Effective Strategies and Tips to Pay Off Debt

Paying off debt requires commitment, patience and a little bit of grace. You’ll need to check in with yourself, carefully review your current finances and utilize the strategies and tools you have at your disposal. With this information, you can create and implement a successful debt repayment strategy to help you pay debt off and build healthy financial habits along the way.

How to pay off debt: Steps to take now

Starting your debt payoff journey can feel intimidating and overwhelming, especially if you only look at your total debt. Taking it step-by-step can ease those feelings.

“Stop looking at the total number every day,” says Bernadette Joy, Bankrate expert contributor and founder of Crush Your Money Goals. “That’s like staring at the top of a mountain instead of taking the first step.”

The first step is deciding you want to tackle your debt. From there, the debt payoff journey requires five actions.

1. Perform a self-audit
2. Figure out what you owe
3. Review your spending
4. Create a more intentional budget
5. Choose a debt payoff strategy

Joy recommends taking on each action separately and remembering the big picture. “Focus on one chunk at a time,” she says. “Keep your goals front and center, not just the balances.”

1. Perform a self-audit

Before diving into your debt, think about your beliefs about debt and what you say to yourself, recommends Rita-Soledad Fernández Paulino, Bankrate expert contributor and founder of Wealth Para Todos.

“Being aware of what your thoughts are is important because it could impact the way you approach implementing a debt payoff plan,” they say. “Some people will approach it with a lot of urgency and self-criticism. And you can pay off your debt in that way, but is that the way you want to do it? You can choose to pay off your debt in a way that’s a lot more gentle and not so alarming to your nervous system.”

Joy agrees with the gentle approach, acknowledging that debt can cause damage to more than just finances. Part of her debt payment method includes “healing money wounds,” by asking yourself why you may have accumulated debt, what stress it caused and what you’ll change once it’s cleared.

Being aware of your habits and feelings around money and giving yourself grace can help flip your internal dialogue. By performing a self-audit, you can feel more motivated and see what other areas of life you can work on to help with your debt payoff plan.

2. Figure out how much you owe

Next, you’ll need to determine the exact amount of your debt. This could seem overwhelming. However, that knowledge can be empowering, giving you a starting point to plan your way out.

In addition to focusing on the dollars owed on each account, pay attention to:

• Loan interest rates
• Minimum monthly payment requirements
• Payment due dates
• Final payment due date/repayment term

You’ll need all of this to determine how you’ll pay these debts and which debt you’ll prioritize first.

3. Review your spending

Once you know your debt to the dollar, the next focus should be your expenses other than debt. Go through and group your purchases into specific categories. Such categories include: groceries, gas or transportation, clothing, entertainment and pet needs.

Review your spending for the last three months to get an idea of what you spend your money on, how much you spend, where you’re overspending and where you may be able to save.

4. Create a more intentional budget

A budget tells your money where to go and helps you avoid overspending. Typically, a budget prioritizes your required expenses, including your mortgage, basic living needs and minimum debt payments. The money left over can go to your discretionary spending, like entertainment and clothing. An intentional budget goes a step further, separating required expenses and discretionary spending into smaller, more specific categories and assigning dollar amounts to each one.

By reviewing and tracking your spending from step three, you’ll have an idea of how much you should assign to each category. Be honest with yourself and use this first budget before seeing where you can make cuts. Once you lower the amount budgeted for specific categories, put the amount you cut toward your debt payments.

While most spending cuts will take place in discretionary spending, there are ways you can decrease your mandatory spending as well.

Examples of how to save include:

• Buy generic brands
• Dine out less frequently
• Meal plan and grocery shop with a list
• Bring coffee and lunch from home
• Cancel unused subscriptions and memberships
• Reduce your electricity or water use
• Change providers, including cable and cell phone carriers
• Carpool or take public transportation to reduce fuel use
• Shop for clothing and accessories at thrift stores and consignment shops
• Participate in cooperatives
• DIY when possible

If you need to make more money, there are ways to add to your income. Just make sure you include that income in your budget if you aren’t putting all the money toward paying off your debt.

5. Choose your debt payoff strategy

Once you organize your finances, have a plan for your spending and make room in your budget, it’s time to determine how to apply that extra money toward your debt. While the two common debt repayment strategies are the snowball and avalanche methods, you can also use a personal loan to help pay off your debt. These are just a few strategies to help you pay debt off fast. Research others and combine strategies to find the best fit for your goals.

• Debt snowball
  

  The debt snowball strategy involves making minimum payments to all creditors and focusing all extra dollars on the account with the smallest outstanding balance. Once that balance hits zero, turn your attention — and the extra money — to the next-smallest balance and work on that. Repeat the process until all balances are down to zero.

  The snowball strategy’s main benefit is that it gives you quick wins, but it can also be costlier because balances on higher-interest accounts continue growing. When you get to that high-rate balance, you could owe a great deal based on compounding interest.

• Debt avalanche
  

  Like the snowball method, the debt avalanche strategy requires you to make minimum payments to all creditors and lenders and put extra money toward just one debt. Rather than focus on smaller account balances, your attention is on the debt with the highest interest rate. When that account is paid off, the debt with the next-highest interest rate is the focus and so on.

  The debt avalanche approach removes the most expensive debts first, meaning you save on interest. However, it requires patience, especially if that high-interest-rate account represents one of your largest debts, because you may not see wins right away.

• Debt consolidation
  

  Debt consolidation combines multiple debts into one new loan with one interest rate and one payment. There are several debt consolidation options to choose from. Weigh your options by considering the type and amount of debt you have, how long you’ll need to pay it off and your credit profile.

  A balance transfer credit card lets you move multiple balances from other cards to a single one that offers a 0 percent introductory APR period. You then have a set period — generally six to 21 months — to pay the amount without accruing interest.

  With a debt consolidation loan, you obtain a lump sum of money in the form of a personal loan from a bank, credit union or online lender, then make monthly payments on that loan. This allows you to consolidate various loans into one debt and the interest rates for debt consolidation loans are typically fixed and lower than credit card rates.

Other debt relief options

Debt management

With a debt management plan (DMP) a counseling agency helps you develop a budget and negotiates with creditors to waive fees and lower your interest rates. Instead of paying creditors directly, you’ll pay the agency a lump sum each month, and the agency will pay the creditors on your behalf. You may pay a fee for these services, which is part of the monthly payment.

Debt settlement

A debt settlement program involves negotiating with creditors to settle for less than the amount owed. A third-party debt relief company can work with the creditors on your behalf, or you can negotiate on your own to avoid paying for the service. The end result may include a reduced balance, lower interest rates and/or reduced or waived fees. However, you may be taxed on the forgiven amount and your credit could take a hit.

How to stay motivated while paying off debt

No matter the strategy for getting out of debt, the process for becoming debt-free may take a significant amount of time. Stay motivated along the way by remembering the benefits of paying off debt. Not only will you feel less stress and anxiety, but you’ll also free up money to put toward saving, investing and other goals.

Along with knowing the benefits, knowing the various free resources available to help can also make a big difference. Paulino recommends reading articles from Bankrate, listening to podcasts and audiobooks or checking out finance books for free from your local library.

The experts also recommend rewarding yourself for small wins and finding a community to cheer you on.

“I remember just having to really listen to a lot of people who said, like, this is a good idea,” says Paulino of her own debt payoff journey. “We live in a society that [says] ‘spend, spend, spend,’ and you have to be aware of what you’re consuming, because to pay off debt is very atypical, it’s not the norm.”

If debt is the norm, who wants to be normal?