How To Pay Down Debt Once And For All | ModMoney

How To Pay Down Debt Once And For All

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Living with high-interest rate debt is overwhelming. You feel exposed. You feel burdened. You feel like you’re crumbling under a weight that just keeps growing. Whether you took on student loans to get through school or swiped your credit card a few too many times, you can work through it. By shifting your mindset and breaking down action items, you can start tackling your debt today. Let’s get started!

1. Get in the right mindset.

Remember that final project you dreaded in school? The hardest part about it was merely getting started. Similarly, you must take that initial step in erasing your debt. First, acknowledge that you have debt to pay off, and don’t berate yourself for it. Instead, get motivated to pay it down so your money can start working for you. Compound interest is a powerful tool that literally turns time into money, and you don’t want to miss out. You adhered to your professor’s final project deadline, so develop that same sense of urgency for your debt.

2. Break down what you owe, and prioritize it.

Next, confront your debt burden on paper. To do this, write down every individual piece of debt that you owe and the associated interest rate. Then, decide the order in which you’ll pay it off. You have a couple of options here.

First, you can pay off your debt in order of highest interest rate to lowest interest rate. In theory, this is the most effective approach because you’ll knock out higher interest payments first. However, a “snowball” approach may actually bring you more success. In this option, you prioritize your smaller debts first, and then work your way up to your larger loans, regardless of interest rates. Our human brains are wired to celebrate small successes that encourage us to keep the momentum going. If you think that trudging through a larger piece of debt will inhibit your progress, then the snowball approach may be the right one for you.

3. Don't forget about your rainy day fund.

Ridding yourself of burdensome debt is obviously important. But so is setting cash aside in case things go wrong. If you use all your extra cash to pay down debt, then what happens when your car breaks down? Or you take an unexpected pay cut at work? It’s important to have a rainy day fund to address these issues. Otherwise, you may have to take out another loan, which exacerbates the problem. One option is to allocate a portion of your savings to a rainy day fund and the remainder to your debt, so you make progress on both.

4. Find ways to cut your spending.

Reducing your spending will help you boost savings to pay down debt and also avoid taking on incremental loans. But first, you have to evaluate where you're currently spending your dough. Personal Capital can help you visualize your expenses by category. The dashboard makes it easy to see how much you spend on clothes, groceries, restaurants, personal care, cable subscriptions, etc. Then, think about some creative ways you can cut back. Maybe that means finally cutting the cord or finding ways to save money when you work out. Maybe you can cook more meals at home or start using Ebates to earn cash back when you shop.

Pro tip: To turbocharge your debt paydown, I recommend using Digit. This is a free app that moves money from your checking account into a savings account. Soon enough, you will build a stockpile of cash that you can use to eradicate your debt.

5. Follow best practices going forward.

At the end of 2016, U.S. consumers carried almost $800 billion in credit card debt! Credit cards can be dangerous because (1) they emotionally distance you from cash leaving your pocket; (2) their interest rates are exceptionally high at 15-25%; and (3) many people don’t realize that credit card debt is detrimental to their financial future. Since you’re on a plan to eliminate debt, you may want to avoid using credit cards at all for the time being. However, credit cards aren’t all bad, and it’s important to know how to use them prudently. These five rules will help you avoid mishandling your credit in the future.

The Bottom Line

Paying down debt is an important topic for a couple reasons. First, it’s a widespread issue. Americans owed over $2 trillion in student loans and credit card debt last year. Second, there is so much to be gained from compound interest at a young age, and a debt burden can force you to miss out. Time truly is money, and high interest expense can eat away at your potential savings. While the idea of paying down debt is daunting, breaking it down into bite-sized pieces will make it far easier to manage.

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