You don't want to admit it. It lingers. It's crept up slowly: that nasty credit card balance, personal loan, or line of credit taken from your home. Maybe it stresses you out, maybe it doesn't. Maybe you think that extra $100+ per month or so of interest isn't so bad. It's worth spending money on what you want.
Wouldn't it be great if you didn't have to worry about those balances though? Holding debt isn't the way to build wealth. Utilizing leverage appropriately may be, but typical consumer loans to buy "stuff" aren't the type of leverage that builds wealth.
Step 1: Figure Out What's There
Do you have 3 credit cards with varying balances? A home equity line outstanding? A personal loan through the bank? Maybe a couple of car loans? Student loans? It's time to gather your statements, log into your institutions, call your banker. If you don't remember where everything is, pull one of your credit reports - everything will be listed there. As you gather these, try not to get overwhelmed, treat the exercise as clinically as possible. This is a list of outstanding balances, and their associated interest rates and terms, just a list. Now you can see it in one place. Microsoft Excel has loan amortization templates that can be a helpful starting point. They are designed for mortgages, but they are ultimately an exercise in paying down any type of debt.
Step 2: Prioritize Your Debts
Here are some things to consider. What is the largest balance? What is the highest interest rate? How many years do you have to pay them off? The rule of thumb is to focus on the highest interest rate first, which is frequently the credit cards. Next I would look at the terms. If you have 15-30 years to pay the largest balance off, then you can pay the minimum payment a couple more months while you figure things out.
Step 3: Negotiate Rates
Start with the credit cards. Just do it. Call them and ask for a lower rate. If you have high credit, consider opening a zero interest credit card and transferring a portion of your balance, but do the math to see if the charges incurred make sense. Compare the transfer fees to the monthly interest charges you currently pay. Ask your banker if you can refinance your line of credit. Before you consider refinancing your student loans, STOP. It's so tempting based on the interest rates, but you lose all of the flexibility you get with Federal loans. Things like the ability to pause your student loans with forbearance or adjust your payment method based on your income or job.
Step 4: Decide on an Affordable Monthly Payment
Stretch yourself here. You are shifting your mindset from an attitude of "I can have whatever I want," to "my debt is something I'm making a priority." It's time to make some sacrifices for a few years while you trim this debt. You won't believe how good it feels once it's done. After your debt is gone, you can decide how to treat yourself when you get an unexpected bonus. Now that's a good feeling.
Step 5: Automate Your Payments
This takes the need to remember out of the equation. Just automate it and know what your net paycheck is. That's what you can spend every month until the debt is gone. Imagine the "bonus" you'll have when you don't have to make debt payments any longer.
This is all stuff you know already, but sometimes it serves as a healthy reminder. Organize your debt, prioritize it, negotiate, decide on a payment and automate. Would you like more content like this? Subscribe to our newsletter or schedule a call!