Debt: Most have it, most don't want it, yet many are afraid to talk about it. While it's generally considered "normal" to have mortgages, school loans, car loans, and credit card balances, the struggle to keep up with the bills — and the Joneses — is often swept under the rug. But if you're in the hole and you want to get out, believe it or not, figuring out how to become debt-free quickly is not an unattainable goal.
But, where do you begin? "Often the biggest hurdles our members face when tackling debt is developing a realistic and effective plan," explains Lauren Anastasio, a financial planner at SoFi. After all, if you have debts from multiple lenders with varying balances and interest rates, it's easy to get overwhelmed. "My biggest piece of advice for someone looking to pay off debt when they don’t know where to get started is to get organized. This would involve getting to know each one of your debts intimately and creating a system that works for you to keep track of your progress."
If you're ready to build a complete plan in order to get hold of your finances, read on. Ahead, two financial experts share their best advice for paying off loans and balances as quickly as possible. From understanding the impact of your debts to utilizing pro payoff strategies, you can take control of your money by following these tried-and-true steps.
Prioritize Your Debt
While being in debt isn't exactly a positive thing, Anastasio explains that some types tend to be less detrimental than others. "For people who have multiple types of debt, the first thing they need to do is understand that not all debts are created equal," she says. The money pro categorizes "good debt" and "bad debt," differentiating each below.
Good Debt: "'Good debt' includes mortgages, car loans, and student loans. These are installment debts, meaning they have fixed payments and are designed to be paid in full within a fixed period of time. They also tend to have much lower interest rates and can be helpful to your credit history by providing diversification of debt types. Lenders also perceive installment loans as less risky and associate these types of debt with more responsible borrowing behavior."
Bad Debt: "'Bad debt' includes credit cards and unsecured lines of credit, otherwise known as 'revolving debt.' They often come with much higher interest rates, and carrying balances on these types of debts can be harmful to your credit."
Strategize Your Payoff Plan
When it comes to actually tackling your debt, the key is to make extra payments one at a time while maintaining the minimum payments on the rest. There are a few methods in which to prioritize, which Anastasio explains below:
The Snowball Method: "The 'Snowball Method' is an approach that involves paying off debt based on the balance, prioritizing from smallest to largest. This approach allows you to reduce the total amount of bills you have to pay each month quickly and provides achievement milestones early in the process to keep you motivated."
The Avalanche Method: "The 'Avalanche Method' is another well-known approach that prioritizes debt based on interest rate. This strategy entails paying down your higher interest rate debt first, which will save the most money in the long run."
The Debt Fireball Method: "In my years of experience working with SoFi members, I always recommend a hybrid approach that combines the best features from these two strategies, which we call the 'Debt Fireball Method.' This approach involves 3 steps:
- First, break up your 'good debt' and 'bad debt.'
- Then prioritize all of the 'bad debt' (which has high-interest) and use the snowball method among your 'bad debts,' paying them down from lowest balance to highest balance.
- Then work on tackling your 'good debt' from the lowest balance to highest balance."
Create A Budget
Ah, the dreaded "B" word. While no one likes to track their spending, it's an integral part of the debt-paying process. "Too often, I’ll talk to a member who is making aggressive payments on their credit cards, but underestimated their monthly spending," says Anastasio. "They then run out of money before their next paycheck and are forced to charge expenses on the credit card they’re trying to pay down, which only causes a vicious cycle."
If spreadsheets aren't your thing, you're in luck, because technology is on your side. "My best tip for building and maintaining a budget is to use some sort of software program that makes the budget easy and understandable," Michael Foley, a Financial Peace University coordinator and Dave Ramsey Master Financial Coach. (Check out budgeting apps like Every Dollar and NerdWallet.) Foley also suggests withdrawing cash and stashing it in envelopes to pay for specific budget items — say, your month's worth of groceries or "fun money" — as another effective approach. "This helps to feel the pain of spending actual cash, which very few of us do nowadays," he points out. So not only will it help you limit your spending, you may think twice about forking out $4.50 for a latte.
Maintain (Intense) Focus
If your number one goal is to squelch your debt ASAP, you have to make paying it down (here's that word again!) a priority. Foley describes an idea that Ramsey teaches his students: Be "gazelle intense." In other words, you pay off debt like your life depends on it, the way a gazelle sprints away from a cheetah. "Examples [of being 'gazelle intense'] include cutting back on expenses, selling things you own, cutting up credit cards ... just doing anything to help attain your goal of being debt-free."
Recently get a bonus at work? How about a check for your birthday? Consider contributing it to the debt you're trying to pay off. If you can't live without your monthly trip to Sephora or evenings getting drinks with the girls, that's okay — just limit your spending by budgeting for it.
Find A Support System
The last step to working toward financial freedom is to find someone who can support you, as well as hold you accountable. As mentioned earlier, for some, being honest about money may be the most difficult part of the plan. "It may be tempting to try and keep your finances a secret, but keeping your family and friends in the loop on your efforts will help ensure your success and hold you accountable to your goals," says Anastasio. "You don’t have to tell anyone specific dollar amounts, but letting your inner circle know that right now is not the best time to plan a cruise [...] will not only help them avoid unintentionally tempting you to deviate from your plan, you’ll also have emotional support to keep you motivated through your efforts and celebrate your achievements along the way."
Foley agrees that having an "accountability partner" can make a huge difference. "For singles, having a friend or financial coach can help you remain on track. For married couples, you can work tougher with this, and from experience, we find that married couples should combine [debts to pay off] together."
Plus, when you confide in others about your finances, Anastasio points out, "you may also get some great advice from someone close to you who has gone through the same thing."