed. Thus, saving you over the long term.
Have your money work for you. Having debt paid off increases cash flow.
Extra cash can go towards various investments, such as stocks, bonds, rental properties, or real estate investments.
A cash flow allows your money to work for you rather than working for your money.
Three Different Options to Pay off Loans
1. Pay the Minimum
Paying the minimum of what is due is paying off the amount on the bill each month.
As long as the payment covers the occurring interest and you are not adding more debt to the principal, the ongoing debt should decrease monthly.
However, if you continue adding more than the minimum you are paying on the debt, it will continue to grow.
For example, only make a minimum payment of $50.00 on your credit card and add $100.00 more on your credit card within the same month.
Therefore, your debt is increasing instead of dwindling.
Always check your bills every month for accuracy, even if you are not adding to the overall debt.
2. Pay More than the Minimum
Paying more than the minimum due is the fastest way to pay off debt and save on interest. Make sure what you are paying (even if more than the minimum due) covers the loan’s interest.
Paying as much as possible in addition to your minimum payment will help cut down the principle of the balance.
Therefore, adding less interest rate to the overall loan.
3. Shred it and Forget About it.
Although, this is a strategy for some. We highly do not recommend this strategy.
Not only will interest continue to accrue on the original balance, but it can cause a significant hit against your credit score.
The problem we have with collections on your credit report is, for one, your credit score will drop.
A bad credit score tells lenders you are high risk, which can prevent loans from getting approved.
With a bad credit score, if your loan does get approved, it will be with sky-high interest rates, making it extremely expensive to take out future loans.
Full List of Get Out of Debt | How to Pay Off Debt Fast
1. Pay Off the Highest Interest Loan First
2. Pay Highest Loan First
3. Pay Smallest Loan First
4. Consolidate Multiple Debts
5. Pay Down All Loans Together
About Author, Sara Elizabeth
Writer, Amora V Lifestyle
Co-Owner of Elizabeth Besich Boutique
Sara is a writer for Amora V Lifestyle and is Co-Owner of Elizabeth Besich. Sara previously worked as a Marketing Manager and has her Master’s from Lindenwood University.
Sara studies everything of interest, from psychology, recipes, finances, mental health, and travel, thriving to find happiness and to live a good life.
When not learning, Sara loves all things outdoors, food, and hanging around great company. Furthermore, Sara loves spending time with family, who she is blessed to have in her life.
Note from the author: Through my articles, I hope to bring you joy and peace and that you enjoy it!
Disclaimer: The information provided in this opinion article is for entertainment purposes only. It should not be construed as financial advice and does not constitute an offer or solicitation for investment. We cannot guarantee the accuracy or completeness of the information presented, and readers should always conduct their own research and seek professional advice before making any investment decisions. The content of this blog is the opinion of the author and should not be attributed to any organization or entity. Any reliance on the information provided in this blog is solely at your own risk. Any reviews or comments written are the subjective opinion of an Amora V Lifestyle member and not Amora V Lifestyle. Amora V Lifestyle performs occasional checks on commentary left by users. It’s worth mentioning that we may also use comments in our articles. By posting a comment, you are giving us permission to use it in our content. Please check out Privacy Policy and Terms of Use for full disclosure. Sources: https://www.cnbc.com/select/how-to-take-control-of-your-finances/ https://www.nerdwallet.com/article/finance/debt-snowball-calculator https://studentloanhero.com/featured/truth-about-student-loan-interest-rates/
Leave a reply
