About 8 years ago I became wildly popular overnight. My phone suddenly began ringing off the hook. The problem was the people on the other line weren’t friends inviting me to nights on the town but debt collectors looking for payments. You see, I had a friend that had decided it would be super awesome to open a bunch of accounts in my name.
Having a pile of debt longer than your arm is like trying to live with five bowling balls in your backpack. If the debt collectors don’t get you, the stress will, and my nerves became frayed quickly. Even though the debt wasn’t mine, I had to find a solution. Filing fraud cases and battling credit card companies becomes really exhausting. With that, I put together a debt repayment strategy that you (and your debt collectors) will love.
Mend your budget and save 10% of your income
I know it doesn’t make sense to start your new life as an awe-inspiring debtor by hiding money in a bank account, but every financial adviser will tell you this is key to the success of your strategy. It doesn’t pay to let yourself fall into crisis, and that 10% will keep you safe when something happens. If you’re short on rent money or medical bills pile up, that’s what this is there for. Comb through your budget with a critical eye, getting rid of unnecessary expenses.
Have fun with your dreams
It’s time to get up close and personal with your goals for the future. Your goal is to build up enough commitment to carry you through the doldrums of paying off that debt. What are you going to do the moment when you pay back that final penny?
Create a dream board with all the things you want to do when you’ve found financial freedom. How do you want to spend the extra money you’ll have? What will you do with your sparkling credit record? Where will you take your life when you’re no longer tied down by debt? Keep it visual with magazine pictures or sketches. The clearer the image in your head, the stronger your motivation will be when the going gets tough.
It may be a wise decision to consolidate your debt. Sometimes, it’s easier for all your debt to fall under one debtor who charges the least interest. Look for credit cards that offer 0% balance transfers and lower accrued interest than your current ones. Alternatively, negotiate with your existing credit card companies to reduce your APR.
The Debt Snowball
Dave Ramsey is known for his system of the debt snowball strategy. This is great for those who need to bolster their motivation. It functions much like real snowball-making. You create a tiny snowball, and then roll it across the yard until you have enough to win the fight.
- List your debt in order of amounts, from small to large, without looking at interest rates.
- Stick to your minimum payments on all but your smallest account. That’s the one you want to clear in your first month.
- The second month is for paying off the second smallest, then the third and so on, splitting them over a few months if necessary. Keep on with your minimum payments.
This strategy keeps your motivation levels sky high—who doesn’t love to scratch major achievements off their list? At the same time, you wave goodbye to an entire chunk of interest quickly, which frees up the money you need to cover the next debt on your list, creating the ‘snowball’ you need to cover everything far faster.
Cutting costs can only free up so much, so find ways to earn what’s necessary to contribute more. Ask for a raise, pick up freelance work, and sell the junk that’s adding clutter to your home. Who knows? You might just finish your repayment plan with the kind of income you need to stay out of debt for good.