Financial Fitness for Real Life: Debt Management
When it comes to financial fitness, carrying some debt can actually be healthy. Especially if you used the money to get a better job through education or by putting equity into a home.
But carrying too much debt can be overwhelming. High interest payments can keep you from using that money for the other things you need.
Let’s look at a simple but solid plan for burning off that debt and recovering your financial freedom!
1. Take stock of your situation
Any good fitness trainer will tell you that you can always do something positive for your health. No matter where you are, you can start there and move forward, one step at a time.
Financial fitness training works the same way. The first step is to take stock of your situation and understand where you’re starting.
With that in mind, and without any judgment, gather your last 90 days of loan payments, credit card statements, and spending.
Pay special attention to the interest rate on each loan and credit card. For now, just make a note of it. That’s going to matter later.
Remember, this step is just about seeing the big picture.
2. Find ways to pay a little extra
Nice work! Now that you know where you are, you can start looking at ways to carve out a little extra to start paying down that debt more aggressively.
When you’re paying on a high interest rate, you want to pay that debt down as quickly as you can. The sooner you can chip away at the underlying debt, the less interest you’ll pay over time.
That’s true of any debt that has an interest rate above 0%, but the higher your rate, the worse it is. We’ll get back to that in a second.
For now, remember that any time you can give something up to pay down your debt, that payment will turn into more money that you can spend later.
3. Burn that debt off strategically
Okay, here comes that part about higher and lower interest rates. Find the loan or credit card debt with the highest interest rate.
Put all your extra debt-reduction payments into the debt with the highest interest.
For every other loan, pay just the minimum amount due, until the highest one is paid off. Then, pay off the next highest one, and so on.
Why? Because the debt with the highest interest rate is the most expensive one.
Remember, debt has 2 parts:
- Principal—the amount you borrowed minus whatever part you’ve paid down
- Interest—the extra money they’re charging you every month for borrowing that money
Lenders apply your payments first toward the interest you owe, and then toward paying down your actual debt. So if you can make an extra payment in any given month, you’ll make a lot more progress toward paying down the actual principal.
Paying off the debt that carries the highest interest rate first is the fastest way to trim that extra interest off your monthly expenses!
4. Negotiate your terms
Finally, try asking your creditors to lower their rates.
As a general rule, the better your credit history, the more lenders are willing to work with you. So if you’ve been making your payments consistently and on time, it’s worth asking.
If they say no, don’t be discouraged. Keep making those payments on time, pay down the most expensive debt as aggressively as you can, and try again in a few months!
Follow these strategies and you’ll be on your way to burning off that debt in no time. For more tips, tools, and tricks on debt management, check out simplifimoney.com or download the Simplifi by Quicken app today.
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